It's the day after the Powerball lottery. The joke on trading desks all week is that Wall Street has been selling stocks to play the lottery.
Now the lottery is over, and we are rallying. This makes sense, no?
Coming into work, the new joke was that we were rallying but it would all fall apart by midday, because that is all we do anymore Rally at the open, fall apart midday.
It hasn't happened today, thanks to a rally in oil and a set of indicators that have been in oversold territory for days on end, including a high put/call ratio, the VIX in backwardation (the front month contracts are higher priced than contracts further out), and horrible sentiment from rank-and-file traders (the American Association of Individual Investors weekly sentiment indicator hit an 11-year low this week).
So is this a bottom? I doubt it. Traders are grappling with big issues that they can't quite get their heads around. They want:
1) China currency stability
2) Oil stability
3) Good guidance on earnings
4) the Fed to lower its rate hike expectations.
Then there's the biggest head-banger of all: how much is the global economy decelerating?
I am not expecting all these issues to be resolved in the next month, or that stocks can't find a bottom until everything on this list is cured.
But I am saying we haven't fallen enough to create the impression that stocks are a bargain.
Just think about it: right now, we are in the middle of a garden variety correction. The S&P 500 is roughly 10 percent off its historic high it hit in the middle of last year.
But remember, the S&P 5000 went from 700 in 2009 to 2,100 in 2015. Now it's at roughly 1,900.
We're going to rally for seven years and then just get away with a garden-variety 10 percent correction? It doesn't seem enough.
That's why the rally seems tentative. No one is going all in, because there is still too much downside risk.
But we are making progress. Chinese authorities getting control of the currency would be a huge help. Oil holding at $30 would be big. And JPMorgan decent earnings was a big help (S&P futures rallied pre-open when their report came out).
And the Fed? St. Louis Fed President James Bullard said the continuing drop in oil had caused a "worrisome" drop in inflation that may make further rate hikes hard to justify.
THAT is a big help.