Good Morning. Are we having fun yet? For a seventh consecutive day, stocks were whipped around in a violent fashion by the big boys and their computer toys yesterday. The Dow once again put up a triple-digit move, this time a dive of 206 points. The problem is that each move tends to reverse the last as the market appears to have little memory from one day to the next. For example, on Tuesday, it looked like the recent downtrend was over and the bulls were back in business. But after Wednesday's algo-induced shellacking, well, not so much.
At issue on Wednesday was the latest update on the economy and Federal Reserve policy from Ben Bernanke. Although the Fed Chairman basically said what everyone expected he would say and he did not provide any surprises during his press conference, traders decided to freak out anyway when bond yields moved to their highest levels of the year.
Sure, Gentle Ben did tell us that the Fed may begin to "moderate" their bond purchases by the end of the year if the data shows sufficient improvement. And yes, Mr. Bernanke did say that the Fed may finish their QE program by the middle of next year. In English, this means that if the economy continues to improve, the Fed will begin to reduce their stimulus programs and eventually stop them over the next year.
In addition, the Fed Chairman made it very clear that "taking the foot off of the gas is NOT the same thing as applying the brakes." This was meant to emphasize the point that the Fed expects a fair amount of time to pass between the time they stop providing stimulus and the time they actually begin to raise interest rates.
To be honest, everything Mr. Bernanke said was logical. Again, there were no surprises. There were no "ah ha" moments that triggered sell programs in stocks. But apparently the boys in the bond pits were not impressed. You see, the Fed's projections for the economy were slightly better than had been expected. (But then again, the Fed has become notorious for overestimating the economy's rate of growth.) And apparently this sparked a rather emphatic sell-off in bonds, sending yields spiking in the process.
From my perch, I did not see a direct correlation between something Bernanke said and the sudden, violent sell programs that hit both the stock and bond markets. However, it became very clear, very quickly that the stock market was the tail and the bond market was the dog yesterday. So, with yields surging (the yield on the 10-year moved from 2.208 to 2.330 in about an hour) traders tied their algos to the move. For every uptick in bonds there was a corresponding sell program in stocks as well as an increase in the dollar.
The bears tell me that it's now "game over" for the bond market; that we've seen the secular low in yields; and that folks are trying to get out of bonds before the Fed makes their moves. To be sure, there is no refuting this logic as a 30-year bull market in bonds will likely end if/when the economy improves enough for the Fed to begin exiting. But my point is that such a decision - a decision which involves perhaps trillions of dollars - doesn't occur in a one-hour time span.
Yes, rising rates could easily hurt the housing market. And a stronger dollar hurts manufacturers who sell their products globally. And there is little doubt that a significant rise in rates from here could be a negative for the economy in general.
However, yesterday's violent movement in the stock, bond, and currency markets took place over a period of less than two hours. And there was little-to-no real news disseminated. Therefore, I have a very hard time accepting these big-picture, fundamental arguments as the reason behind a 200+ point reversal in the DJIA.
Yet at the same time, any good technician will tell you that it is the action in the market that counts - not the words of a politician or central banker. So, while I remain skeptical of yesterday's move, I will agree that the action in the near term will likely speak louder than any words coming out of Washington. Remember, it's not the news but rather how the market reacts to the news that matters.
Turning to This Morning ...
Weak economic data out of China (the Flash PMI signaled contraction for a second straight month and came in at a 9-month low) and soaring interest rates have put traders around the globe in a selling mood this morning. Asian markets were hit hard overnight and European bourses are down approximately 2% across the board. The action in commodities is confirming the growth fears as Gold is plunging in early trade. Not surprisingly, the U.S. futures are following suit and project a red open at the corner of Broad and Wall. However, we should note that there is a slew of economic data due out this morning, which could certainly impact trading.
Here are the Pre-Market indicators we review each morning before the opening bell ...
Major Foreign Markets:
- Shanghai: -2.77%
- Hong Kong: -2.88%
- Japan: -1.74%
- Germany: -2.58%
- France: -2.61%
- Italy: -1.95%
- Spain: -2.36%
- London: -2.33%
Crude Oil Futures: -$1.33 to $96.91
Gold: -$67.40 to $1306.60
Dollar: lower against the yen, higher versus euro and pound
10-Year Bond Yield: Currently trading at 2.438%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -10.03
- Dow Jones Industrial Average: -77
- NASDAQ Composite: -21.55
Thought For The Day ... "Great spirits have always encountered violent opposition from mediocre minds." -Albert Einstein
Positions in stocks mentioned: none