Invasion of the Robots, Markets Thrash as the headlines Hit the Tape

Mamma mia...what a day it was....first global stocks plunged, testing the will and commitment of investors around the world......and this should not have surprised anyone.....You see - On Tuesday – the US mkt had come under pressure – attempted to rally only to get slammed as we approached the closing bell.....stocks ended the day on or near the lows which then set us up for another down day...but since mkts were closed on Wednesday – the angst had time to build.... The down day didn't come until Thursday.....and what a down day it was......First there was there was the fact that stocks had closed on the lows on Tuesday.....(negative) then news spread around the world on Thursday that BoJ Governor Kuroda began to question the strength of the global economy – Asian stocks took a hit........ – the US mkts were asleep, investors, asset managers and most traders were also asleep and when the screaming and yelling started about the Huawei CFO's arrest in Canada – many in the media used that story as the basis for the broad US pullback.....that is laughable.....no matter how they spin it.....this woman's arrest on December 1st had – in my opinion – zero to do with the US mkt sell off on December 6th.....this story MAY have had more credibility on the 3rd...but yesterday? Come on.....please don't kid yourselves.....Look, no matter how much this woman or her father are liked in China – investors around the world are NOT committing money to the mkts based on this event. Do you really think that a portfolio manager at Fidelity or Vanguard, or Capital Research or the IBM pension plan is making a decision to buy or sell stocks on THAT story? REALLY? If they are – please come forward and reveal yourself......

I mean – she ‘allegedly' broke the law (as if there aren't any others? Surely FB or GOOG must somehow be implicated then as well?) – she sold stuff to Iran when she should not have - she will have to face the consequences (or not) Money talks...look what the Crown Prince did in Saudi Arabia! – He had Khashoggi murdered, then dissolved in acid, then buried on the grounds of the consulate and when he got caught – he PUMPED more oil and sent prices lower – which is a boon to the global economy.....and now no one is even talking about it anymore, but the analysts are all screaming about how the build in supply is due to waning demand – Are you kidding me? I And now the Saudi's are about to cut production – which should send prices higher - now that the hoopla has calmed down..... So if you think trade between the US and China is going to be dictated by this event...think again...

And then there was the subset of investors who are glued to their screens convinced that the ‘death cross' was the next signal to suggest the end of the world......(dramatic? Yes....but you get the point)

(Death Cross – is when the mkts short term trendline (50 dma) crosses and falls below the long term trendline (200 dma)....this is a bearish tech indicator that ‘suggests' that the current downtrend is most likely to remain in force for a long period of time)

MMMM...ok – whatever....I find it to be a lagging indicator that has missed the biggest part of the down move already – I mean look – the S&P has already fallen 11% before this tech indicator even comes close to "the signal" so how's that working for you? (Not sure about you, but I want a tech indicator that tells me the mkt is going to fall before it falls NOT after it falls) In fact I would argue that by the time the cross happens – the worst of the selling is over ....now we may churn a bit down here, but not sure we are plunging another 10% in the near term at all.....but that's me....you have to make up your own mind.....

Now in my note yesterday I said that it was just a negative environment......

"......anything that has a negative tone will be blown up and anything that is the least bit positive will be pushed to the side....it will be one of those accentuate the negatives/eliminate the positives kind of day....."

And that is what it was......(until it was until it wasn't) .......stocks opened as expected – futures had the Dow opening down 450+ pts, the S&P down 50+ pts and the Nasdaq down 150+ pts.....global mkts had taken a beating – all down anywhere from 2% to 3+% - what did you expect the US mkt to do? Go up? Also as noted – the automated ‘smart logic' algo's had it already set...the buy orders got cancelled and replaced at levels down 1.7% – 2% (as indicated by global mkts) while the sell orders were placed ‘at the mkt' - void of any human interaction....in fact- we have allowed the computers to drive the bus....Again – and I've said this before – algorithms are built on a mathematical formula – void of emotion and void of human reasoning......if the math says to sell then that is what they do....but when then happens the same math also tells the buyers to bid lower.....leaving a void in liquidity – which then causes wild and large swings in the mkts.....and then once the day gets started the algo's fight with each other all day – tripping over each other as they fight to stay in control of the mathematical formula that drives it........... and with such a fractured mktplace there is little to no control......over how or why stocks trade the way they do.... Check out the Leon Cooperman CNBC Halftime Report interview......He said what I have been saying all along.....

