Posted | by David Moenning |

By now, anyone thinking that the low of the current corrective phase had been "put in" on October 11 is probably more than a little disappointed. Maybe even a bit dazed or even confused. It seems there were a great many folks who believed that the bulk of the pullback happened on 10/10 and 10/11, that the ensuing 3-day rebound was the "bounce, and that Monday and Tuesday's action represented the "retest" of the low. As such, the consolidation phase and the rally resumption were likely just around the corner.

But as I wrote in Monday morning's missive, for me, the big question to start the week was if we were still in "stage 1" - aka the initial decline. And while the jury is still out, Wednesday afternoon's dance to the downside certainly seemed to support the idea that the correction process is ongoing.

Fundamentals, Really?

All day long yesterday, we heard about the fundamental factors that were supporting the dive, which, until just after lunch, had been focused largely on the technology sector. The TV hosts talked about the impact of the Trade War, the Fed overshoot, the slowing growth, and, of course, the surefire end to the economic expansion here in the U.S. Thus, we were told that investors of all shapes and sizes were busy making the appropriate adjustments to their portfolios.

Or... Another thought is that once the major indices broke Tuesday's low, the systematic/programmatic selling kicked in again. As such, there could very well be some additional price discovery to the downside ahead.

From my seat, Wednesday's action was punctuated by another round of what I call algos gone wild. Call me cynical if you must. But I have a very hard time believing that John Q. Public was busy shifting his family's 401K positions around because of the latest punk report on New Home Sales. Or that mutual fund managers everywhere decided it was time to give up on the semis. Or, more to the point, that the 530-point dive on the Dow, which occurred in less than 90 minutes, was anything more than an example of program selling at its finest.

I Get It, But...

Yes, I completely understand that "Texan" (aka Texas Instruments, symbol TXN) had some pretty rotten things to say about the future. And that revenues were down at United Parcel (UPS). And even that there are a bunch of companies mentioning rising costs and/or supply chain interruptions, which is really financial-speak for Trade War consequences. But c'mon, 533 Dow points in 87 minutes without ANY news whatsoever? Please.

Before I'm accused of being overly naive, or worse yet, in denial here, I must admit that this is simply the way the game is played these days. "Risk happens fast," we're told. But from my perch, it appears that the current debacle is really all about the fear of what might happen and then buyers sitting on their hands whenever the algos kick in.

The Fear Trade

Like previous waterfall declines, this one seems to be focused mostly on fear. Fear that the Fed will overshoot, tighten too much, and stop the economic expansion in its tracks. Fear that Trump and Xi Jinping will act like stubborn old men and let the Trade "skirmish" wreck the global economy. Fear that the tight labor market will create inflation, which, in keeping with my theme, will kill the economy. Fear that the purported economic slowdown will mean lower profits for Corporate America. Fear of geopolitical issues in the Middle East. Fear of an ever rising dollar. Fear that higher rates will become competition for stocks, which, of course, means lower multiples. And so on.

Here's the key. Fear can indeed cause and sustain what I like to call "mini" or cyclical bear markets. Exhibit A here was the "mini" bear seen in 2015-16. At the time, everyone feared the impact of China's currency devaluation, the country's slowing growth, and the collapse in oil. And had it not been for Super Mario (aka ECB President Mario Draghi) "saving the day" by announcing more QE in February 2016, things might have turned out very differently.

Then there was the "mini" bear of 2011. If you will recall, this adventure in selling knocked the S&P 500 down by about 19% in less than 3 weeks as traders were busy breaking in new high-speed trading algos, fretting mightily about Europe's banks, and what might happen to the U.S. after our debt was downgraded. Personally, I think we can call this a true panic situation, which isn't completely dissimilar to what we are seeing today.

To be sure, I'm not saying we have nothing to fear but fear itself. But at this stage of the game, it appears that the action is being driven primarily by fear.Fear causes selling. The selling breaks technical levels, which causes more selling. Rinse and repeat.

This doesn't mean we won't see another "mini" bear - as always, anything can happen in this game. But it is also important to recognize that the fundamental backdrop remains pretty darn good here in the U.S. So, unless something really bad happens, I don't see how this morphs into a major bear market such as we saw in 2000-02 or 2008.

Good Things Can Happen

Finally, at times like these, we must remember that good things can also happen! For example, what do you suppose the stock market will do if Trump announces plans to solve the trade situation and then Jay Powell decides it might be time to be "data dependent?" Hmmm... I'm guessing the word "melt up" might be used a time or two.

So... Before you run out and bury your head (and your portfolio positions) in the sand/savings account, remember that this too shall pass and that getting every wiggle and giggle in the market right is downright impossible. So, unless/until a big, bad bear looks to be coming our way, it is probably best to stay seated and to keep the current ugliness in perspective.

Thought For The Day:

The greatest glory in living lies not in never falling, but in rising every time we fall. -Nelson Mandela

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research

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At the time of publication, Mr. Moenning held long positions in the following securities mentioned: None - Note that positions may change at any time.

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

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