Correction time, is it finally happening?
Or is it too early to post Ron Paul.gif?
Pretty exciting. Take your guess, we'll see in a week who was right. Make sure to see the top comment below by UFOinsider.
Tuesday update:
**Thursday update: **
**End of the week update: **
I'd say the thread winning calls are from EnergyHou, traderlife and Dm100 so far. Many made longer term calls that might be proven correct in the next 2-3 weeks.
Also I'm a bit disappointed because I didn't get to post the nuclear Ron Paul version ''it's happening/you didn't listen/why didn't you stop it/you only had to listen''.
Idk, but it feels good when you sell at the 52 week high, then everything starts dropping even below the price where you bought. It is exciting.
ITS THE END OF THE WORLD AS WE KNOW IT
TRADITIONAL FINANCIAL INSTITUTIONS CAN'T SAVE YOU NOW
And I feel fine
It would feel a lot more exciting if you sold at the 52 week high and things didn't yet even come close to where you bought it......just a thought
Not to me. I think it makes my margin feel even more juiced up. The point is, it's classic Warren Buffett, focus on the fundamentals, and buy cheap scenarios that are being created right now.
Everything is fine, just a healthy correction to clear out all the players that contributed to the parabolic rise last 3 months.
This is obviously profit taking combined with algorithm selling.
GDP is increasing. Unemployment is low. Tax cuts passed. Inflation is within range. No macro events.
Is the market due for a correction? Sure. Is this 2008 all over again? Highly improbable.
And if you haven’t been taking profit all this time, you deserve to lose money.
The macro event is interest rates. The economy cannot handle a rise in interest rates but the central bank's hands are tied. There was too much QE from 2008 on and it cannot allow that money to enter into circulation with rising velocity.
https://www.bloomberg.com/news/articles/2018-02-05/machines-had-their-f…
Not disagreeing that rising rates are or will have an impact. That being said, I think this is a algorithm driven and profit taking sell off.
Guess time will tell.
Back in the Bernanke days when we were helicoptering money to everyone we could and interest went to 0, the question wasn’t IF it would pull us out... the question was always, “how do we pull the plug when things turn around?” There’s a reason that during past recessions such “extreme” measures weren’t taken, because central banks are supposed to balance what’s occurring in the economy to steady it, not create a market by buying everything and giving away money to everyone. So we will see, you ask me Yellen is fortunate to have gotten out when she did, the waters are about to get a lot tougher as other central banks start trying to... ease the easing.
The recent turbulence, however, IMO is more due to the billions that were being spent shorting vol, keeping it artificially low... ironically, the VIX was created to track market vol, but leave it to us finance people turn it upside down, where instruments keep the measure low and allow markets to skyrocket because everyone looks for downward pressure that doesn’t exist because so much money is tied up in an inverse / short vol position. This is more where algos that automatically arbitrage vol and markets play a YUUUGE role... indeed the tail wagging the dog, in both instances of central banks and the vol situation. Rant over.
I’m as bullish as anyone.
But tax cuts are meaningless. Because deficit spending at a close to full employment economy just leads to rate increases.
The economy is no where near "close to full employment." People have simply given up and dropped out of the pool of those actively searching for work, distorting the official statistic.
Algorithm selling?
I do think TNA is kinda getting at something in the statarb space, but I don't want to just give it away. Let's keep calling it algo selling. Quant shops are dumb and the efficient market hypothesis always holds.
Still, I think the impact from the vol market dwarfs the quant shops.
why the fuck is TNA getting MS for this? he's spot on. great economic backdrop (quibble all you want about the details, we're in global synchronous growth, and that's inarguable), so no need to worry about a recession in the short term. until the yield curve inverts, I'm a buyer.
also, if you guys are freaking out because we're 10% down from a record high, I would've hated to see you in 2008, or even August 2011 for that matter.
one of my gray haired partners says this smells like 1987. if he's right, strap in kiddies.
I’ve lived through the tech bubble and the financial crises. People just need perspective. I’m buying on the dips. If I’m wrong, oh well. Long time span.
One of your grey haired partners?... you gotta let him know, “this time it’s different”! -guaranteed promotion, old Wall guys love hearing that!
Interest rates have been rising...which caused stocks sensitive to interest rates to selloff...ultimately causing the stock indices to selloff....this caused Risk Parity funds (big, long stocks and long 20yr bonds) to liquidate last week (So, Friday, they were selling stocks and bonds). Today, trend following CTA funds (long stocks, short bonds) took Friday's close as an input, and they hit the liquidate button....so they sold stocks (just like Risk Parity funds) and the BOUGHT bonds (unlike RP funds). And that's where we are today.
Add into the mix short volatility funds are blowing up (XIV will go bankrupt overnight...among others)...that will cause margin $$ to come from somewhere...so the short vol "investors" will be selling what they own to come up with margin $$. This will cause a fire sale. In the near future, there will be good stocks to be had at bargain sale prices.
Curious what you see 18-24 months down the line?
expect the stock market to chop around these lower levels for the next 4 weeks....then rally back to the highs...and then selloff again to these lows, all within the next 6 months
Funny. Banks sold off hard too. Aren’t higher rates bullish for banks like citi.
