October 18, 2015
Weekly Market Outlook
By Keith Schneider
Equity Markets continued to bounce this week, with the S&P 500 improving by almost one percent, and monthly gains so far almost 6%. Leading the charge are Gold Miners, up 20% since the August swoon.
The markets are confounding just about everybody according to a study conducted by Credit Suisse and investors are headed to cash after the crash (the mini one in August). It seems they can’t make sense out of how or why various asset classes are trading. Cash levels in mutual funds and ETF’s are now at levels usually associated with market washouts. That is bullish.
This coming Monday will mark the 28 year anniversary of the stock market crash otherwise known as Black Monday. If you weren’t trading back then, it’s the day the equity markets dropped 25% in one day.
I am not making a prediction that this Monday there will be another crash but this is just a friendly reminder that markets can be irrational (even more irrational than in the past) and that seems to be institutionalized these days. October is the most volatile month of the year.
Differences abound this week from 28 years ago, as on the days before Black Monday we saw massive selling right to the close on Friday, but not so this Friday as the powers that be made sure even a hint of a crash is not wafting thru the air.
Also noteworthy is that while volatility has dropped off sharply from panic levels on the sharp rally this month, hedge funds are long deep out of the money put options at record levels , which equates to paying up for crash protection. Very strange indeed. It’s as if the market is saying “nice job” to Janet and the Fed for keeping things aloft, but hey, maybe you can’t do this forever.
This highlights the disconnect between economic realities and market behavior and It boils down to this: the markets now anticipate that the Fed and central banks will do everything in their power to keep deflation at bay and equity markets afloat, including buying stocks and futures to manage the market psyche.
Market players are adapting to this as well in that the underlying economics seem to have little do with asset prices.
Even the ebb and flow of normal price action is distorted with the anticipation of what the Fed might do if markets don’t perform according to plan. These are the consequences of interest rates at 5000 year lows. It creates a perpetual motion machine of Bad news, Good action.
This is a worldwide phenomenon. The Chinese stock market is being “managed “ by the communist party who are changing rules, throwing short sellers into jail or scaring hedge Fund managers by calling them in for questioning.
The huge Fat Tail that took place 28 years ago basically disproved that markets are random, which at the time was conventional wisdom. What the crash did do is spawn an offshoot of market analysis called Behavioral Finance. This field is the intersection of classic economic science and the study of human psychology and its impact on market outcomes. We call it chart reading.
So let’s go to this week’s video and see where those emotional inflection points are now.
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