And while so many don't want to hear this either – think about how all of the ETF's only add gas to the fire.....Yeah, I know....I don't get it...ETF's have nothing to do with it... (blah, blah, blah....) That is BS....... These are passive investments that are built upon a mathematical formula and some of them are levered 2 & 3 times.....which only increases the risk to the system.... And while YOU may not own these highly charged products – YOU are still at risk because they exist and they play in the same mkts that you do......again think about the ‘volatility trade' that disrupted the mkts back in February – think about the speed at which that happened............the breakdown in the mkts was due to the unwinding of that very complex derivative trade driven by computers...and while you didn't own it – your portfolio was at risk because of it.

So yesterday – as the selling pressure was building the automated sell orders kept hitting the mkt...and with the US mkts so fractured and fragmented (remember - there are 10 exchanges and 50 + different dark pools/alternative venues) we are seeing a breakdown in the way the capital mkts (both stocks and bonds) function.....– and with nearly 40% of the equity volume taking place away from the public exchanges – it only acts to further weaken the very mkts that we depend on.......Understand that 40% of the volume NEVER gets exposed to the public mktplace, it is volume that gets internalized at the big investment banks and wholesalers– think GS, JPM, MS, C, WFC, UBS, CITADEL, – which is good for them – as they ring the cash register but bad for the health of the public mkts......In the end – the public mkts are less robust and liquid because of the volume that does NOT trade there. And in times of stress that is never more evident! Remember – its all good as long as the mkt is going up.......they are breaking their arms patting themselves on the back, but when ‘it' hits the fan they point their fingers at everyone else. Look some ETF's were reportedly trading below their NAV (net asset value) yesterday....exactly what is NOT supposed to happen......and when it does guess what? The anxiety level rises...... And the nervousness in the mkts builds...because why? You suddenly realize that the underlying liquidity you thought was in the mkt is now not in the mkt - and guess what? BOOM!

And just like that – when the indexes were testing the lows of November - the WSJ runs with the story that FED chair Papa Jay (Powell) is going to surprise the mkts next week....first he will raise rates by the expected 25 bps bringing the range to 2.25 – 2.50% (still artificially low by historical standards) but then he will pull back on his most recent statements and suggest that there is NO SET schedule in 2019.....We won't necessarily have a spring, summer and fall increase at all......the story went onto say that we may only get ONE rate increase in 2019 and that caused the algo's to blow up....wait! Now THAT headline was not programmed into the process – so in pico seconds – the buyers are unleashed and the sell side orders get cancelled and replaced at higher prices – leaving a void in supply just when the buyers get aggressive....and so we saw the Dow rally 709 pts to end the day down 80 pts, the S&P rallied 74 pts to end the day down 4 pts while the Nasdaq rallied 203 pts to end the day UP 30 pts.....Wait – what happened to the Chinese woman? How could the mkt rally – she is still in custody.....OH...I get it.....no one cares about her...it's was all about the FED! BOOM!

So this morning global mkts are trading higher....both Asian and European mkts rebounding from what was a tough day.......almost every sector is rallying.....in Asia – Japan was the standout performer rising 0.82%.....with Australia not far behind at +0.42%. Hong Kong ended the day just below the unchanged line and China was flat.....(all this was a win!). In Europe – mkts there are bushing off the negative tone and rallying nicely...all mkt centers up more than 1%. Italian bonds are stronger, German bonds holding their own and in the UK – PM Terry May is weighing a plan to ‘postpone the vote on the BREXIT deal'.

In the US – futures are pointing to a slightly lower open - S&P Futures down 7 pts......with Dow futures down 55 – (this is better than they were only hours ago – when the S&P was down double digits and the Dow down triple digits) ahead of the NFP report....expectations are for us to show about 200k new jobs....Last night FED Chair Powell gave a speech and reminded us how strong the US labor mkt is by many measures.......saying: "Our economy is currently performing very well overall, with strong job creation and gradually rising wages" and that does confirm – for me at least – that he is moving ahead to raise rates next week – but is not married to any rate increase in the new year....but until the mkts hear that, or get add'l clarity on that – the mood will remain volatile and the algo's will respond to whatever the headline of the day is...

We remain in the 2630/27620 range....

The market commentary is the opinion of the author and is based on decades of industry and market experience; however no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of O’Neil Securities, Incorporated or its affiliates.