When we stated that we thought that up to a 2500 point correction could be coming, the thought process was that it would play out over the next quarter or so. The thought was based on the quick internal deterioration from the previous days combined with the MASSIVE, MASSIVE, MASSIVE bullishness, froth, speculation and all that goes with it…combined with how extended the move became off of the January romp. We had no idea it would happen in days but that’s what happens when you have not had a correction in 15 months. That’s what happens when passive investing pervades. That’s what happens when you get such a one-sided trade. That’s what happens when you have record margin. That’s what happens when complacency is about as complacent as it can become. When things turn, all that greed turns into fear quickly, thus the sharp move down both here and around the globe. We now know the geniuses were at it again as a few “products” blew up. We suspect there will be quite a few class action attorneys making a few bucks in the months ahead.
But now what?
Anything is possible. After all, we are being told the Dow moved 20,000+ points in the past week throughout the days. Frankly, not sure we can match some of the moves we saw. 100 point moves in 10 seconds. Not kidding. 300 points moves in a few minutes. 300 points the other way in a few minutes. 500 point moves in 20 minutes. 1,000 point moves in hours. Our motto…DON’T BLINK! But we do have some thoughts from here.
We suspect Friday’s action puts in a low for now. (“Now” could mean hours in this environment!) That was one heck of a late day reversal OFF OF MAJOR SUPPORT AREAS as a few important indices tagged or undercut the longer term 200 day average and powered back up a few. This was the institutional crowd playing defense right where they needed to…and suspect there could be some upside testing. But that is far as we are willing to go right now as there has been a lot of damage done. Everything around the globe had sharp drops through short-term and intermediate-term levels. We have been asked a dozen times whether the worst is over. Our only answer is that it is too early and need to see some cards come out of the deck. Normally we would tell you no way as damage like this does not lend itself to just turn back up but with central banks at the ready, we do not put anything past this market.
So what do we mean by central banks when all the headlines claim we are at the end of the easy money parade? We think those headlines are nuts. Easy money is here to stay. Any headlines are opinions. Here are the facts:
This past week:
Japan said they are not ready to move rates from negative even back to 0%. They also said they will continue to print money and in fact said they stood ready to increase if necessary.
Europe has been teasing a little tightening but remain negative with rates and are still printing money. The latest excuse to not tighten? Draghi all of a sudden, is worried about a strong Euro…so no tightening there…and
We are still at a whopping 1.25% and guess who said this? “Investors really do understand now that we will be there to prevent serious losses!” Drum roll please! That was Jerome Powell, the new fedhead in 2012. Need we say more.
As you know, we write a lot more during bear phases because Wall Street is always bullish. Time will tell but we think there just may be some more time and price once any anticipated bounce hits the wall. Stay tuned. We suspect the action will continue to be wild in the days ahead.