|Dow||-153.49 to 16,461.32|
|S&P 500||-14.17 to 1,927.11|
|Nasdaq||-36.63 to 4,382.85|
|10-YR Yield||+0.02 to 2.229%|
|Gold||-$9.60 to $1,241.10|
|Crude Oil||-1.95 to $80.54|
But over the past week, that’s exactly what we’ve seen. The Dow Industrials miraculously started levitating from down-450 in the middle of last week, and then we rallied all the way back from around 15,900 to 16,600 before today’s decline.
The move in the Dow Transports is even more striking. Look at this chart below. We took a few weeks to plunge around 1,000 points … then gained almost all of that back in just six days. It’s as if every concern in the world — from lousy Chinese and European growth, to the Ebola outbreak, to deteriorating earnings, to massive technical divergences, and more just went “Poof”!
Just how unusual is that? Well, look back to the 2011 debt ceiling crisis. The Dow Transports started plunging in July of that year, then flopped and chopped around all the way until October — testing and re-testing their lows. Then they didn’t recapture their old highs until January 2013.
Or how about the summer of 2007? That was when the last major bear market was just getting started. We saw the Dow Transports plunge in July and August of that year.
That was followed by a relief rally to be sure — but one that got nowhere near the previous peak. Several retests of the low followed, before the Transports resumed a decline that lasted until January 2008. And I’m not even talking about the disastrous, multi-stage collapse that occurred later that year.
In other words, what just happened in the Transports (and to a lesser extent, the Industrials and S&P 500) is very rare in my work. So what the heck is going on? I’ve seen a couple of theories:
Algorithmic (computerized) trading — Historical stock market movements follow human emotions to some degree. It’s extremely rare for a person to swing from massive depression and fear to giddiness and euphoria. So it’s abnormal for stocks to fall and fall sharply, then immediately reverse course and soar as if nothing happened. It takes time for the human psyche to repair itself, and for investors to get over the shock of a sharp downturn and start tip-toeing back into the markets.
But machines don’t think like we do. If more and more trading activity is just computer algorithms chasing momentum, and high-frequency bucket shops fighting over every last share being traded, then it’s possible the slightest sign of a reversal of a pullback or correction would lead to buying, buying, and more buying.
Central bank put speculation — Let’s be honest. Central bankers these days are acting more like day traders than calm, cool, and collected policymakers focused on real, underlying fundamentals.
|Central bankers are acting like day traders instead of focused policymakers.|
Literally a matter of days after saying that the economy was strong, optimism was increasing, and that interest rates need to normalize sooner than many on Wall Street are projecting, Federal Reserve officials completely switched sides.
A handful came out and said you know what? Maybe we won’t stop QE entirely at our next meeting in late October. And heck, we could even launch QE4 if we have to!
What changed? Certainly not the underlying economic data — it continued to show the U.S. doing relatively well and Europe suffering. Instead, they were clearly reacting to a 1,200-point decline in the Dow as if it were the end of the world. That brought out the “buy the dippers” crowd in force, on the assumption even more monetary heroin would be dumped into the market.
The other possibility — and this is my main theory — is that investors are just conditioned to expect nothing less than rising markets. We’re now almost six years past the worst of the last bear market. We haven’t had a serious double-digit correction (15 percent-20 percent) since the 2011 mini-meltdown.
|“Investors are conditioned to expect nothing less than rising markets.”|
So investors figure they can’t lose by just buying stocks willy-nilly and racking up profits. They came in and “sold volatility” aggressively as soon as it began to spike, and that helped send stocks right back up.
I believe we are at or close to the point of exhaustion on extreme central banking. Not all central banks are pulling in the same direction anymore, and there is ample evidence that QE serves no useful purpose for the underlying economy whatsoever (even if it temporarily gooses asset values). That makes it much harder to launch fresh QE.
Even after the sharp rally, many sectors and individual stocks are also lagging badly and still trading below significant technical resistance. Finally, we’ve gone from having a synchronized global economic recovery (just at different paces in different regions) to a divergent one. Some major economies are even slumping into outright Double Dip or Triple Dip recessions!
