Why Are Stocks Still Up?
Once again, stocks had a great opportunity to put together a down day...but so far have refused to do so.
With the overbought conditions, the weakness in China, and the big down day on Monday...both yesterday and today would have been a good excuse to drop the markets more.
Instead, we have rallied two days in a row, and are now comfortably back in the narrow trading range (990-1010).
This is the second time in a month stocks have not followed what the majority of traders wanted: a modest (10 percent or so) correction so they could buy stocks cheaper.
Recall that this happened at the end of July. After a big two week rally, which saw the S&P move up almost 100 points (11 percent), the index topped out and after two very modest down days looked like it was about to roll over...
But it didn't roll over, despite the best efforts of shorts. The S&P moved up on July 30th and 31st, ending efforts to drop the market.
The paradox: the refusal to "correct" is frustrating for bears and many bulls at the same time.
The China story: what's behind the recent 20 percent correction in the Shanghai Composite? Citi's research arm in Hong Kong released an excellent report on what's behind the recent decline. Several factors were cited, but two stand out:
1) Bank lending slowdown. As banks have slowed lending, less money has flowed into the stock market (this goes to the observation that much of China's lending efforts have gone to speculate in stocks).
2) The return of IPOs. IPOs were suspended for over a year due to the poor market and only resumed in July; 7 large IPOs have occurred since then.
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