Stocks Skid & GS Says to Go To CASH! Really?

Stocks fell like a ton of bricks…in fact yesterday if felt more like 32 tons!  The headlines say it all:

• $1 Tril lost in the Technology names

• Stocks Skid as Major Indexes Shed 2018 Gains

• The End is Near!  Oh, come on!  Really?  (a bit dramatic no?)

So they managed to do it again......in October during the first round of the sell off - investors/traders managed to erase all of the gains for 2018...and then the mkt bounced, moved steadily higher - attempting to retake technical levels of support/resistance as the indexes went positive again……..until it failed....and as of last night’s close - we erased all of those gains again....the Dow lost 551 pts, the S&P gave up 48 pts and the Nasdaq choked - falling 119 pts.....leaving both the Dow and S&P negative on the year  (-1.09% & -1.19% respectively) while the Nasdaq is barely breathing.....as of last night - up 0.8%.....a stunning reversal from the +18% only 5 weeks ago! 

Ok by now – you are well aware of the causes…..better earnings but weaker guidance, continued trade tariffs, creeping wage inflation, weakening China and Europe and the Italians who just refuse to fall into line with the EU (European Union)…….But the real culprit here are the computers that run the ‘risk management software employed by so many asset management firms’  that failed to recognize that higher rates (yes they are coming) will cause equity valuations to come under pressure…..

it’s Econ 201….rising rates cause stock valuations (and btw home valuations) to come under pressure. AND rising rates will cause the Dollar to strengthen – and when that happens commodities come under pressure….it is the same argument – the inverse relationship.  (Here’s a tip – commodities are priced in $’s.  Stronger $/weaker commodity prices, Weaker dollar/Stronger Commodity prices) Note that as the dollar rallied from June to now…. +3.5%, commodities fell 7.9%.  And as 10 yr rates rose in October – from 3.08% to 3.25% the mkts fell initially 8% and then just for giggles fell another 4 % sending it neg on the year while it broke all technical levels of support – and this creates another problem….

So – here is where it goes off the rails…..we have been talking about rising rates for 20 months now and rates kept going up…..and the risk management software programs kept sending buy signals to the mkt – and stocks kept going up – in fact the S&P went up 32% in that same time frame (partly because rates were still artificially LOW) ……….all while the talking heads told us that it was all good because the economy was strong…..so no worries…..THAT IS UNTIL IT ISN’T….

And early October revealed that fact in all its glory…..the NFP in October suggested that wages were creeping higher and that maybe inflation that they say is benign – is suddenly not so benign and then the same risk management programs did an about face…..cancelling the buy orders and initiating sell orders sending so many running for the door (notice singular)….Rates spiked to 3.25% and the party was over….. the Dow and S&P went negative on the year in the matter of days and TECH took a beating….as the same talking heads told us ‘forget everything we told you last week – this week it’s different’.  The consumer is weakened, The China slowdown is bigger than we thought, the mid-terms changed the complexion of Congress and Papa Jay (Powell) can’t possibly raise rates….

Stocks thrashed around…trying to stabilize , trying to find  a base……as the mkt rallied – the trader types hit the sell button as they try to save their a**es to lock in profits as the mkt gyrated……support levels failed again and the risk management software lights up…sending sell signals to the mkt once again….and with the fractured mktplace we have – the sh*t hits the fan and all of the passive investment products underperform, the leveraged ones get slammed and the computers ‘spray’ the mktplace with sell orders…buyers pull back and the books are left with big voids in bids…and stocks and indexes collapse (again)…..and like I said – we needed to retest the October lows of 2620 ish…and yesterday we did just that…go as low as 2630…..(close enough)…..as the buyers defended the position….but remember – It is a holiday week – so move tend to be more exaggerated…….

Look the failure is the result of investors and traders trying to now create alpha - as they ‘trade stocks’ looking to clip pennies here and there as the mkt whips around looking for stability.  Remember what I told you.....after all of the TECHNICAL breaks in the mkt - the failure of the 50, 100, & 200 DMA’s, after the strong earnings reports accompanied by weaker forward guidance, after the realization that the FED is going to continue to raise rates, which then causes a re-evaluation of equity valuations - why is anyone surprised?  Stocks got taken to UNSUSTAINABLE levels - Period. 

Rising rates must cause equity valuations to be trimmed - what don’t these bozo’s get?  It’s like the housing mkt - interest rates go up and housing prices go down!  It’s the inverses relationship argument.... Don’t they teach that in all those Ivy League schools?
There was nowhere to hide yesterday....it seemed that almost everything was under assault.... Bitcoin continuing its free fall – piercing $4500 now and going lower…. and Oil plunging 6% to end the day at $52.50.....and this is causing the analysts to once again stand up and bitch and complain that the economy is also going into a tail spin - in fact - our friends at GS made news.....(if you can believe that) - the Drudge Report ran with the headline that GS says

‘Go to CASH’!

GO TO CASH!  Really?  Wasn’t it you that told us only 2 months ago that oil was going to pierce $100/barrel because the economy was so strong, and that demand was so strong that the consumer better be ready to pay higher prices!  (Of course, this bullish call on Oil had NOTHING to do with the potential IPO of Saudi Aramco - that you so want to take control of.... - but that’s another story - let’s just stick to yesterday’s headline...) - How can you tell investors to go to cash after the mkt has entered correction or bear mkt territory?  Are you saying that there are NO good stocks out there?     Isn’t the point of this exercise to tell your clients to go to cash BEFORE the mkt falls 15% and individual names get hammered by 20, 30 & 40%? 

In fact - I would argue that the GS call to go to cash is the SIREN that is signaling a BUYING opportunity…and BOOM…mkts recover overnight – could be the pre-Thanksgiving rally. Or it could be the beginning of the healing process………. China and Hong Kong go Green and the Europeans are all higher…. even though the EU is now launching disciplinary actions against Italy for failing to submit a reasonable budget…after a half dozen attempts…. Italy will be in focus today and tomorrow and the next day as the European Commission decides what to do….  Word has it that the Italians would be open to negotiation on the proposed budget, and that helped fuel the bounce this morning. 

Today should be a generally quiet day after 11 am…. as travel picks up for the Thanksgiving holiday.  Eco reports this morning: Durable Goods (E: -2.5%), Jobless Claims (E: 215k), Existing Home Sales (E: 5.21M).  Bottom line, tech remains key in the short term.  If Nasdaq can bounce, then the broader indexes will go along… S&P futures are up 22, Dow futures +125 and Nasdaq futures +56.    I would look for resistance at 2700 on the S&P and support at 2620…. but today the tone is positive and the algo’s will go shopping for oversold names – Tech, Financials, Energy, Industrials all ripe for the picking….

Oil is up today – after the hit yesterday…. Donny fully supports the Crown Prince and for that you can expect that the Saudi’s will keep pumping oil…. the collapse in oil has NOTHING TO DO WITH WEAKER DEMAND…. demand is fine….  (Recall that yesterday the CIA issued a report that said ‘Crowny’ ordered the killing of Khashoggi…and then Donny said – not so fast…. maybe he did and maybe he didn’t…either way – no one knows for sure…just keep pumping oil….  

Take good care.   Happy Thanksgiving. May the blessings of the season start with your dinner table tomorrow afternoon….