What Is Real And What Is Artificial?
What a difference a few days can make in this business, right? Seven days ago, the Dow closed at a fresh all-time high. The market narrative at the time was well known. The economy was booming, and rates were rising for "the right reasons." At that time, the thinking was that stocks could "handle" higher rates and a bit of inflation was welcome. After all, getting some inflation in the system was what the Fed had been working on for years.
Then Jay Powell made a couple comments that were interpreted as being more hawkish than expected, causing many to conclude that the Fed is about to change course. With Powell saying that the Fed could go "past neutral," uncertainty was suddenly back in a big way. In response, traders threw a temper tantrum to the tune of 1377 Dow points and a decline of 5.3% on the S&P 500 - in just two days.
To be sure, the concept of rates rising more than expected is problematic for stocks. Especially growth stocks, where the value of future earnings becomes more difficult to ascertain. Especially for highly levered companies. And especially for those stocks that have doubled recently.
Yes, the stock market is indeed a discounting mechanism of future expectations. As such, when you mix higher rates with the idea of tariffs beginning to bite, a prolonged trade war, a slowdown in global growth, and perhaps mounting inflation pressures, some corrective action in the stock market is to be expected.
However, I have a serious problem with the idea that Wednesday's dive of 838 points and Thursday's decline of 546 points represents a "normal" correction.
Yes, I am well aware of the fact that "risk happens fast" in the stock market game. And I certainly understand that everyone moving in the same direction at once can create waterfall moves.
Yet at the same time, I want to suggest that a fair amount of the plunge in stock prices seen this week has been the result of algo-driven trading reacting to technical action on the charts. For example, yesterday's shellacking really got rolling when first the S&P 500 and then the Dow Jones Industrial Average failed to hold their respective 200-day moving averages.
For some reason, traders believe that the 200-day is a magical line in the sand that separates the bulls and the bears. And the bottom line is a break below this line usually leads to more selling pressure.
As the big dive really began to roll yesterday afternoon, the always energetic Kenny Polcari told CNBC, "It's all technical right now," and the market is "not paying attention to fundamentals." With the Dow appearing to "flush" several hundred points during his 3-minute segment, Kenny exclaimed that the move was being driven entirely by algorithmic trading.
As long-time readers know, I've been yammering on about these types of algo-induced moves for years. The point is that once the trend-following algos get rolling, they simply don't stop. And in my opinion, this means that a fair amount of the action on days like Wednesday and Thursday becomes artificial.
So, just like that, much of the S&P's gains for the year are gone (the S&P 500 starts today up just 2% on the year - and 3.5% after dividends). Just like that, the major indices are all below their 200-day moving averages. And just like that, the talk on Wall Street is about corrections and the "new narrative."
My point on this fine Friday morning is that at this stage, it is not clear how much of the current dance to the downside is real and how much is simply a result of algos gone wild. Thus, it will likely take some time to sort things out.
To be clear, I am NOT suggesting that everything is hunky dory here. I've been complaining about the state of my primary cycle models and the technical divergences for quite some time. Nor am I saying that the current move should be ignored. In fact, it can be argued that the current decline in the U.S. represents a "catch up" move in what NDR's Tim Hayes believes may be the beginning of a global bear market.
What I am saying is that a portion of this week's devastation has been artificial. As such, a bounce of the dead cat variety may be in order in the near-term. And with 30 minutes to go before the opening bell, it looks like stocks are going to attempt to rally a bit at the open. But remember, in this type of market environment, it isn't where you open but where you close that really matters.
Bottom Line: The action is currently wild and woolly - and at least a portion of the move has to be viewed with raised eyebrows. As such, I am going to be spending my time trying to ascertain what is real and what is artificial. Wish me luck!
Thought For The Day:
Enjoy the little things, for one day you may look back and realize they were the big things. - Robert Brault
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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