Everybody I read and listened to called it. The S&P 500 (SPX) was going to test the August 24th lows, then test the October 2014 lows then bounce back to 1950. If you came into 2016 as that as your market thesis, you might as well drop the mic and go home. It all happened in less than 2 months:
But now, the the latest W bottom has many thinking that was it and the ol’ buy the dip mentality that served investors so well in years of a Fed induced levitation of risk assets is back. The big problem with that thinking is that it’s probably different this time. And while I’m on the mic, the suckers run. I’ll defer to Mohamed El-Erian, certainly no “fear monger” to explain. From yesterday’s BloombergView :
the continued ability of central banks to repress financial volatility is increasingly in doubt. The institutions that are willing to pursue such policies, particularly in China and Japan, are facing questions about their effectiveness. And more able central banks, such as the Federal Reserve, may not be as willing to do so, particularly given economic indicators suggesting that financial volatility has not contaminated economic activity and that wage and price inflation are starting to pick up.
So far in 2016, some of the most volatile period for equities have been around ECB, BOJ, PBOC and FOMC action and/or meetings. I think this reinforces El-Erian’s point above, and his conclusion:
The world is experiencing policy and economic realignments that undermine two notions that have served “buy and hold” investors well in the last few years: that global growth, while low, remains relatively stable; and that systemically important central banks continue to be both willing and able to repress financial volatility and boost financial asset prices.
This paradigm is coming to an end. Moreover, what may follow is far from predestined, depending in large part on whether politicians are able to bring about the much needed hand-off from excessive reliance on central banks to a broader policy response. In the meantime, we all better get ready for the return of greater financial market volatility.
No matter how constructive you think the recent bounce is, I’ll just say this, if the SPX fails l at 1950 (or gets above for a bit and can’t hold), right at the 50 day moving average, than the technical set up for stocks in the first half of 2016 just went from bad to worse. The series of lower highs and lows since late spring, with a few bouts of severe volatility, not just in stocks, leads me to believe that the causes of prior volatility are very likely to return. Largely for one main reason, The ECB meets again on March 10th, the BOJ meets again on March 15th, the FOMC meets again on March 16th, and who the hell knows that the PBOC is going to do.
The long term chart of the SPX from its financial crisis lows looks like a disaster waiting to happen from where I sit, having early this year broken the uptrend that had been in place since early 2009, and not butting up against what was prior support:
Maybe we get back to 2000, but we would still be in a downtrend from the 2015 all time highs, and if we fail there we would only fall harder in my opinion. The topping formation in the SPX that started in 2014, has been one of very poor breadth, and a rejection at long term resistance, at the first break of an epic uptrend, and re-test of the Feb 11th lows, which were below the lowest levels of the last 16 months would place the largest equity index in the world in a very precarious position, with little support for another 200 points.
Regular readers know that we covered a lot of shorts, and have tried to be very patient about putting new ones out, but we are now gaining more confidence in the short trade set up, especially with all the central bank speak due in mid March.
We had a massive relief rally off of a near panicked position just 2 weeks ago. This is purely anecdotal, but while risk assets felt a little panicky on Feb 10th/11th, it was far from capitulatory/puking type behavior. We have not seen that yet. That’s what August 24th felt like. It’s my view that global stocks are not in a crash mode, but more of a one step up, two steps back sort of market. The ingredients that made stocks irresistible to global investors leading up to 2015 no longer exist, and the latest stage of monetary policy stimulus (NIRP is likely to yield a very different set of results for investors in risk assets.