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2.6.2019 - Free Investment Newsletter Bookmark

The Bear Bounce
 
If you're even loosely connected to the stock market, you know that back in December the wheels flew off things. 70% of the listed stocks fell more than 20%. Some fell 50. It was fast and it was harsh.
 
But then the spirits flipped and from the end of December until now, stocks have roared higher. Day after day it seemed, the market could only go up. That of course has the TV stock evangelists proclaiming that the new bull market was back in effect, and we've got years of ever rising stock prices ahead.

Or, do we? First we must question why the market put in its pout party. The reason is really really simple. The Feds had begun hiking interest rates and working off their balance sheet. Well, that was going to have an effect at some point and that point was December.
 
I'll beat the dead horse. When the market crashed in 08, they didn't simply let the huge recession clear out the ills. See folks, recessions, even deep recessions are a NECESSARY evil. When things are all manner of bullish and people are throwing money at every lame-brain idea and project, when people are taking outsized risks, it's the recession that clears things up.
 
Recessions work off the excesses. They punish the people that went a bit too crazy, and they blow the froth off of markets. Then, when a state of equilibrium is established, the bull spirits can then once again begin to form and expansion can take place. It's all normal, it's mother natures way of reverting to the mean.
 
But politicians don't like recessions, it doesn't help them get reelected. Wall street doesn't like them, because less people send less money to them to steal. So what they do, is they put pressure on the Feds to bail them out and boy did they bail them out in 08 - 09. Trillions of injected liquidity, gobs of spending programs, and of course, cutting interest rates to zero.
 
So the economy improved and the area that ALWAYS benefits from Fed liquidity, namely the market, went on a tear. There was QE1 and QE2 and the "twist" and QE3. As usual, people jumped all over the money and the zero bound interest rates. People that weren't going to buy a new car, went and bought a new car. How couldn't they, with 0.8% loans? People bought cars and houses and all manner of things.
And so it went. FOR YEARS. Since 2009, our economy has basically been built on the heels of the Feds feeding monetary heroin into the system. So, was it any real mystery that when they started hiking rates that things would get shaky? No, not at all. It was simply a matter of "when?"
 
The "When" hit in November and December. Everyone's blaming the market fall on the Fed's statements in October about hiking rates 4 more times and working down the balance sheet. I think it was deeper than that. I think the market was reacting to all the downward economic reports that started popping up. Consumer confidence fell, ISM's fell, PMI's fell, trucking fell, etc.
 
The market was puking because it had raw data showing a nearing recession, AND a Fed that was being oblivious to it. But then there was a "miracle". By the end of December Jerome Powell the Fed head was talking much more dovish. They liked that. Then it got even more interesting. At the latest FOMC meeting the Feds did a 180 degree about face. Without saying it in such words, they basically said "no more rate hikes and yeah we could stop working down the balance sheet."
 
Which brings up the 64 million dollar question. Is simply stopping rate hikes and stopping liquidity draining, going to be enough to avert the recession? OR... is it already baked in the cake, and hike or no hike, we're getting a recession this year?
 
I suggest that we're going to get the recession. Not because of any future rate hikes they might have done, but because the damage that was done in the past. It's also my guess that before 2020 rolls around, they'll either have done one, or hinted at CUTTING rates.
 
So that all begs the question, 'Isn't the market supposed to be all knowing? If it's going up and up and up, doesn't that mean there's not recession coming?" Well, let's look at that.
 
What if this run up isn't a rebound from the bull market correction we had in December, but is instead a bear market correction? Don't forget folks, the biggest up days in market history, have typically come during bear markets. What if we've actually entered a bear market, but it got ahead of itself in December, and now they're trying to "ease the pain" with this big snapback?
 
I'm voting for that explanation. Do NOT forget that Steve Mnuchin told the press that he had gathered the "presidents working group on financial markets" which we refer to as the "plunge patrol" These guys have the ability to intervene in the markets if things get too ugly.
 
Well things must have been pretty ugly for him to be meeting with those bankers, and it's my absolute belief that 70% of this market run up is because of them. Recently Deutsche bank put out a report showing that since October, there has been consistent and cumulative OUTflows of US equities. Yet if you look at their chart, and put the S&P on it as an overlay, you see something odd. Billions and billions have come out of equities, yet the S&P has gone straight up. Who's buying??
 
That's our plunge patrol folks doing their best to manage the market. They didn't want the December plunge to really develop into something wicked, and they stepped in to stop the bleeding. So from my point of view, we're in the midst of a bear market rally, pushed along by our friendly banker folks.

They can be fast, they can be furious and they can go further than you'd expect. Doesn't anyone besides me find it interesting that even the "bulls" on CNBC are admitting that the Earnings aren't really enough to give us decent growth this year, yet the market is up 15% off the lows and climbing?? Something doesn't add up, and the missing element is our Plunge Patrol folks playing "save the day."
 
The market folks always like to mention "fundamentals" which makes me chuckle a bit. How is it that during the December sell off, the Volume in the SPY was literally 2X the volume we've seen in the last month? 50% less volume, but the S&P soars for 11%? That's manipulation folks, nothing else.
 
This won't last forever. As more evidence of an eroding economy become apparent, we'll start heading lower again. My guess is that they want to "manage" the downside. Then as I mentioned, at some point they'll end up having to cut rates and possibly inject more liquidity. When that happens, all hell breaks loose.
 
We got addicted to 0% interest rates and monthly injections of money. They took the zero away, and before we even hit 3%, we were going through withdrawal. Our economy is sick folks, it needs its monetary heroin to keep going, and right now we don't have it. This run will come to an end, and we will test those December lows. It's just a matter of "when?" I suggest, soon. Within the year.
 
The Market:
 
On Monday and Tuesday, the insane ramp up continued, again on low volumes. Then today, finally they put in a bit of a pause day.
 
Well it should have. The S&P ran smack into its 200 day moving average Tuesday, and today it sat quietly beneath it. So it is now, decision time. If they can power the S&P up and over that 200 day moving average, it's going to probably spark a bunch of Algo-bot buying and we could see another spurt higher.
 
But It does have some things working against it. The technical are pretty mature on this bounce. The Relative strength was up in the 70's and rolling over a bit. We're banging against the upper band of the Bollinger bands, The stochastics are pretty extended.
 

Yet the fact is, that today we really just "sat there". Volume was low, and in a market this high, ending the day down 6 points is a rounding error. If they were afraid of the 200 day they didn't show it.
 
One thing we have to try and guard against is a headfake breakout. Don't forget folks, the markets number one job is to tick off as many people as possible at any one moment. I said a few weeks back that I felt the run was overdone, but to screw as many folks as possible, it could easily keep running. That would squeeze the shorts into covering and keep the dip buyers from getting a dip to buy.
 
So could we see them punch us up over the 200, run for a day or two and then once everyone's in and convinced we're going higher, see them yank the rug? It's very possible, it's almost perfect. The market is sinister like that.
 
Either we fade away right from here, or they headfake us higher and then fade us, I tend to think this run is pretty long in the tooth. Be careful out there.



NOTE> The next issue of Horizons (a letter for the longer term investor) goes out Sunday evening. 

In that issue, we're going to discuss attempting to create a portfolio in something as restrictive as a 401K, that has the least risk, while possibly taking in above average gains.  If you're the person with only a 401K, and wonder where to allocate things, this might be the time to sign up for Horizons. Just click here:

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