This post was originally published on this site
The S&P closed at 2619.55 – So today’s circuit breakers are: (Although it appears a moot point this morning as US futs are rocketing higher….MAGA!)
Level 1. 183.37 pts (7%) or 2336.18
Level 2. 340.54 pts (13% total) or 2279.01
Level 3. 523.91 pts (20% total) or 2095.64
And the tremors linger……. mkts continued the wild ride begun 2 weeks when the pressure started to build, pressure brought on by increasing concerns over the strength of the macro data and that means wage growth, producer prices, industrial production, capacity utilization, consumer prices etc and how those reports will impact underlying inflation which then dictates the future action of the FED now led by Jay Powell.
Now NONE of this should be a surprise to anyone that has been watching the stock mkt.
The moves down and up in the mkts last week were at times dizzying – causing dramatic swings in the averages – technical support levels were all broken and this only adds to the instability of the mkts. (Once technical supports are broken – the mkts will tend to thrash around for a couple of weeks as investors re-price the risk)
Automated risk management software that is designed around technical indicators were all thrown into a tizzy last week – as KEY support levels failed. And when those supports are breached the software sends out a SELL signal to the asset managers that subscribe to this theory. And conversely asset managers that use risk management software that identifies major ‘dislocated’ moves in stocks – moves that can’t be explained by individual company fundamentals – also kick into high gear causing those asset managers to hit the BUY button… and so you get the schizophrenic action that we witnessed last week. High speed computers spit out SELL orders causing buyers to retreat and then when it feels like the sellers are exhausted the same hi speed computers spit out buy orders to take advantage of the ‘dislocation’ – causing stocks to collapse and then rally as the seconds turn to minutes….
On Saturday – the WSJ ran with a front-page article on Saturday morning – and parts of it are laughable….
“US Stocks Rebound as Wild Week Ends” ….in there the writer had this to say –
“The weeks turbulence was especially unsettling given that there was no obvious cause for the frequent lurches”. (None? Really?)
And then Nandini Ramakrishman – Global Market Strategist at JPM Asset and Wealth Management chimed in with this thought –
“It is very tricky to find anything that would make sense for why equity markets are so nervous aside from the fact that we have come a long way”.
DUDE!!! Are you kidding me? “We have come a long way?”
You are the global equity strategist for the JPMorgan wealth management division and that is what you are telling your clients?? Oh – sorry – It’s tricky. We can’t find any reason to suggest why the mkts are psychotic this week! (Where do I send my resume?)
Look. – here’s just a couple of clues that you may want to pass along to your clients……
Let’s start with global central banks that have kept interest rates artificially low for a DECADE now – probably 3 yrs longer than they should have. They have held everyone’s hand and made it almost impossible to put your money anywhere other than global equites – because God knows – putting your money in the bank to earn 0.5% ain’t gonna get it done.
And then the ongoing discussion about how the US and global economy was really starting to pick its head up – should have been the 2nd clue to what future monetary policy might look like and what that meant to mkt valuations.
Maybe the bond mkt served as the 3rd clue as we all watched rates begin to tick higher every time we got another stronger than expected macro data report – suggesting that inflation was about to rear its ugly head forcing swifter action by every central bank around the world.
The upward pressure on WAGES that the FED has been screaming about for months now as the ‘canary in the coal mine’ might have provided the 4th clue.
How about the ECB (European Central Bank), the BoE (Bank of England), the BoJ (Bank of Japan) ALL suggesting in the past couple of weeks that the macro data (in their respective countries) was improving – causing all of them to consider a ‘change in policy’ in the months ahead – months AHEAD of what the mkt and investors had expected may have been the 5th clue.
And in case you were asleep – All those clues then ‘poked the bear of complacency’…. Did you happen to hear about the Short Vol Trade – that engulfed the world? The trade that had billions of dollars invested in it – the trade that had all those institutional asset managers all betting that volatility would remain stagnant …. how’d that work out for you? So when ‘VOL’ spiked it caused all of those same investors – that had the same trade ‘on’ to all run for the door all at the same time….now here is the real kicker – the Short Vol Trade – is a complex, quantitative computer driven trade – designed by physicists, quants and computer nerds – guys who have no real world trading experience – that has zero sense of emotion, stress or loss (it’s just numbers to the computer) – and investors in that product by now had a false sense of ‘security’ (because ‘the trade’ worked for such a long time – 2017 – it was never gonna change) and here is where history repeats itself…..
