Postmortum

I'm writing this  a few minutes before the market opens this morning.  Consider it a bit of a postmortem on what's occurred in the markets this week.  Right now the futures are showing a higher open.  I wouldn't be surprised if that open gets sold.  If it does and if any attempt to rebound fails then I would think the higher probability would be for another bad day today and then the greater probability would be for the market to gather its footing about mid-week coming up.  

A market that can hold these gains today would likely be signaling that the worst is over for now.  A retest of these lows wouldn't be ruled out though in the coming weeks.  Understand, these scenarios are just me throwing out the highest probabilities based on data and past experience.  I've been doing this long enough to know that anything could happen.

Investors are always looking for explanations on why markets sold off and when the decline doesn't match the data there is always a level of concern.  Most would expect this type of sell-off to occur when the economy was showing signs of slowing down or slipping into a recession, not when things seem to be going along as well as we're currently seeing.  If I had to venture a guess on what's spooked the markets it would be the constant and rapid rise in interest rates since Labor Day.  I'm guessing the growing frictions with China haven't helped either as tariffs have been up at the forefront on the financial news daily.  Finally throw into the pot that we were very overbought, add a pinch of complacent sentiment amongst investors, that market breadth had narrowed. the uncertainty of the upcoming elections and finally seasonal weakness and you had the perfect potion for a decline.  Perhaps that is just a long winded way of saying it was time for markets to go down.  Oh by-the-way, investors are complacent no more.

At any rate, short of an unlooked for event that has caught market participants offsides, this kind of decline historically has not been able to be sustained at the speed we've seen and many of the indicators I follow are now historically very oversold.  As such and relying on what my systems have told me, I was in general a buyer yesterday in client accounts where cash positions justified making investments.   I did this according to client's individual mandates and based on their risk/reward profiles.  To me the markets had become too cheap not to at least try to go out and find some bargains.  Only time will tell if that positioning is correct, but I feel better about buying markets that are down 7-10% than trying to justify purchases when stocks are making all time highs.   I like to buy assets when they are on sale.  While there is no guarantee that this strategy will work in the future, it has historically worked for my clients, especially since my time horizon is 6-18 months from now and not what happens tomorrow.

I'll update some charts next week and talk somewhat on what I think the markets are trying to tell us.  Here are a few things I'm thinking stocks are trying to say.  First, as time has passed it seems more likely than not that stocks formed a blow off top back in January and have spent the last seven months  recovering from last winter's sell-off and consolidating those gains.  What we don't know yet is whether this is a consolidation based mostly on time or if at some point do we have another step downward in the economy.  Right now I'd argue time because I think the economy is doing too well but we'll have to see what the evidence shows in the coming weeks.  In this regard, this earnings season may be the most important we've seen in years.

2nd, if I'm correct and longer term interest rates are headed to the 4% range then suddenly stocks face some real competition from bonds.  Now this is something that markets can adjust to but it may take some time.  You'll see lots of people talking in the financial press about how rates at these levels are going to kill the economy.  Just remember this.  I cut my teeth in this business in years where interest rates were much higher than what we have now.  When I started you could get 8% in money markets!  The economy and stocks managed to move higher in those years and there's no reason to think we can't adjust to an environment where the cost of money has moved up.  However, it may take time for us to get there.

Finally we may be in an environment where what has worked for the last few years may not be what takes us forward into the future.  2019 may also be a bit more economically challenging than Wall Street thinks right now.  I want to think about these last two points for a bit and we'll revisit them at a later date.

TGIF!