The “Half-Life” of “Buy and Chase” is Shrinking

Sometimes, markets move so quickly that what I write in the morning seems silly by afternoon.  It’s also not unusual for market moves that seem solid by mid-morning to change direction even as I set out my thoughts.  This morning, the change occurred before I even began – the opening rally faded very quickly.  A knee-jerk rally now requires substance.  As I type this, the President’s comments about peace talks failed to have a lasting effect, but assuaging talk on inflation from the Fed Chair seems to be raising spirits for now.

This, unfortunately, reaffirms the psychological change that was reflected in Friday’s selloff.  As we asserted that morning, in a piece written before the worst of the afternoon drop, traders finally seemed to tire of comments seemingly designed to mollify nervous markets yet lacking substantial changes on the ground (or water).  There was a palpable feeling of malaise amidst various market sectors as stocks fell steadily throughout the afternoon. 

Having exercised the “Trump Put” last Monday, the President’s attempt to exercise it again on Thursday afternoon at the same strike failed. 

Overnight, we saw futures open sharply lower but then move higher as Asian and European markets consolidated their initial reactions to our Friday afternoon selloff.  It was understandable to see futures bounce after an ugly end-of-week close, especially when oil futures came off their own early highs.  But the pre-market action shows a continuing pattern among eager traders – pre-market rallies tend to get extended as the morning moves along.  It is impossible to know whether that is genuine enthusiasm or simply because US traders wake up, see a plus sign on their futures screens, and reflexively hit the “buy” button, but it is now customary to see those rallies get extended, nonetheless.  Note that ES futures had already staged a major reversal even before the President’s comments.

ES June Futures, 1-Day, 1-Minute Candles (with text annotations)

Source: Interactive Brokers

Note how quickly the early rally faded, though.  I’m not talking about the spikes that occurred after newsworthy tidbits, though.  It’s all too normal for market-makers to widen their quotes when news-reading algorithms and exuberant humans chase a positive story and then tighten them when the initial fray peters out.  Instead, I’m referring to the quick evaporation of the rally that built throughout the pre-market.  Futures were up nearly 1% before the open but were only slightly positive a few minutes later.  They meandered in plus territory until the Fed Chair began his talk, which featured encouraging comments about inflation.  Although stocks failed to maintain their highest post-Powell levels – at least by noon – bond yields, which had been lower all morning, maintained and improved upon their levels, pushing yields about 10 basis points lower across the curve.

Once again, the inclination to bounce could be a feature of the day of the week.  If we close higher today, that will make 10 of 11 positive Mondays for the S&P 500 (SPX) in 2026.  Oddly, this comes even as 10 of the prior 13 weeks have seen declines.  Furthermore, while each of the past 4 Mondays saw positive closes, they were followed by lower weekly closes anyway.   

Perhaps this is just a coincidence, but I frankly doubt it.  Traders remain hopeful that the situation in the Persian Gulf will improve in any given week, lose hope as the week goes on without improvement, then are relatively unwilling to go home with long positions.  Yet it is important to remember that the conflict is only four weeks old, yet another 6 of the prior 9 weeks showed lower closes as well.  It is useful to bear this in mind when examining longer-term moving averages that have turned lower.  It is one thing for 10-, 30-, or even 50-day moving averages to point lower after a rough month, but another to see the 100-day joining the fray.  That implies that the erosion had been occurring for some time prior, which also raises the difficulty of a quick recovery.

Source: Interactive Brokers