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2.7.2018 - Free Investment Letter Bookmark

Volatility Strikes


Here’s an interesting tid-bit:  The S&P 500 went 94 days without a +/-1% change and then had 5 in 8 days.


That pretty much sums up what has been going on over the past few days. Since the big plunge and bounce on Monday, we’ve seen the market travel up and down over 1000 points combined. I didn’t take the time to add up the swings today, but suffice it to say, it was wild.



For instance today, the DOW put in an early high, up 381 points at one point. Then an hour later it was up just 3. Yes, just 3. The S&P had been up 16. It went red. This has been going on for two days now.


Yesterday, all they talk about is that the DOW ended the day up 560, after Monday’s 1100 point drop. What they didn’t  tell you is that at various points during the day, the averages were RED.


After YEARS of having very little volatility, the big trade on the street was to short volatility. In fact there were so many shorts that when volatility went crazy, it was blowing up ETN’s.  It’s not every day when something drops over 100 dollars per share. But if you look at a chart of the XIV, you see it was trading at about 130 bucks 4 sessions ago, and now it’s 6.


So what’s it all about? Where did all this shaking come from. Well that depends on who you ask. Really. Some are absolutely convinced it’s the Central banks pulling the rug on the market so that Trump takes the fall for a market crash. Some think that it’s the fear of rising interest rates, and a new Fed head that wants them higher. Some thought it was the budget debate and debt levels to keep the Government open.


It could be any of them, or all of them. Or, none of them. I hate to be that flip about it, but seriously, consider where we are in this wild world. A war is raging between the FBI heads, and Nunes. The Russian collusion story has been shot to hell, but they won’t let it die. We’ve got more and more memo’s coming out almost daily, and new names are implicated.


Could it be that some of this nervousness is related to all that? Sure it could. But again, I think we have to look at ALL of this in the context of where we are.


The market has risen to nosebleed levels, and NOT organically. It got there because of massive injections of Central bank liquidity. Sure all that seemed necessary back in 2008/09 when the global markets were hours away from total melt down. But guess what? They didn’t stop.


Take a peek at the following chart which shows the Central banks balance sheet, back during the shake out of 2008 and where they said things were fixed:  


But interestingly, one might have thought they’d pull their foot off the accelerator and work off some of that froth once the danger had passed, right?  Well not so fast. Take a look at this chart which continues from 08 to present:


Now, when you have a nosebleed market, fueled by umpteen trillions of Central bank money, which pushes the markets to levels of absurdity, it really doesn’t take a rocket scientist to think that “some day” something might break.


Well, what ever the straw was that creased the camels back, it started last week and got wild on Monday. Remember that at one point Monday the market was down 1600 points.  Since then the market has been a hot mess of ups and down.  Again, think about today. An hour ahead of the close the DOW was up over 150 points. Guess where we ended? Red by 19.


So, we’ve had a fake run up built on cheap interest rates and trillions in Central bank money. At some point, we had to run into issues. Then we had budget problems, FBI problems, Memo’s, rising interest rates, a more hawkish Fed, and who knows what else.


Now of course the question is this: The Central banks juiced the global markets, because they know that so many things are pinned to a rising market that if they were to actually truly pull money out, all manner of hell would break out.  They’re almost in a box where if they keep printing and pushing the market, they’re just blowing a bigger monster bubble. But if they pull money out, then the markets will fall like a rock, and all those cross party swaps, all those derivatives, all those loans that used stocks as collateral, are going to implode.


Not to mention the pension funds that are so underwater they need every ounce of help they can get. So it’s indecision time in market land. Some are betting the party is over and they’re selling. Others are thinking this was the closest thing to a correction we’re going to get and they’re piling in. That’s why we have these wild gyrations.


We’ve been sitting it out. Late last week, we took our profits on what we had in our short term trading account and since then we’ve done a lot of nothing. Well, that’s not terribly true we have had some fun playing with the DIA’s during the day when we’ve seen this tremendous run ups. When a market is gaining and falling 300 points in hours, it’s been fairly easy to pick off 2, 3, even 4 dollar per share gains.


But the bigger deeper question is of course, what are the Central banks going to do? The “only” way out of this is to keep the markets up, and sacrifice the US Dollar. But even that can’t go on for ever. If rates do rise, and right now the Fed’s are hinting that they’re still going to hike them, that can put quite a damper on things.  At this point the only thing that you can truly say is that a correction was long overdue, we’re getting or are “in” one, and it isn’t clear yet what’s next.


The one thing I feel fairly confident about is that I don’t think we’re going to be seeing a repeat of 2017. I think we’re in a period now where we chop sideways, see pops and drops and they let this market unfold itself.  For the first time in a long time, it’s time to get really cautious. In the real near term, I’m thinking we see a bit more down, before we see any meaningful up.


Good luck out there, it’s quite a show!

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