Investors rattled by 5% sell-off in three days
On Tuesday,
January 19th, US stocks reached the highest level since
September 30th, 2008, a sixteen month high. For the rest of the week, stocks
declined 5.1%, reminding investors of the dark winter of 2008-9, when
stocks seemed prepared to drop to zero.
We remain relative
sanguine for several reasons:
1.
As annoying as it is to see stocks fall 5%, the current decline
rolls stock prices back to December 8th. Compare that to the bear market bottom
of March 2009, when stocks hit a 13 year low!
2.
US stocks gained over 70% from the March 9, 2009 low. Aside from a 7.1% pullback in June-July
2009, stocks were pretty much straight up for 10 months. A garden variety 5-10% correction is
not out of bounds.
3.
The solid rally of the previous seven weeks was driven by
expectations of solid January earnings ("buy the rumor.") Now that we actually see the earnings reports
(and they're pretty good) investors are "selling the fact!"
4.
Against all year-end forecasts, the US dollar is
surging. This drives down
commodity prices (commodities are generally paid for in dollars, but
produced in local currencies such as the Saudi Riyal, Australian Dollar
or the South African Rand.) A
stronger dollar means that non-dollar countries must pay more for
industrial inputs, which chokes off the resurgent world economy.
5.
The Chinese stock market in particular, but emerging markets
in general, are down on the year as investors take profits after last
year's triple digit gains.
6.
Many of whom we call the "smarty-pants"
investors (hedge funds, day traders) aggressively shorted the market over
the last few months and were getting killed. To recoup, these traders need to slam
the market to spook other investors.
It doesn't surprise us that 50% of today's decline occurred
between 3-4PM. As we saw last
winter, the traders load up all their shorts for 3PM, particularly
shorting the ETF's that have the power to move markets. All those sales hitting simultaneously
cause the broader market to over-react and dump stocks. It's market manipulation, pure &
simple, but the SEC has neither the expertise nor the will to police the
rules.
What would it take
to drive sharper market declines beyond what we already saw this week?
1.
Earnings coming in worse than expected - so far not an
issue
2.
Leveraged investors facing margin calls - so far not an
issue as leverage ratios are down sharply compared to a year ago.
3.
Economic news that implied a "double-dip"
recession. So far the world's
economy is recovering at a moderate pace, with Europe and the US bringing
up the rear. We see "slow
growth" but not "no growth" or "negative
growth."
