Market Volatility Continues to Surge
Over the 16 trading days ended yesterday, the Dow Jones Industrials (Dow) have had an average change EXCEEDING 400 points (1.75%) per day. This level of volatility is FOUR TIMES the average for August and September and nearly TWICE the elevated levels of October and November.
Since bottoming at 21,700, the Dow is up 2200 points in 9 days. That, after losing 2900 in the prior 7 days.
The Slide Show Below is of the Major Equity Indexes. The key takeaways are:
- The Dow, Standard & Poor’s 500, and Nasdaq 100 (NDX) have all broken back ABOVE key Resistance. The Russell 2000 (RUT), however, has lagged. The mini-Waterfall Decline that began on December 1, ended on December 26th.
- None of the Indexes are in Bull Market Patterns yet and have substantial Resistance to work through.
- While all the indexes are now in NEUTRAL Patterns, there is not enough evidence that the BEAR MARKET is over. It appears to be merely, a Bear Market, interrupted.
What Credit Crisis? A Rapid Repricing
The Charts on the left provide an eye-opening angle from which to view the recent market rebound.
The top chart is of the First Trust Senior Loan Fund, a portfolio of bank loans.
The bottom chart is of Barclay’s High Yield Bond ETF (JNK).
Economic bad news, earnings misses, and plunging oil prices caused the credit spread to widen substantially.
In addition, illiquid conditions in the market place made these prone to large, outsized price changes.
What happened? What caused investors to dump credit risk only to panic and buy it a few days later?
Increasing Fed Support Since Greenspan
The Federal Reserve (FED) is known by many as an entity whose purpose is to “support markets”. Why shouldn’t they? The Fed has increasingly acted to stem market declines acting like a “Guarantor” of sorts. Investors have come to rely on the Fed to reduce risk and loss.
A “Put” Option gives a holder the right to sell an asset at a fixed priced for a period of time. Since the Chairmanship of Alan Greenspan, the investors have referred to the Fed’s implied guarantee as the “Greenspan Put”. The idea of a “Put” has been attributed to subsequent Fed Chairmen. Ben Bernanke became known as “Helicopter Ben” for his willingness to throw “Money Out of Helicopters” if necessary to stave of a liquidity crisis. (https://en.wikipedia.org/wiki/Greenspan_put).
The Powell Put
Up until recently, new Fed Chairman Jay Powell insisted that it was NOT the Fed’s job to bail out investors. That’s all changed. Last Friday, the “Powell Put” was born.
Powell said the Fed was “Listening to the Markets” and would soften its policy substantially, if necessary. For the first time, Powell included Fed Treasury Sales in the policy tools subject to adjustment. Powell had previously used the term “auto-pilot” to describe the monthly sales of $50 Billion per month. Now, those sales are subject to tweaking as circumstances dictate. (https://www.bloomberg.com/news/articles/2019-01-04/powell-says-fed-ready-to-adjust-policy-if-needed-can-be-patient).
The markets have come to rely on the Fed’s ability and willingness to prevent an adverse, financial event. That works until it doesn’t. The Fed was unable to predict the 2008-9 financial crisis, nor stop it once it began. There is no reason this Fed will be, or can be, any more prescient.
The concept of a Fed Put is dangerous. It distorts the PRICING of risk accurately and lessens the adverse consequences of taking risk. It is an ingredient in creation of asset bubbles.
Earnings And Warnings Of Slowdown
Yesterday, electronics Giant Samsung guided lower. Samsung now forecasts an operating profits DECLINE of nearly 30% year over year. Samsung, the largest seller of smartphones, cited a recession and tougher competition in the market.
LG, the large Television Maker, guided it’s profits LOWER by 80%. (http://fortune.com/2019/01/08/samsung-lg-profit-warnings/). It did not provide any information as to the sources of the miss.
This morning, it was reported Apple would slash production of I-Phones an ADDITIONAL 10%. For the first quarter, I-Phone sales are projected to be 20% lower than last year. (https://www.zerohedge.com/news/2019-01-09/apples-slashes-iphone-production-2nd-time-2-months).
Buy The Rumor, Sell The News
Financial media reports explain the 9 day “Moon shot” as being attributable to:
- Anticipation of a “Trade Deal” with China.
- Optimism for an end to the Government Shutdown.
- The reduction of Fed Policy Uncertainty.
Make no mistake, this is a Fed induced rally. The 4 day panic buying in both JNK and FTSL (see above) suggests that the birth of the Powell Put was VERY significant to giving the rally fuel. The credit crisis is over for the moment. What now?
There is NO reason to believe that the Bear Market is over, at least yet. More likely it is an INTERRUPTION in the existing Bear Market. This literally may be a “Buy The Rumor, Sell The News” situation.
Nonetheless, capital preservation is critical here. Our ongoing advice to “sit it out of the sidelines” in cash, remains the most prudent course. Keep in mind, that the best opportunities require YOU to be liquid when others NEED it.
Liquidity and Information are the key. That’s where we come in. Be Informed, Not Misled!