For weeks, we have been telling you how sentiment was too bullish. (contrary indicator) Some of our indicators took us as far back to 87 to see so much bullishness. For weeks, we have told you how frothy and speculative markets had become. (bitcoin) For weeks, we have been telling you that the one-sided trade continued to build up as the market refused to even correct 2%. For months, we have been telling you how leverage has picked up in the market. (margin) All this but the markets kept rolling along. Remember, sentiment indicators are not pinpoint in that there is always lag time. Price matters first.
And then came January where the market experienced a whopping 8% move to top off the move we had seen since the election. Since the election, 8400 DOW points were gained since Paul Krugman said the market was never coming back. That 8400 points represented about 6-7 years of normal gains. It was just a matter of time before demand finally dried up and supply took over. Very often this occurs after a parabolic move just like we have seen in January.
Off of the January 17th, ugly reversal day, we actually thought the market was about to correct. We were about 8 trading days early. There was one more small move up off of earnings reports. But while the market made one last move, we indicated that new highs were actually contracting while the a/d was heading south giving us a decent clue that we were getting close.
On tv and on our radio show this past Monday, we stated we thought we were going to see a 5-10% correction (1250-2500 Dow points). The weight of the evidence was building up. We just did not know exactly when but again, thought we were close. Even before the move down:
Interest rates were really starting to back up.
Junk bonds were being slammed.
Interest rate-sensitive areas like utilities, real estate and housing were being crushed.
TRANSPORTS looked to have topped led down by the AIRLINES.
Europe was topping out.
Lastly, while indices were at highs, more and more names were topping. AND THEN CAME TUESDAY! Not the end of the world…just an ugly, higher volume, down day. But it was an ugly, higher volume down day AFTER a parabolic January. This gave us more confidence we were getting even closer. AND THEN CAME FRIDAY!
Very simply, 8400 points without a correction combined with massive leverage (margin) combined with massive bullishness combined with the most extended and stretched conditions we have seen in ages combined with the one-sided trade caused by all this and away we go. Before we get into what we think is next, we are always asked why something happens. We could talk rates or memos or labor costs or the Knicks are stinking up the joint but look no further than 8400 points without a correction.
Friday was a massive, high volume, institutional selling day. We suspect there is more time and price as markets do not usually unwind a large move in a day or a week. We are seeing:
Junk bonds worsening.
Rates continuing to spike as central banks remain insane by staying too easy. You think we are bad at 1.25%? Europe just announced they are going to continue to print and keep rates negative.
European markets look topped. Other foreign markets, while not as bad as Europe, look tired, and that’s being nice.
To repeat, interest rate-sensitive areas are more than topped.
COMMODITIES now look like they have topped. (They have been a big help to the market!)
Consumer staples (XLP) have broken support.
And we are now seeing just about everything else rolling over off recent tops…while many, many names break the all-important 50 day moving average the past couple of days.
The one area holding up best so far is the FINANCIALS. Rates spiking on the long end have helped as perception is margins will expand. But if markets continue to weaken, expect the financials to also come in.
JUST KEEP IN MIND ANY CORRECTION IS WAAAAAAY OVERDUE. What we have seen since the election is not normal. Markets are supposed to have ebbs and flows. Rallies and corrections should be the norm. But there has been no corrections. This gives us a little more pause because typically, the longer a rally goes without one, the worse the eventual correction is. Time will tell.
The market is down a measly 3-4%…somewhat of a no biggie. But our best guess there is more time and price as one week of ugly does not usually quench the thirst of sellers and on the other end, we think the January parabolic move sapped all the demand there is…for now. How far it goes and how long it lasts? Already we are hearing the bears come out of the woods calling for a crash. Anything is possible especially after such a big move. We will let the pundits guess. We will just interpret the evidence at hand based on 100 years+ precedent. For now, a little defense probably goes a long way. And as we titled our report on January 30th, “‘YOU KNOW, MARKETS DO GO DOWN EVERY NOW AND THEN!”