So in that scenario, I find it extremely hard to believe we’ll just be off to the races again. That’s why I am continuing to look at paring back exposure and/or potentially hedging more aggressively into this rally, rather than embracing it wholeheartedly. V certainly isn’t the most common letter in the American alphabet — and 9 times out of 10, it isn’t the most common one to use in the stock market, either.
How about you? Is it all puppy dogs and ice cream again for stocks? Or is this extreme volatility signaling a trend change — the end of the V-Shape Recovery myth? What sectors or stocks would you be buying here, if anything? Or are you holding off to see what major trend unfolds next. Go to the Money and Markets comment section to join this very important debate!
|Our Readers Speak|
In the wake of the latest corporate earnings news — and the extreme volatility we’ve seen the past few weeks — many of you weighed in on the website.
Reader Anthony G. said with regards to the market: “This time might be different. The Fed may win. I just find it hard to accept.”
But Reader H.C.B. said: “I remain very skeptical of this stock market and this economy and this administration — and consequently, am extremely unlikely to be fully invested in stocks or bonds, even good ones.
“I value the return of my principal, as did author Mark Twain. The chances of suffering a big loss are significant in my mind because the real risks in this kind of market are not always evident or visible, but we get a preview now and then (As we have in the past several weeks with this modest, if not short, correction).”
Thanks for the input to both of you. I believe we’ve seen some serious technical damage done to the markets, despite the sharp rally back. So I’ve gotten more conservative in my investing strategies — and am skeptical we can just run right back to and through new highs. We shall see.
As for companies like Coca-Cola (KO, Weiss Ratings: B) and McDonald’s (MCD, Weiss Ratings: B-), opinions were split as well.
Reader Kathryn H. said: “Baby boomers, of which there are millions, have drunk Coke all their lives and will reject fast food and other restaurants which don’t sell it. So please don’t throw KO under the bus yet.”
But Reader Howard said: “It’s not so much the captive markets that fast food and fizzy drinks are in trouble with. It is more the demographics in newer markets that pose a threat.
“In years gone by, the big names only had competition from the same product type competitors. Now they are having to battle worldwide consumption trends like ‘fresh is best’ product ranges.”
We won’t settle this debate overnight. But when I have to get fast food for myself or the kids, I stay away from McDonald’s most of the time. I’ll take them to a Moe’s to get a fresher and better tasting burrito, or something like Chik-fil-A. I enjoy its somewhat healthier and better tasting options, including zestier chicken sandwiches, nuggets (including grilled ones) or side items like fruit.
Make sure you go to the website now if you want to weigh in. Here’s the link!
|Other Developments of the Day|
There it is right on the front page of the Wall Street Journal’s website: A story titled “Global Growth Woes Threaten to Beset U.S. Economy.”
It pretty much hits on all the same points I’ve been making for a while — Europe is dangerously close to deflation, China’s economy is slowing, volatility is rising, and the Fed can’t keep saving the day.
Consumer inflation came in at 0.1 percent in September — both the headline CPI and the “core” number that excludes food and energy. Since, you know, we don’t use any of that stuff!
New Ebola travel restrictions are taking effect. They will funnel individuals flying from three West African nations through five gateway airports in the U.S. — Chicago, Atlanta, Newark, New York and Washington D.C. The idea is to make sure anyone coming from Liberia, Sierra Leone or Guinea is subjected to stricter health screening upon landing.
How much money does the average middle class American have saved up for retirement? A “whopping” $20,000, according to a new Harris Poll. That’s just 8 percent of the $250,000 that would serve as an adequate cushion.
More than one-third of those polled weren’t saving a single, solitary cent in their 401(k)s. But that’s okay, Janet Yellen and Mario Draghi. You just keep printing up trillions of dollars for the Goldman Sachs’s of the world to feast off of – and I’m sure Main Street will get its share any day now.
Until next time,
P.S. Today, thousands of your fellow investors attended “Your Retirement Miracle” Session #1 of Martin’s retirement course.
The good news is, it’s still not too late: If you enroll in the course now, you’ll immediately receive the link to view the video of today’s session … PLUS he will also send you the link to download the free report that goes along with it. Click here to register!