Good morning. It never fails. Write a bullish piece on the stock market and wham! - The bears come out of the woodwork to make you look like an idiot. Such was the certainly case yesterday. No sooner had I presented the bullish case for the stock market through the end of the year than Philadelphia Fed President Charles Plosser starts dissing QE3 and talking about how the Fed's newest bond buying binge won't help the economy in any meaningful way. No sooner had I mentioned that the bears should be given the benefit of any doubt right now than the riots in Spain start. And no sooner had I given up on the idea of a decent pullback than the boyz and their computer toyz rediscover the sell algo.
In all fairness, I did end Tuesday's meandering morning missive with the following: "Even the most enthusiastic bulls will agree that stocks are overbought and due for a pullback. As such, we would not at all be surprised to see the S&P test the 1440 area or even the 1420-1400 zone should the bears get something to work with in the coming days. But as long as the important support holds, I would suggest giving the bulls the benefit of any doubt here." So I guess I got that part right.
Frankly, a pullback of a couple percent or more is pretty standard operating procedure for an extended market and no one, including yours truly, should have been surprised to see stocks correct a bit. Especially for a market that had run more than 15% in just a little over three months. However, Tuesday's decline seemingly came out of nowhere and appeared to have little to no catalyst to trigger the rather relentless selling that took the S&P down 20 points from its mid-morning highs. As such, the question I was asked a time or three after the close was whether or not the market's "character" had suddenly changed.
As someone who is obsessed with the reasons "why" the market does what it does - especially when the indices make sudden and unexpected moves - I spent a fair amount of time hunting around yesterday afternoon. I checked my info services, scanned hundreds of tweets, looked at the newswires, and asked around. The standard response I got to the question of what is driving the market lower was, "Other than Pollard and the protests in Spain, I got nothin'."
Unlike 99% of the times the market makes a big move, "nothin'" is what I finished my search with yesterday. Yep that's right, except for one of the hawkish Fed Presidents talking trash and an enthusiastic protest in Spain, the bears didn't really have much to work with. Yet despite all the talk about Fed "bazookas" and stimulus plans and economic rebounds, our furry friends were able to knock the stuffing out of the S&P yesterday afternoon. And the funny part is that the bears had been unable to get ANYTHING at all going since the middle of July.
One analyst I respect suggested yesterday that since the market declined on the "good news" from the Richmond Fed and Consumer Confidence reports, this meant that the bears had effectively served notice that they were back. However, I'm not so sure.
First and foremost, let's remember that just about everybody in the game has been looking for some sort of a pullback of late. Anybody who has ever clicked the buy button knows that markets don't head one direction in a straight line for long. And in this environment, with questions about the ultimate effectiveness of QE3, worries about the "fiscal cliff," the concerns about China's growth, fears about the upcoming earnings season, and the ongoing uncertainties across the pond (remember, the EU and ECB have yet to actually do much of anything to stop the rate contagion), it wasn't exactly surprising to see the bears enjoy an afternoon in the sun.
Next, we should note that the end of the quarter is drawing near and that "T+3" means that any manager wanting to have positions show up on their books (or off their books as the case may be) for the end of the quarter, needed to do so yesterday. This doesn't mean that managers won't "dress up" (or down) their windows prior to the end of the quarter. But if you wanted to "look smart" and have a fresh new position in Google (GOOG) show in your portfolio for the quarterly report, you needed to get it done yesterday.
And finally there is what I like to call hedge fund follies. By now, everybody knows that the hedgies are underperforming the market by a fairly wide margin this year. This means that there is an entire swath of hedge fund managers that would like nothing better than to see the S&P "come back to them" by a few percentage points before Friday afternoon. Thus, it doesn't take much imagination to see that the boys and girls who happen to possess both the computer power and the leverage needed to push markets around might have some incentive to do so right about now.
Please don't misunderstand my point today. I am NOT saying that stocks didn't deserve to pull back a bit, because they did. I am NOT saying that the bears don't have a point or two worthy of consideration. And I am NOT saying that stocks will go up from here. However, I am saying that when the market dives lower in a single afternoon without a headline or data point to get the ball rolling, and that the dive is clearly driven by algo's, well, I wouldn't be too quick to jump on the character change bandwagon just yet. But rest assured that if we do see evidence that the market's character has indeed changed, you will be the first to know.
Turning to this morning ... Asian markets followed Wall Street lower with Shanghai falling to its lowest level since 2009 and the European are down hard this morning on renewed concerns about Spain, Italy, and Greece. However, U.S. futures are currently bucking the negative trend and point to a flat-to-modestly higher open as of this writing.
Major Foreign Markets:
- Australia: -0.33%
- Shanghai: -1.25%
- Hong Kong: -0.82%
- Japan: -2.03%
- France: -2.36%
- Germany: -1.87%
- Italy: -3.11%
- Spain: -3.49%
- London: -1.31%
- Crude Oil Futures: -$1.11 to $90.26
- Gold: -$5.40 to $1761.00
- Dollar: higher against the yen and euro, lower vs. pound
- 10-Year Bond Yield: Currently trading at 1.653%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +0.46
- Dow Jones Industrial Average: +13
- NASDAQ Composite: -0.73