Newton is Back

February 4, 2018

Weekly Market Outlook

By Keith Schneider


"I can calculate the motions of the heavenly bodies, but not the madness of the people." Sir Isaac Newton (quote after he went broke trading and not using his own theories)

Global equities finally got slapped this week, with the US markets down almost – 4%. The Dow Industrials were down a devilish 666 points on Friday, making for its worst performance in two years. Greece and Mexico fell the least amount, down only -2%.

Newton’s laws of physics seem to be exerting themselves once again.  For some, that might be comforting to know, as we might have finally come out of an unexplainable Green Hole (the net effect is that stocks go up endlessly creating unlimited wealth).  A Green hole is a close relative of a Blackhole where Newtonian physics just don’t apply.

Last week, we noted a change in the ether when, despite the run-up to new highs in equities, volatility ran up in tandem, breaking out of a 2-year down trendline. (chart is below)

Longer term, weekly charts for the key stock indexes are still mostly intact.  Market internals are reaching oversold levels and poised to bounce after a few more days of pressure. How far that bounce takes us is the big question and if it has the means to take out the highs is another question.

We have done some damage to the short-term structure and best case it will take some time to regroup before possibly attacking the highs again.

The yield curve continues to flatten.  Bonds tanked (we highlighted that last week), attacking a 30-year downtrend. The whammy of higher rates took its toll, taking volatility higher first, followed by stocks tanking.

Defensive sectors such as Utilities outperformed. Semi-Conductors look like they might have topped as well, possibly completing a historic run magnified by the Crypto Craze.

Crypto itself might have run its course for the time being, as it was spurred on by massive online ad spends, which are now being banned by both Facebook and Google.

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