On Tuesday, we put on a small S&P 500 trading position for an oversold bounce. At first, it didn’t work and we were almost stopped out, but a late day rally kept us in the position.
Wednesday was a different picture as stocks rocketed out of the gate on more “trade talk” news with China, but that rally faded as well heading into late day as the owner of the “National Enquirer” was granted immunity in exchange for details on another Trump-related “hush money” payment.
Yesterday, the markets struggled out of the gate as economic data pointed to slowing rates of inflationary pressure and economic growth, fell into negative territory, and then ended the day flat.
This morning stocks opened down as concerns of global economic weakness rose from China.
So far, the “Santa Rally” has failed to appear and traders are beginning to wonder if they are on the “Naughty List” this year? With all of the rhetoric over trade, White House shenanigans, and weak economic data, it certainly would seem to be the case.
But, it may actually be more of the “Grinch (aka The Fed) That Stole Christmas” this year.
While the Fed’s rate hikes do indeed raise borrowing costs and slow economic growth, it is the extraction of liquidity from the markets which is most important. As shown in the chart below, the Fed is now reducing their flows by $50 billion each month. This is in direct contrast to the billions they were injecting previously which corresponds with the markets decade-long bull market despite weak revenue growth due to a sluggish economic expansion.
But it is no longer just the Fed. On Thursday, the European Central Bank made two important announcements.
- They will stop adding to its stock of government and corporate bonds at the end of December, and;
- They are seeing signs of weaker inflation and economic growth.
In other words, as world markets are beginning to struggle as the driver of the decade-long bull market is being removed.
But yet, despite the market turmoil this year, which certainly got investors attention, the debate has turned to whether the decline is over or has it just begun?
Dana Lyons had an interesting point earlier this week on the bout of selling.
“Specifically, regardless of the closing performance, the past 4 days have seen the S&P 500 drop at least 1.89% each day on an intra-day basis. That is just the 11th streak of such selling pressure in the S&P 500 going back to 1960, and the first since 2008. If we relax the parameter a bit to 4 straight intraday drops of at least 1.7%, we observe 17 occurrences going back to 1960. Many of them occurred at interesting market junctures.”
“As the chart displays, several of these instances occurred in the direct vicinity of cyclical market bottoms, including 1974, 1982, 1987, 2002 and 2009. That might give bulls some hope that perhaps things have gotten so bad, i.e., rock bottom, that there’s nowhere to go but up. Although, it is probably a stretch to conclude that we are at a cyclical low right now since we were at all-time highs just about 10 weeks ago. And looking back at the chart, we see that some of the other historical events, e.g., 1974, 2001, 2008, occurred during the meat of a bear market and saw stocks just continue to fall further, going ‘subterranean’ if you will.”
I agree with Dana that it is hard to imagine we are at a cyclical low when we were just pegging all-time highs a few short weeks ago. As noted by Barbara Kollmeyer, Jeff Gundlach may have this right:
“DoubleLine founder Jeff Gundlach, who told clients Tuesday evening that the S&P 500 could take out February’s 2018 low due to a growth slowdown hitting company profits.
‘Many equity markets are down over 20%, which some people call a bear market,’ Gundlach said in his latest webcast, according to Reuters. ‘I don’t really define bear markets as a certain fixed arbitrary percentage. I think of it more as mood. And certainly, the setup for the equity markets looked like a bear market going into the middle of this year…the global equity market which is strongly in a bear market at the present time.’
Bottom line, his mood is still bearish, considering he warned us in November that stocks still hadn’t hit a ‘panic low.’”
While the Fed could certainly reduce, or even eliminate, their rate hike campaign, the extraction of liquidity is a much more problematic issue. Combined with still elevated valuation, weaker economic growth, and declining profit growth, it is highly likely that Lyons and Gundlach are correct in that the S&P 500 has yet to find a lasting bottom.
For now, “we have our stocking hung with care in hopes that Saint Nick will soon be there,” but don’t be surprised if you wind up with a “big lump of coal.”
Research / Interesting Reads
- The Market’s “Long-Term” Is Changing via Fundamental Capital via Seeking Alpha
- Brexit: No Confidence, No Clarity by Simon Constable via Korn Ferry Institute
- US Banks Haven’t Behaved Like This Since 2009 by Jeffrey Snider via Alhambra Partners
- Netflix Christmas Movies – Appalling Economics by Aaron Brown via RCM
- Yep, Bitcoin Was A Bubble & It Popped by Noah Smith via Bloomberg
- Your Love Of Index Funds Is Economically Terrible by Michael Brush via MarketWatch
- Tales From The “Trading” Crypt by Shawn Langlois via MarketWatch
- Do American’s Marry For Love Or Money – An Answer by Quentin Fottrell via MarketWatch
- Oil Prices And The Global Economy by John Stepek via MoneyWeek
- 7-Questions To Ask In A Volatile Market by Brett Arends via MarketWatch
- Low Rates And “Good” Are A Delusion by John Hussman via Hussman Funds