Good Morning. This is when it gets interesting. After a six-month rally that produced gains of +23.3% from the November low to the mid-May high, stocks then pulled back -5.76% over a one-month span. And then, as is usually the case, just about the time everybody became convinced that the bears were back, stocks proceeded to bounce back up. Therefore, the question of the day is if this week's rebound is simply a bounce of the "dead cat" variety or the start of something more enjoyable for those holding long positions.
In case, you don't know me at all, I feel obligated to admit that unlike all the pundits on the financial stations, I really don't know which way stocks will go from here. And as long-time readers know, trying to peer into the crystal ball just isn't my game.
However, understanding the drivers of the market and the reasons behind a move are indeed in my wheel house. In short, I believe it is much easier to play the game if you have at least some cursory understanding of why Ms. Market is doing whatever she is doing at any point in time.
So here goes. Let me start by saying that what follows is merely one man's opinion, and I could very easily wind up being dead wrong with my analysis. But given the way the game is played these days, this is always a risk - and this is why I have an exit strategy in place on every position we ever enter.
Okay enough of the caveats, let's get to it. In my humble opinion, the initial pullback from the May 21 highs was quite orderly. Some might even call it constructive as just about everybody in the game had been looking for the relentless rally to take a break. In other words, it was time. And as of last Tuesday, it looked like we had a garden-variety consolidation phase on our hands. But then things started to get nasty.
While concerns about China's growth and the spike in interest rates were part and parcel to last week's rather vigorous dance to the downside, I'm of the mind that the majority of that decline was tied to the market being surprised by all the "taper talk." If you will recall, up until the word "taper" became part of our daily vernacular in the financial markets, the assumption was that Ben Bernanke's bunch was going to stay friendly for quite some time.
But then, almost out of nowhere, the talk about the Fed starting to taper their QE buying program began. And then it became clear that the bond market was freaking out over the issue. The bottom line appeared to be that traders of all shapes and sizes were surprised by the idea that the Fed might start pulling the punch bowl from the ZIRP (zero interest rate policy) party sooner than anyone had anticipated. And remember, traders don't like surprises!
The assumption was quickly made that tapering was the same as tightening. Although this is obviously not true, the thinking was that tapering was the first step in what would eventually become Fed tightening. And thus, the freaking out continued.
But then the jawboning started. With the "wealth effect" and the sustainability of the economic recovery on the line, suddenly noted inflation hawks such as Dallas Fed President Richard Fisher, Minneapolis Fed President Kocherlakota, and Richmond Fed President Lacker were making statements that sounded downright dovish. "Tapering is not tightening" was the battle cry as the three Fedheads attempted to soothe the markets by reminding us that an increase in interest rates is a very long way off.
The "talking nice" hasn't been constrained to the U.S. either. In the last few days we've heard similar comments from central bankers in China, Japan, England, and the Eurozone. In fact, Super Mario (Draghi) chimed in with the exact same phrase yesterday, saying that an ECB "exit" was a long way off.
In effect, the central bankers of the world have been trying to tell the markets that enough is enough. Oh, and the fact that our Q1 GDP print stunk up the joint on Wednesday also lent credence to the idea that the Fed isn't about to change its tune any time soon.
The result - again, in my humble opinion - has been the realization that the reason behind last week's -4.8% decline over four days may not have been completely valid. As such, traders appear to be doing some correcting of the correction.
Of course, I could be all wet here and the focus of the market could shift to something negative at the drop of an algorithm. But for now at least, that's my story and I'm sticking to it. Well, for now anyway.
Turning to this morning... Although volatility has remained exceptionally high of late (June has had the most tripe-digit moves on the DJIA of any month since October 2011) things are fairly quiet in the early going this morning. But we've got another batch of economic data (Weekly Jobless Claims, Personal Income and Spending, Bloomberg Consumer Comfort and Pending Home Sales as well as three Fed governors speaking today (Dudley, Powell, and Lockhart). Thus, it is a decent bet that traders will find something to move the market on today.
"Wise men are not always silent, but they know when to be" --Unknown
Positions in stocks mentioned: none
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