Today, August 24, has been like two days (maybe three) in one. (Yesterday in my Saturday Night Quarterback post on my paid JubakAM.com site I told readers to watch to see if Monday brought a bounce or a continued decline. Well… how about both?)
First, there was the continued global rout that began in Asia—with the Shanghai Composite index closing down 8.49% and even the Japanese Nikkei 225 index participating in the downturn with a loss of 4.6%.
U.S. stocks opened hugely lower with the Dow Jones Industrial Average plunging 1000 points at the open for a 6.6% loss and the Standard & Poor’s 500 tumbling to a 5.3% decline. But then U.S. stocks rallied into midday and held on to much of those gains so that at 2:30 p.m. New York time the Dow was “only” off by 363.5 points (2.21%) and the Standard & Poor’s was down “only 2.64%.
And then, as U.S.markets moved toward the close, U.S. stocks fell again with the Dow Jones Industrial Average down 3.57% at the close and the S&P 500 falling by 3.94%. The swing in the NASDAQ was even wilder with a 6.6% loss “rallying” to a 2.16% loss by 2:30 p.m and then falling to a 3.82% loss as of the close.
There is actually some logic to the day’s action. The big worry is slowing global growth with the epicenter for that potential financial earthquake in China’s economy. So it’s “logical” that Shanghai would take the worst of the hit and that economies that export a lot to China would fall in concert. Europe’s biggest export economy, Germany, saw its DAX stock index down 4.7% at the close.
On the other hand, once traders and investors had a chance to get over their early shock at yet another big down day in Shanghai, it was “logical” for U.S. stocks to take back much of their early losses. The U.S. economy looks to be growing at a better than expected—if still modest rate—in the second and third quarters and with its huge domestic market, the U.S. economy has proportionately less exposure to global export growth or decline. Certainly a 2.2% loss in the Dow Industrial Average is nothing to cheer about, but it is nonetheless a comparatively better performance.
Volatility on the S&P 500 as measured by the CBOE volatility index, the VIX, soared in the morning to 53.29 as of 9:55 a.m. from a prior close at 28.03 before moving up again to 35.13 as of 2:30. That’s still a 43% pop in what is known as the fear index but that’s still a lot better than the 90% jump in the index at its high. (A higher index number indicates that options on the S&P 500 have moved up in price as more traders and investors decide to buy in order to hedge against market volatility.)
The rally within a down day didn’t stem the commodity markets from turning in another dismal performance. U.S. benchmark West Texas Intermediate crude, which breached the psychologically important $40 a barrel price intraday on Friday fell another 3.73% as of 2:30 p.m. New York time to $38.94 a barrel. Brent benchmark crude fell 4.18% to $43.56 a barrel. That move and the continued closing of the price gap between the U.S and the Brent global benchmark also has its logic if the U.S. economy will turn in relatively better growth than the global economy.
The Bloomberg Commodity Index fell to its lowest level since August 1999. Copper prices, a key indicator of expectations for global growth, fell 4% to the lowest level since 2009 on the London Metal Exchange.
Are we looking at a yearend melt up?
I think the odds are good, very good indeed that we’ll see one of those big, all-animal-spirits-on-deck upward moves in U.S. stocks from now until at least mid-December.
Assuming, and at this point I think this is a relatively safe assumption after Monday’s report of a very disappointing 5.6% month to month drop in pending home sales in September, that the markets can get past this week’s October 30 meeting of the Federal Reserve’s Open Market Committee without a move by the U.S. central bank to cut back on its $85 billion a month in stimulus.
I think the Standard & Poor’s 500 stock index could easily break 1850—the index closed at 1760 on Friday, October 25, within the next six weeks. That would add another 5 percentage points of return to what is already an extraordinary year for U.S. stocks. As of October 25, the year-to-date return for the S&P 500 was 25.4%.
But an end of the year melt up wouldn’t be all good news for traders and investors.
As the term implies, with its echo of “melt down,” stocks can fall hard after a melt up. In a melt up valuations run far away from any fundamentals in the economy, the market, or individual stocks. A melt up is driven by momentum as investors who have profited from the market’s gains greedily chase more and as investors who have been on the sidelines decide that they can’t take missing out any longer and join the party. Worries about risk go out the window and often it’s the riskiest assets that climb the fastest. In a melt up the last of every group of investors except the permanently bearish throws in the towel and finally puts cash into the market.
A melt up can be the last blow off before a market dive.
“Can be” is, of course, the key problem. Melt ups don’t have to end in corrections or market dives. Best-case fundamental wishes can turn out to be true, and provide support for valuations at exactly the right time. Extravagant hopes for the future can yield to even more extravagant hopes. Markets can calmly go through a period of consolidation rather than dropping to support levels.
Let’s start at the beginning and work through the important points one by one: Read more
Waiting for tomorrow’s jobs numbers: Will good news be bad news, or will bad news be good news, or vice-versa?
