On Tuesday, just around noon time, the market fell like the proverbial rock. While it was slightly down from the open, hovering around – 200 points, when the S&P neared the 2760 area, all hell broke loose. How much hell? About 32 billion dollars worth of stock hit the market. All to the sell side. By 2 pm, we had the DOW down 740 points. The S&P down 80.
Where did that come from? The most likely criminals, are the "CTA's". These are managed futures houses, or "commodity trading advisors". One would think with a name like "commodity trading advisors" they'd be content just dealing with wheat or soy beans. But no, Managed futures houses chase momentum and they don't much care where it comes from.
Because they had their algo's set at a particular "deleverage" level, when it hit, the machines sold. Naturally one might ask the simple question "why are commodity trading advisors" running Algo's for stock futures funds, but that's a whole different "fraud" story.
Actually, it didn't really matter where the selling was going to come from. It was coming, whether it was Tuesday, next Friday, or some day in February. Why? Because the market has topped.
Tuesday created a lot of buzz because of the rate "inversion" that is taking place across the 3 month, 2 year, 3 year, and 5 year notes. History hasn't been kind to yield curve inversions, with a perfect record of predicting a recession some 8 or 9 months later. So, was it rate inversion that had all those robots selling?
That was part of it. But just one part. It has been my opinion that the market is in the process of topping out, and all one needs to do is look around and see why. Rates have risen, and the Fed's are on the hook to hike again in December. Car sales have fallen. Housing sales have plunged. Hundreds of stores have gone out of business. Apple's having trouble selling phones. Car manufacturers are laying off thousands. The China tariff situation hasn't been solved.
Add that all up and you come away thinking "wow, what's left for the market to rise on?" Not much. In fact, after running higher for 9+ Years, a lot of investors are moving to the side of bonds. They figure hey, why not get 3% with no risk to principle, whereas in stocks, they could fall by 40% and still be overpriced? So indeed, a lot of movement is happening into fixed income.
Sure, there will be a few companies here and there that will continue with some earnings growth, but overall, earnings have peaked. When you have been told all your investing life that stocks rise because of growing earnings, and those earnings stop growing or "God forbid" decline, then should not the stocks fall? They should.
Granted our market is actually NOT based on earnings. That's your Granddaddy's market. This market is based on credit growth, low interest rates, buy backs and central bank intervention. Well ponder that "credit growth" situation. Companies have borrowed trillions over the past few years, and a ton of them are going to get repriced early next year. For those that borrowed at a quarter of a point, paying 3% is going to be quite a headwind for them.
If you add it all up, you come away with the idea that the overall market really has no reason to get much higher. But there's a problem there folks. Since the big 2008 melt down, everything "Wall Street" has been about pushing stocks higher. Entire portfolio's have been built and sold, using stock prices as collateral. For years there was simply no risk. Now, there is.
So let's ask the big question, why hasn't Bob been wholesale short lately? It's a great question, so let me pick away at it. Every time this market has gone a bit sour over the past 6 years, they've found a way to goose it higher. Whether it's the BLS adding jobs that don't exist to the payroll report, or changing the way GDP is calculated, to Hedonic measurements of inflation, to the Swiss National bank simply printing billions and buying US Stocks to you name it.
These people are criminals folks. To this day the banks still don't have to mark to market! Read that again. They can still "mark to model". So if their fantasy model was for their portfolio's to gain 4% while in reality they lost 5%, they can still report a 4% gain.
With that kind of financial engineering available to them, one really doesn't want to go wholesale short, until you're completely convinced you have a reason to. While all the things I must mentioned seem reason enough, the criminals can still engineer a "kick save" by stopping the unwinding of the Feds balance sheets, cutting rates, having the central banks buy more stock, etc.
So what would prompt me to really be aggressive on the short side? 1) I'd like to get past the seasonality. December into January is historically the strongest time of the year. 2) I'd like a concrete answer to the tariff issue. Are more coming or not? 3) I'd like to see the market lose the October 29th intra day low on the S&P.
Give me two out of those three, and I'll be camping out on the short side. But for now, while the old highs are still in place, and the October low is still in place, big stupid days like Tuesday are nothing but noise. We're still inside the "range" and we need to either break out of it or break down. Neither has occurred yet.
Yes a recession is coming. Actually I can make the case that we've been in one. It's going to get worse. Yes I believe that the market is wildly overpriced. It will come down. But to bet that right now is the very time that it's all over, is a bit premature. I can still see these criminals manufacturing one more "last hurrah" run higher. Add that as number 4 by the way. I'd like nothing more than one last year end run that gets us near the all time high. I'd short that "bigly".
In the mean time, we need to play safely. Any time the market puts in 3 or 4 up days, it's probably time to ring the register, and wait to reload. That's sort of what we've been doing and it's working pretty well. Good luck folks.