Crash!
By Claus Vistesen
In case you did not notice it, the much discussed "range" on the S&P 500 broke in spectacular fashion today as the short rollers bypassed the 1250 mark in the same style as the Germany panzer passed the Maginot line back in the early stages of WWII.
Basically, too many people tried to catch the knife of the falling market (everywhere) in anticipation of just one good data point or perhaps CB intervention… but nothing came!
As such the pain trade is still down I think. Of course, we DID walk into the office to some JPY selling by the BOJ and the ECB finally looked outside the ivory tower to see the badlands that its stfu policy has so far engineered even if the continuing mention of inflation risks somehow strikes me as beyond crazy.
With most market participants probably now sitting shivering in a corner wishing today were Friday there is indeed a day tomorrow and one has to assume that a bad jobs report will bring the whole world down on the back of stock investors. Blood is currently flowing but it can get worse, much worse than this.
Given the feedback loop between our recession indicators and the S&P 500 with the former taking the latter as an input there is clearly now a real risk of a recession in the US and on my casual calculation it is well above 50%.
Now, if the pain trade is still down the decision by BNY Mellon today to charge customers for holding large piles of cash indicates to me that the pendulum has swung extremely fast into uber fear mode. My feeling is that the market has much further downside from here in the short term, but nothing goes down in a straight line forever. In this sense a US recession market level is likely to be very close to this level, it may still squeeze the longs yet awhile.
More generally, I am constructive on how this might impact emerging markets in the sense that inflation is now likely to be even more a non issue. This is especially the case in economies which have mainly been combating headline inflation (e.g. Chile with India as a rather more sinister case of demand pull inflation too). There will be no recession in EM and therefore a re-rotation into EM from here on as DM slumps into a recession is one way to stay constructive even in the midst of the bloodbath taking place.
This article originally appeared on Alpha.Sources.
All indices are flirting with their 6 months EMA crossing under their 10 months EMA. Go back 100 years and look at these crosses. When they happen, you are about 10 to 20% into a new down or up move on a down or up cross respectively . If they kiss off and do not cross, you usually get an opposite move like last August. In other words, we are at moving point and an up or down move will likely accelerate from here. Maybe we are extremely over-sold and a bounce off will happen and the world can support a ho-hum flat GDP picture but can the weak world-wide demand support a hum-hum world GDP picture? If not, what can support a bounce?
But what would be a good number here ? … surely, the result is given already. I just don’t know what it is :)
I saw Barton Biggs talking up the Market today and yesterday and he’s saying it’s a capitulation move down. Well it had better be and I imagine given what you’re saying Roger and what Claus Vistesen is saying that you really need some government action to support the market if we are going to see that 10% to 20% move be an upside one. EVERYONE is looking at non-farm payrolls. This will be big!
If the fate of equity markets worldwide relies on a couple of thousand unemployed US citizens, this will become epic.
Edward,
With such a huge down move today in price and volume and pretty much a large price fall over the last few weeks, you would think we would bounce no matter the news. But watching all the talking heads today, it seems most expect a bounce. I think even if the market is extremely over-sold, if a majority is looking for a bounce, a bounce is the last thing that will happen (the market never gives what is expected.) Also, with the leverage of Money Manager Capitalism, I am wondering if there is some extreme liquidity/margin problem in a market or markets, and large parties are having to liquidate stuff to satisfy margin or counterparty collateral calls and we are in a negative feedback loop. For example, I heard some major issues had sell to buy orders of 100 to 1 for much of the day (it seems that with such a lopsided sell to buy order flow, some entities have to sell versus having any choice in the matter.)
Retail is very animated by this sell-off so it will bei nteresting to see how tomorrow goes given the fact that it’s a Friday and that makes people nervous. Since the ADP number was in the mid 100s, a BAD number would be something like +50,000 since government probably trimmed payroll. A good number might be 200-250K. if we get a 250K NFP, then downside might be more limited.
Side note, the logic behind a 6 month EMA and 10 month EMA, is that they are smooth enough to filter out almost all noise, so when they cross it confirms institutional money is moving in that direction. That is why these crosses are just the first 10 to 20% of a move – it takes institutional money many months to over a year to complete such a move.
I read a report that “insiders” are net selling their companies’ stock at rates higher than ever seen and data, keeping track of those transactions, has been around since the mid or early 1970s so that is a fairly long history for the highest rate to be set.
Have you seen reports on institutional money flow (I think it is weekly delayed and is proprietary information sold by Trim Tab and other similar companies for pretty high fees, so I only see the data when news reports quote it.)
I have not seen reports on institutional money but you would expect fund redemptions or purchases to be a big driver of that.
Here is a free service I use for mutual fund flows (it is about a week delay) https://www.ici.org/research/stats/
Here is teh latest reading: https://www.ici.org/research/stats/flows/flows_08_03_11
It shows an increasing trend of outflows the last few weeks.
I was expecting this fall last year. QE has kept this bubble inflated till now. The interesting thing is who will be nursing big losses next week?