Good Morning. If ever there was a self-fulfilling bearish prophecy, this was it. Everybody, everywhere has been watching the same lines in the sand, the same data, the same earnings guidance, and the same speeches by Fed officials. Everybody, everywhere knew that internal momentum had been waning, that complacency was running high, and that if the S&P 500 broke below important support, it would lead to an almost instantaneous "whoosh" lower. And sure enough, from the very moment the futures broke below the equivalent of the 1680 on the S&P 500 early Thursday morning, it was Katie, bar the door.
After having been frustrated mightily for the vast majority of the past nine months, the bears must be feeling pretty good right about now. And while the S&P is only off 2.8% from its Aug. 2 high, everybody, everywhere assumes that stocks are heading lower from here.
The excuses du jour for Thursday's rout in the stock market were many and varied. For starters, apparently Cisco Systems (CSCO), which is known for manufacturing earnings that impress by a penny or so, didn't have good things to say about the future after the close on Wednesday. Next, the yen-carry trade began heading the wrong direction overnight on concerns that corporate taxes in Japan won't be reformed after all. Then there was the Wal-Mart (WMT) report, which also raised some concern about the coming quarters. Next, the yield on the 10-year U.S. government bond spiked to a fresh high for the cycle. And all of this occurred before the sun was up at my office.
The yield spike, the yen rally, and the guidance issues from two very big names were clearly the triggers for the selling on Thursday. And to be sure, there were algos chasing algos once the S&P's line in the sand at 1680 was breached. However, it is important to recognize that there are other big-picture worries out there as well. And the bottom line is the combination of the big-picture stuff and the near-term catalysts simply overwhelmed anybody interested in doing some bottom-fishing on Thursday.
Anytime there is an important break in the market, I believe it is important to understand why the move occurred. Yes, algos can certainly both create and reinforce a move. However, I simply don't believe that markets dive 225 points just for the heck of it. No, there is usually a reason to be found for the move, if you are willing to look hard enough for it. So, now that we understand the catalysts for Thursday's dive, the next question, of course, is how low can it go? And for that question, we need to look a little harder at the big picture.
The question I am noodling on this morning is actually the title of this morning's missive: What does the market fear most? As I began scribbling down the list of "worries" that traders may be feeling queasy about these days, I noted the usual suspects: China growth, the budget battle, Europe's banking system, the calendar, interest rates, valuations, the economy, the Middle East, and the Fed. But in all honesty, with the exception of the renewed rate surge, nothing on this list was new. And as anyone who has been at this game awhile knows, markets can deal with just about anything -- as long as there are no big surprises.
Then the light bulb in my feeble brain lit up and I scribbled down one word: uncertainty. Yes, that's right; uncertainty is the real issue of the day. Uncertainty about what to expect going forward is the reason folks take profits, reduce risk, or decide to "go the other way" for a while. Uncertainty is what causes traders to say, "I've seen enough, the market can do its price discovery without me." And uncertainty winds up being the primary cause of the big declines.
The key question here is if there is enough uncertainty at the present time to turn a garden-variety pullback into a meaningful correction. Is fear of a "policy mistake" by the Fed enough to cause a decline of more than 5%? Is the uncertainty over when "the taper" might start significant enough? Will the unknown of how "the taper" might actually impact the markets do the trick? Can the concern about the lack of revenue growth morph into a focal point that keeps traders' attention for more than a day or two? And what about the bite that rising rates might have on the economy? Are any of these worries big enough to warrant another mid-year dance to the downside?
Long-time readers know that, unlike all those folks on CNBC and Bloomberg, I don't know the answers to these questions. However, I believe that sometimes it is actually much more important to know what the questions are than the answers. And while I may be guilty of beating a dead horse here, the real question is what is the market worried about the most? Frankly, this is one of those times when the tape may indeed tell all. Although most of Wall Street traders are at the beach with their kids, what the market does over the next week or two will likely answer some or all of the questions posed this fine Friday morning. So, my advice is to stay tuned because this ought to be interesting.
Turning to This Morning
Anyone looking for a global market crash following Thursday's thrashing on Wall Street will likely be disappointed this morning. While there was massive volatility in China (the Shanghai stock index moved from -1% to +5% in minutes before lunch), most markets have held up fairly well in the face of the Dow's 225 point dive. Europe was mixed in the early going and U.S. futures pointed to a rebound attempt at the open on Wall Street.
Here are the Pre-Market indicators we review each morning before the opening bell.
Major Foreign Markets:
- Japan: -0.75%
- Hong Kong: -0.09%
- Shanghai: -0.67%
- London: -0.08%
- Germany: -0.24%
- France: +0.09%
- Italy: +0.38%
- Spain: +0.36%
Crude Oil Futures: +$0.19 to $107.52
Gold: +$3.30 to $1364.20
Dollar: lower against the yen, higher vs. euro and pound.
10-Year Bond Yield: Currently trading at 2.788%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +3.27
- Dow Jones Industrial Average: +13
- NASDAQ Composite: +4.17
Thought for the Day
"Unthinking respect for authority is the greatest enemy of truth." - Albert Einstein
Positions in stocks mentioned: None.