Looking Back At The Market

The ECB left its key lending rates at record low levels, and the four-week moving average for initial claims is at an eight-year low.  That sounds like a pretty good setup for a stock market that worries about earnings prospects tied to a stronger dollar, loves the thought of central bank policy rates holding near the zero bound, and is anxious to see evidence the U.S. economy is gaining momentum.

Despite the setup, it has been a swing and a miss so far for the stock market, which has once again been greeted with steady, and broad-based, selling pressure.

ECB President Mario Draghi is getting a lot of blame for the disappointing price action based on reports that his presentation regarding the ECB's asset-backed securities purchase program was lacking and the impression from today's press conference that the ECB's ability to change the economic dynamic in the eurozone is also lacking.

There is some merit to the latter claim given the seeming lack of urgency to implement structural reforms in the eurozone, yet that is just one element that has kept buyers on the sideline.

The primary element is that the stock market just isn't acting well.  That's a simple deduction we know, but so many participants have been conditioned to expect a strong, buy-the-dip trade on just about any dip that the lack of that trade has been off-putting and interpreted as a deeper-seated effort to reduce risk exposure.

With the S&P 500 down nearly 4.0% over the last month and the Dow flirting with turning negative for the year, the narrative that the stock market is oversold and that this pullback is a "healthy" pullback is apt to start gathering some steam. 

The setup is there to come back and buy on the recent, big dip: the Fed isn't going to raise interest rates anytime soon, we'll soon see that earnings grew once again in the third quarter and probably grew more than expected, and there are reportedly a lot of underperforming money managers chomping at the bit to buy on a pullback.

The stock market is hitting an important inflection point.  The failure to live up to the buy-the-dip expectations needs to be eradicated soon or October could turn spooky and it won't have anything to do with Halloween. 

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