Don't you just love this game? Just about the time that everyone on the planet realizes that stocks are on a roll and will likely continue movin' on up because of, well, you know the drill... something usually comes crawling out of the woodwork to put the brakes on the move. At least for a while, anyway.
To be sure, we have no way of knowing whether Monday's 177-point dance to the downside represents the start of a pullback or was merely a pause in the joyride to the upside. However, most traders and nearly all risk managers have been warning for some time now that (a) the market's recent rate of ascent was unsustainable and (b) volatility was likely to pick up at some point soon.
So, with the stock market futures pointing to another drop at the open on this fine Tuesday morning, the question of the day is if it is time for the much-anticipated pullback, correction, and/or pause that refreshes.
To find some clues here, I like to look at the action and try to determine whether or not the excuse for the selling has legs. So, let's go to the videotape.
From my seat, there were three primary drivers to yesterday's decline: Rates, Apple (NASDAQ: AAPL), and Goldman.
First up is the issue of interest rates. In case you missed it, the yield on the U.S. 10-Year spiked again yesterday, hitting an intraday high of 2.725% before closing at 2.696%, which the media rounded to 2.7%. This represents the highest yield seen since April 2014. And the bottom line is the swiftness of the move has taken many by surprise.
Although economists will argue that rates are rising for a good reason (better than expected global economic growth) and as such, stocks have nothing to fear, the bond bears are out in force talking about the start of the great bear market in bonds.
The key here is inflation expectations and the actions of global central bankers. In short, while inflation isn't prevalent by most measures, the trend of inflation and inflation expectations is definitely moving higher. Therefore, it isn't much of a stretch to argue that (a) inflation is on the rise and (b) both the ECB and BOJ are likely to take notice sooner than expected. Cue the end-of-QE talk.
Next up is the issue with Apple. Reports hit yesterday that the company is cutting production of the iPhone X due to lackluster demand. In response, the stock dropped 2%. And for those keeping score at home, AAPL is actually down so far in 2018.
The bears argue that difficulty for one of the market's poster children will not go unnoticed and could easily drag down the rest of the FAMANG's due to valuation concerns, the massive gains seen recently, etc. Personally, I find this argument to be a pretty big oversimplification, but we shall see.
And finally, there was the report out of Goldman Sachs (NYSE: GS). The headline was "Goldman Sachs sees 'high probability' of a stock market correction in the coming months."
The firm's Chief Global Equity Strategist, Peter Oppenheimer, wrote Monday that the S&P 500 has entered the longest period since 1929 without a correction of more than 5% and that, "whatever the trigger, a correction of some kind seems a high probability in the coming months." Cue the sell algos.
So, there you have it. There were finally enough reasons for traders to rediscover the location of the sell button and for the dip buyers to take a day off. The question, of course, is if the reasons will be enough to cause this combination to continue for a while and if it is time for the bulls to, at the very least, take a break.
For the record, for all the folks out there that have been begging for a pullback to get money invest, this may be just what you are looking for.
Thought For The Day:
When we put our cares in His hands, He puts His peace in our hearts. -Anonymous
Wishing you green screens and all the best for a great day,
Disclosure: At the time of publication, Mr. Moenning held long positions in the following securities mentioned: None
Note that positions may change at any time.
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