Just some words of advice as futures are down off of last week’s ugly:
No one knows how this plays out. We don’t know but we can take away a few things from last week and the overall scenario.
We have not had a correction since the election. This is the most worrisome part of the equation. There is supposed to be normal ebbs and flows in the market. Up 500, down 200. Up 700, down 300. Instead, it was up and up and up and rest with no pullback, and up and up. This served to attract massive retail money AFTER the big run. This served to get all feeling omnipotent, that markets will never go down. This served to create a gargantuan one-sided trade. This served to get margin skyrocketing. Remember, margin is your best friend in a bull phase as it is fuel for higher prices but you worst enemy in bear phases as greed turns into fear quickly. Margin comes off first before real selling fueling lower prices quickly.
The recent move was somewhat parabolic with price getting about as extended as extended can be. This, very often insures the first move down is straight down…and subsequent moves not so pretty. A week ago, the Dow was 1800 points above the 50 day moving average. This morning, the Dow will open within a few hundred points of the 50 day moving average.
The 50 day moving average is the place where the big money stand up and defend price in a bull phase. A break below will just add to the misery. Watch these levels: Dow 25,016…S&P 2715…NASDAQ 7067.
To repeat, the market has been waaaaaay overdue. The biggest issue we have is the parabolic move without any correction. Very often, this leads to pretty decent-sized unwinds. By the way, a decent sized unwind would be normal based on 8400 Dow points to the upside since the election.
For years, every time markets pulled back, another central bank would up the ante with even easier money. Bernanke with is QE1 to QE3 and when we stopped, the baton was handed off to Europe and Japan, who are still printing and still have negative rates. We are not so sure there is any ammo left and there is a decent chance markets are yelling to these easy money maniacs that they are way behind the curve.
Of course, the swings could be tradeable but you had better get it right. Markets are going to get volatile with back and forth wild swings. The big bounces will get many thinking everything is back to being ok. We think there may be some more time and price on this one but will let markets decide. Be careful of the talk about a strong economy and strong earnings. We can assure you if markets want to go down in spite, they will. Prices are about supply and demand. After 8400 Dow points, demand may have been used up as supply now becomes plentiful. Watch those 50 day moving averages carefully.
The good news and its about time, we will finally be able to isolate strength for the first time in a while. It is easiest to isolate strength when the market is weak as they stick out like sore thumbs.
And we didn’t even mention the memo.