Monday, February 05, 2018

Welcome Back!

It's been nearly a year since my last post but frankly there was very little to talk about.  However, I got an alert from the host of the blog today that traffic was spiking despite the fact that I hadn't posted anything so I thought I should touch base.

Obviously, the markets are unraveling a bit so let's talk about what's going on.  First, despite all of the headlines screaming about the WORST POINT DROP IN HISTORY.... The reality is that this is only like the 100th worst day in the markets on a percentage basis.  Yes, when stocks have gone straight up for a year it can feel weird to have a couple of down days, but ignore that clickbait on you Facebook feed.

Since November 2016, the markets have been a one way street of buy everything and never sell.  So every day for the past year the markets became more and more boring, buy at 3am, sell at 4pm and try to avoid all of the nonsense talk about cryptocurrencies on the financial networks. 

However, 2 weeks ago I was struck by the increasing interest of "casual market observers" suddenly reaching out to me.

* "I keep hearing about the stock market, should I buy something?"
* "Can you believe this market?"

These are just anecdotes, but when a collection of these items hit my phone at the same time it's usually a sign that the last retail investors are finally getting ready to take the leap into stocks.  For reference the last time this happened was 2008 and before that is 1999-2000.

Around this same time, the bond market started to make some unprecedented moves (well, unprecedented relative to recent past).  I won't go through all of the machinations here, but suffice to say that the bond market is really the one to watch.  Combine spiking interest rates with a collapsing US dollar, a leveraged US consumer and corporate balance sheets flooded with debt and you have some very ominous signals hitting the market all at once.

Well, you might be saying, that's great to know now, but where were you last week to tell us this?  True, but we've had warning signals like this in the past (2011, 2013 and 2015 to be precise) and every time the Fed has stepped in to stop things from getting out of hand.  However, this time it feels different because it feels like the Fed is really boxed in a corner now.

The Fed has stated that they are beginning to unwind their balance sheet and attempting to tighten monetary conditions.  However, rates are rising and the US Dollar has fallen sharply this year which puts the Fed in a tough position -

1) Reverse their stated goals for 2018 and attempt to stop the rise of interest rates by buying bonds
and potentially throwing the US dollar into a real currency crisis or

2) Stick with the plan, allow rates to rise, the dollar to fall, and put the stock market at risk (where risk is a 30%+ decline, 50% decline if we enter recession). 

In the near-term, I suspect we'll get some dip buying in the markets, but beware, the fundamental analysts have left the building.  This is a market for the chart readers, of the chart readers and by the chart readers.  If you are not a skilled technician you may get run over in this market.  The after market trades look very ugly right now but that could just be a thin market. 

Try not to get too caught up in the day to day swings, but watch out for longer trends in the dollar, bonds and the stock market because together they tell a better story.



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