After trading as low as 1598.23 around noon New York time today, the Standard & Poor’s 500 index finished the day at 1622.56, or a gain of 0.84%.
It ‘s clear that the driver for the market today is related to tomorrow’s jobs report for May. And that makes sense since the Federal Reserve has said that its decision on when to begin tapering off its monthly $85 billion in purchases of Treasuries and mortgage-backed assets will depend on the data.
But it’s not clear to me what the action in the financial markets today means that markets are anticipating tomorrow. Would a disappointment—something lower than the 159,000 net jobs projected by economists surveyed by Briefing.com—lead to a move up because markets would decide that such bad news would put off the chances of tapering off purchases from the Fed? Or would markets retreat on that news because it would be a sign of weaker than expected economic growth in the United States?
Complicating the read is the influence of the yen/dollar exchange rate. An appreciating yen has put an end to the rally in Japanese stocks. Would a stronger or weaker jobs number tomorrow send the yen back down?
I don’t think you can tell much of anything from today’s U.S. market action. After the declines of the last few days, the move up today might be nothing more than a squaring of positions before the uncertainty in tomorrow’s news.
But on a slightly longer perspective than the next 24 hours, it looks like we’ve seen major unwinding of positions short the yen and long U.S. Treasuries. The move below 99 yen to the dollar today looks like it triggered another round of stop loss selling that took the dollar down further (and the yen up to 96 to the dollar.) Hedge funds have taken punishing losses in May on their bets against the yen, for Japanese equities, and for U.S. Treasuries. I think the last stage of the Treasury market retreat has been fed by some of these funds exiting losing positions.
Certainly that kind of reversal in positioning can lead to buying where we’ve seen selling (and vice-versa.) And it can also lead to a directionless market as traders try to find a trend.
Of those alternatives, I’d vote for “directionless” just because there’s no much uncertainty ahead of the June and July meetings of the Federal Reserve.
But, gosh, don’t we live interesting times?
Think of the current market this way, as a puzzle where the solution shifts depending on whether you take a long-, medium-, or short-term view. And where the importance that investors afford to the long-, medium, and short-term views itself shifts from hour to hour and day to day.
And, of course, where you have to solve that puzzle with significantly different time horizons depending on which of the three drivers of global financial markets—the United States, Japan, and China—is gathering attention at the moment.
That makes this market very difficult to read, very volatile, and rather scary.
Here’s my guide to what’s going on, what to pay attention to, and what to ignore in the next few weeks.
Consider Friday’s market action as a good example of what we can expect in June and probably into July. Read more
I know everyone would like to make sense of global stock markets today—but the upcoming three-day weekend in the United States makes that really, really difficult. I’m not sure that any news or any news interpretation carries much weight today against the desire of Wall Street professionals to reduce the chance of anything blowing upon them while the markets are closed.
From this perspective, the big drop in Tokyo on Thursday was especially unnerving. It was a reminder of how volatile this market can be just before a long period when the U.S. markets will be closed.
Last night the Tokyo market began strong but faded as traders who had profits early in the session took those profits and closed out positions.
Can you read anything meaningful into this about the market’s worry about the weak yen policy of the Bank of Japan and the Abe government? I doubt it. Banks such as Sumitomo Mitsui Financial Group (8316.JP), down 2.09% when the Nikkei 225 closed up 0.89%, took it on the chin again today, just as they did yesterday. The big loser in Tokyo, however, was Toyota Motor (7203.JP in Tokyo), which fell 6.03%. The stock had been the only member of the Nikkei 225 in the green yesterday. (In New York trading Toyota closed down 3.1%.) My guess is that we’re looking at delayed profit taking—Toyota’s Tokyo shares are up almost 117% from November 14 through the close on May 23. The stock is so liquid that traders can’t have any worries about being able to easily rebuild a position after the weekend.
You’d figure that the U.S. market would be up today on the news. Orders for durable goods climbed 3.3% in April, the Commerce Department said today. That’s a healthy rebound from the 5.9% drop in March and ahead of the 1.5% growth projected by economists surveyed by Bloomberg.
The consensus explanation for a decline today—the Standard & Poor’s 500 index closed down 0.06%—is that investors are worried that strong growth will lead to the Federal reserve tapering off its program of buying $85 billion in Treasuries and mortgage-backed debt sooner rather than later.
Sorry, I don’t buy that explanation for today’s market direction. Yes, I do agree that investors are worried about an early end to Fed stimulus, but the durables orders are hardly so strong that we’re about to see a big increase in hiring that will take unemployment down from its current 7.5% rate to the 6.5% neighborhood that the Fed has indicated would lead to an end to QE3.
I think this is just traders taking risk off the table before the weekend. Nothing more or less.
If I’m right, we’ll have to wait for Tuesday—at least—to get a sense of the current direction in the markets.