Global stock rout: Seven reasons behind the market's wild swings and what’s next

I can’t reiterate this enough…

“The pendulum always swings too far to the right and then too far to the left”

But Mamma Mia – what a swing that was!

The Dow lost 1,034 pts or 2.6%, the S&P lost 160 pts or 3%, the Nasdaq down 577 pts or 3.4%, the Russell gave up 70 pts or 3.35%, the Trans down 270 pts or 1.75% and the Equal Weight S&P down 161 pts or 2.4%. And while that is tough to take, it was worse! All of the indexes traded lower during the day and tried to ‘rally’ a bit into the bell. 

By now you know the culprits –

One – The Japanese Carry Trade – this is where investors borrow Yen at nearly zero rates and then use the cash to invest in US equities (think Magnificent 7 – the Tech names)….OK – that all works fine until it doesn’t…Because you see – it’s like loan – in fact it IS a loan – at some point you need to pay it back…So when the economy appears to be slowing and the FED holds steady on rate cuts – the angst builds. Recall the market (traders/Hedge Funds) have been screaming for the FED to cut.

So, when the FED doesn’t cut – what happens?  They all run for the door at the same time to try and sell their stocks – And BOOM! The bottom falls out… 

Two – The FED! They didn’t cut and they didn’t commit to cut later in the year….and since the odds had been increasing for a possible July cut as well as a September, November and December cut– the trader types (Hedge Funds) started to STAMP their feet and so they say – “We’ll show them, we’ll sell stocks and create pressure on the FED to cut now”…and that too forced the ‘carry trade’ to implode….

Three – Margin Calls – investors who use margin to ‘amplify’ their returns then got caught with their pants down…because they too then had to sell stocks to raise cash to payback the margin accounts. You understand how margin works, right? They loan you 50% and you put up 50%...but when the value of the investment drops below the ‘maintenance margin’ (usually your 50%) then the broker issues a Margin call demanding that you put up more money….and if you don’t have that money – then you have to SELL stocks to raise the cash, Capisce?

Four – the question whether or not the US economy is really circling the drain or not…Now, some think we are slowing, others think we are fine while still others think we are circling the drain….and it is those guys (mostly algorithmic traders) that wreak havoc – because they too run for the door to sell stocks.

Five – Algo trading…. Algos are not Human Beings, they are computers that have NO sense of value or any commitment to any position. All they know is that they operate on a ‘set of mathematical rules. Once those rules are broken, all hell breaks loose. They too the run for the door and initiate SELL orders until the charts suggest that an index or stock is OVERSOLD – and then it works the other way…. (which we might start to see today after yesterday’s beating!).

Six – The US presidential election is really heating up and that is causing some angst.

Seven – The International political crisis in the Mid-East. The idea that Iran (and Syria and Lebanon) have threatened to attack Israel is another concern for investors.

And all this means is that it’s NERVOUS and so the whole damn place gets hit…. Crypto got killed, Gold sold off (think margin calls, so they sell gold to pay back the brokers), Oil is down…. The only thing that went up were Bonds! Why? Because there is safety in the US Treasury markets…Yesterday – the TLT ETF rose by 0.5%, the TLH ETF up 0.35% and that sent yields lower. The 2 yr. is now yielding 3.87% after trading down to 3.64%. The 10 yr. is yielding 3.79% after trading as low as 3.66%. This morning bond prices are down a bit, so yields are rising a bit.

Of the 11 sectors TECH – XLK down 3.3%,  Real Estate XLRE – 2.9%, Consumer Discretionary – XLY down 2.8%, Financials XLF down 2.8%, Communication – XLC down 2.9%, HealthCare XLV down 2.7%, Basic Materials – XLB down 2.2%, Energy – XLE down 2.2%, Consumer Staples – XLP down 1.9% while Industrials – XLI dropped by 1.7%.

The contra trades exploded higher. the Dog + 2.6%, SH + 3% PSQ + 2.8%, VIXY +43%. The leveraged short – SPXS +9%.

This morning – lets see what the markets around the globe did.

 Asia rebounded – Japan closed UP 10.25%, Australia UP 0.4%, Taiwan and South Korea both up 3.3%.  Hong Kong closed down 0.3% while China closed flat.

Europe is trading down just a bit…nothing like yesterday. The UK, DAX and Eurostoxx all down 0.3%, France and Spain down 0.5%, with Italy down 0.6%.

US futures this morning are UP! Dow + 140, S&P +30, the Nasdaq up 115 and the Russell is up by 8 pts.

There is no eco data today to speak of, so expect active investors to lick their wounds and try to trade around the losses…Long term investors are sharpening up their pencils as they look to scoop some up.

Oil traded right down to $72 and closed at $72.94. This morning it is up 10 cts at $73.04.

Gold fell by $45 yesterday to find support at $2400 before rallying back to $2443. This morning it is up $11 at $2455. It remains in the $2400/$2500 trading range.

The S&P closed at 5,186 - down 160 pts. It is now down 8.7% off the July high. Remember we discussed this…we have been expecting it and I am not sure it is over just yet. Recall we are in the seasonally weak time of year; we could see a test of the long term trendline before this is over and that could be another 2.5 – 3%.

Just 2 weeks ago the market was at all-time highs, unemployment was under 4%, inflation was coming down, the Fed was discussing a rate cut and we were on the way to a soft landing. Friday’s NFP report ignited a fire that spun out of control….

But remember while this seems chaotic it is in fact the sign of a healthy market. You should expect two 5% corrections and one 10% correction every year. BUT, Don’t forget - Corrections are exactly that – corrections!… and there is the Pendulum analogy again…. Markets trade too far to the right and then correct by going too far to the left…. until it settles down. In the end – be confident in your portfolio, make sure you know what you own and in times like this talk to your advisor if you are concerned.

Cavatappi with pea pesto

The pesto sauce originated in Genoa which is in the Liguria region of Northern Italy. Liguria borders France, Piedmonte, Emiglia-Romagna, and Tuscany.... and sits right on the coast of the Ligurian Sea. The hills lying immediately beyond the coast coupled with the sea account for a mild climate year-round. Average winter temperatures are 45 to 50 °F and summer temperatures are 73 to 75 °F. This makes it a very temperate place year-round and as such remains quite popular.

Pesto is usually made with Basil, garlic, pine nuts, parmegiana cheese and olive oil.... (in other recipes - I substitute - basil for Arugula, Asparagus, or Broccoli and make pesto out of those ingredients) so today we are going to use Peas.

For this you will need:  Frozen peas, Parmegiana cheese, 2 garlic cloves, splash of lemon juice, a bit of chopped basil, pepper (the cheese is salty enough) and olive oil.

First bring a small saucepan of water to a boil and add the peas...cook until the water re-boils +1 min. Now strain.... Blend all of the ingredients - taste - adjust, if necessary, then set aside.

Now bring a pot of salted water to a rolling boil and add the Cavatappi. - cook for 8 / 10 mins or until andante...strain - reserving a mugful of the pasta water. Put back in pot and add back 1/4 cup of water to remoisten...stir....no puddle in the pan...capisce? Now add the pea pesto and toss. Serve immediately in warmed bowls. Always have extra grated cheese on the table for your guests. Again - this is a simple meal and easy to prepare. Enjoy it for what it is - comfort food....