PORTFOLIO INSURANCE of the 1980’s…..it was also a complex computer driven trade designed by people who had no real-world trading experience and it gave every big asset manager a (false) sense of security…it allowed those investors to think that ‘they were protected’ in the event of a mkt downturn! – Because remember in 1987 – the mkt was doing nothing but going UP (sound somewhat familiar?) …. thus, you didn’t need the insurance……. UNTIL YOU DID……Do I have to repeat the story of the Crash of ‘87 and the 22% loss in the broader mkt in 6 ½ hrs all because some computer risk management program designed by (guess who?) – told you that you were safe? Do you remember how the world imploded once the macro data began to deteriorate? Do you remember how PORTFOLIO INSURANCE FAILED? The bloodletting beginning in Asia on Monday Oct 19th (Sunday Evening October 18th for the US) – spilling over to Europe as we all rose out of bed to take a morning shower – only to hit the shores of America with such vengeance that the mkt collapsed under the weight of these mindless, emotionless machines that caused utter devastation….
Now the 9% loss in the past 2 weeks does not compare to the 22% loss in one day in 1987 – but do not be fooled – regulators have allowed even more complex, leveraged products to be designed and sold to investors today than were available in 1987….and those products represent REAL RISK to the mkts…and when it happens – when the data does not ‘compute’ and the mkt collapses under the weight of these products – that is when we will have every elected official/every regulator (who do not understand US capital mkts) asking “How did that happen?”
But in the end – these dislocations – while painful and anxiety ridden – do create an opportunity for the active, focused long term investor….because the sell signal that was generated by the ‘short vol’ trade – forced investors in that product to GET OUT (at any price) and so – look what that computers did….they got ‘em out…..spraying thousands of ‘MARKET SELL’ orders out across our fractured mktplace causing such swift and painful instability that it rocks you to the very core. But it is that instability (those dislocations) that create the opportunity….
And this morning US Futs are UP big again…. currently +33 pts on the S&P or 300 pts on the Dow as global investors go on a shopping spree created by the ‘SALE’ going on across the globe….
European mkts which had been lower overnight have all surged higher and are now up better than 1% across the board. FTSE + 1.12%, CAC 40- + 1.43%, DAX + 1.6%, EUROSTOXX + 1.4%, SPAIN + 1.4% and ITALY + 0.67%.
Asian mkts did not do as well – as the ended the day lower…Japan -2.3%, Hong Kong – 0.16%, ASX – 0.3%. China was the only Asian mkt to buck the trend closing up 1.3%.
As I said – we broke all 3 supports levels (short term – 2716, Intermediate 2633 & Long term – 2540) so expect the thrashing around to continue as the mkts try to ‘right themselves’. Now while today the mkts are UP big…. My sense is that while we breached the long-term support on Friday at 2540 and bounced – it is just a matter of time before investors test it again to see if it really holds…. that may not be today – but do not get lulled into a false sense of security…. We will test it again….
Eco data today? None. But Valentine’s day (Wednesday – Hello Men…don’t forget the cards) will bring us CPI (Consumer Price Index) and exp are for a +0.3% rise…Ex food and energy look for +0.2%. CPI y/y is expected to show +1.9%, Ex food and energy of +1.7%…this report will be key…if the report is stronger than the expectation – then that means that inflation is heating up faster than the expectation….and this will have broad implications for the mkts – think SELL Pressure….…. BUT if the CPI is benign then look for automated buy programs to take the mkt higher…. Wednesday also brings us Retail Sales – exp of +0.2%, Ex Autos and Gas of +0.4%. And look for Real Avg Weekly and Hourly Earnings –…and if you recall – the NFP report suggested that hourly earnings are on the rise….
Since there are no eco reports nor any FED speakers…. the focus will be on Trump’s budget (out today) and the expected infrastructure spending increases. Watch yields – they remain KEY now. Trump’s budget and infrastructure spending details could put upward pressure on Treasury yields and downward pressure on stocks – although as I said – that does not look like it today – but the details have not been released yet…so stay tuned…
Take good care –
Raisin Bran Muffins
They may help the mkts become ‘regular’!
This is the classic “Kellogg’s” recipe (with a bit of a tweak) that you can find on the side of Bran Cereal box….it is also a muffin that my Aunt Margaret used to make for us every Saturday morning during the summers on Cape Cod. It is such a great memory for me….
So, you will find the recipe on the box – but here it is….
1 ½ c of flour, 2 tsp of baking powder, ¼ cup of sugar, ¼ tsp salt, 2 cups of Kellogg’s All Bran, 1 ¼ cup of whole milk, 1 beaten egg, ¼ cup of veg oil, raisins ….and I add in one stick of melted butter…. (of course, I do!).
Preheat oven to 400 degrees.
Combine all the dry ingredients and set aside.
Add milk to the bran cereal and let it sit for a couple of mins…. then add egg and oil.
In the mixer add the cereal and then slowly add the dry ingredients – mixing well. Now add in the melted butter and continue to mix for another min or so.
Now using a tablespoon – fill the muffin pan (that you have greased). Bang on the counter to remove any air pockets and then place in oven and bake for 20 mins or so. Serve these immediately when warm with more butter on the table. Include a large glass of cold milk……
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