Banks fund short term, and lend for long term...so banks want a steeper curve....but the curve has been flattening...so this is NOT good for banks.
Yeah, this is the correction everyone's been calling for. Not a recession, not a crash.
Before you start buying in your personal account, look for the VIX to start coming down.
In true forced sale bottoms, you sometimes see a V-shaped bounce like we saw in October 2008 and during the flash crash. But usually it doesn't come anywhere close to going all the way back up. That's why I think it's smarter to wait for the VIX to start coming down before you go out there and start buying hand over fist. Wait for the selling pressure to at least slow down a bit before you get in.
The futures market is already telling us we'll be down tomorrow. My guess is that we might see another down move the size of today.
It's not a "crash" until it is. S&P 500 P/B, P/S, and Schiller P/E are all pretty damn frothy. If/when the 10-yr T clears 3.25%, watch out below. Commercial RE is going to get wrecked - watch the office and retail REIT's.
Oh a crash is totally possible. I'm just saying 4% in a day is not a crash.
Tomorrow is unchanged or bid. Portfolio managers will buy size tomorrow. Quant stop out followed by real money buying.
Nice call.
Even during the flash crash the next few weeks were spent auctioning the extreme of that tail.
What scares me a bit here is that we've seen a lot of options volume in a low volatility market leading into this. Meaning that market makers have some pretty big short positions that they're all delta hedging. Whether it's puts or calls, a short options position means that you need to sell as the market goes down and buy as it goes up-- in a sense, a lot of forced sales.
So I'm a bit worried these guys have gotten themselves into a pickle here. Maybe it's a good idea to buy a few disaster puts on Options Clearing Corp. Actually, maybe there's some counterparty risk in that...
Good time to sell some credit spreads. Options volume on puts are insanely heavy so it's worrisome.
On the other hand, gambling on someone else's risk and financing with 5x your portfolio in notional was fun while it lasted. I was mostly rolled down when we hit the top so this crash will hurt, but not terribly, and not half as much as I made on the ride up.
Good. The market has been way out over its skis. The Schiller PE is - after today - 32; double the historical average. That will come down as a) the 10 year trailing earnings age out of the financial crisis, and b) earnings grow into current prices.
This is a healthy dose of rationality, and we are a long way from an oversold market.
Thanks for the caveats on the CAPE. I'm all for including a recession in the PE, but I'm not sure we're going to see a financial crisis in the next down cycle. Furthermore, the US isn't the same high-interest-rate, high-growth, low-capital market that it was back in 1920 or 1880 or even 1950. If you look at the average CAPE over the past 50-60 years, it's more like 20-25. I'd argue the US economy started pricing risk a bit more differently after we got the Fed, not to mention cars, telephones, electricity, etc.
The S&P 500 has a forward P/E of 17, and analyst expectations so far have been realized if not exceeded for Q4. If you're expecting 5% earnings growth simply in line with nominal GDP, you're looking at a 6% earnings yield and an 11% return vs 3% in treasuries. The calculation might change if we get past 4-5% treasury yields, but I think 10-11% nominal returns is pretty darned fair.
The market was a bit overpriced, but I think a lot of value investors are going to end their strike and start sifting through cheaper names if prices come down another 10%.
https://www.researchaffiliates.com/en_us/publications/articles/645-cape…
https://www.researchaffiliates.com/en_us/publications/articles/618-cape…
if you like CAPE, you should read Arnott's work on it...
It's not just a correction, it's a pre-war selloff.
Hyperbole or prophesy? I don’t know. I just don’t know.
Asia security advisor just went in records commenting that a strike on N Korea will help the gop this fall. But the current bunch says all sorts of stupid shit then does something else, so who the hell knows.
That there’s no consistently communicated policy is cause enough for concern given the chaos that comes from not being able to plan anything.
I find it hilarious you got pood on but a war would be the typical political distraction from a failing economy,especially from the chicken hawk crowd.
Dibs on the upstate bug out hideout if they drop the big one
For the record I'm totally with you on this one (and you know that I'm a bit more of a Trump supporter than you, albeit grudgingly). If Trump starts a war with NK as some sort of political gambit, it would really piss me off.
For that matter, if Trump tries to fire Mueller, I want him out. And Sean Hannity is sounding pretty desperate right now.
In any case, foreigners can't find Chicago on a map, so I'm pretty sure I'm safe from NK. For now.
If you’re an academic, the market never corrects: it’s always correct. YOU just got it wrong. Theoretically speaking of course...from a certain point of view.
Reality is, market participants collectively and individually get things REALLY wrong. All. The. Time.
One of two things happens now: We go into a downturn, or markets bounce back within a few weeks or so, climb for 3-9 months(ish) and THEN we go into a downturn, albeit a worse one.
Why? I call this post “it was late and I was tired” but here goes. Rising interest rates will force a rotation from equity positions to debt positions at a time when borrowing is superfluous. High corporate cash reserves rule out increasingly expensive debt financing needs, so you will see declining equity AND debt market prices. Not so bad in and of itself and would probably stabilize if it weren’t for the game of hot potato where no one wants to be left holding a sharply discounted asset....hence the impending sell off arms race that acts as its own self fulfilling prophesy.
BTC and other digital toys crashing in the midst of this will weaken retail investors confidence in markets, and worse, reduce their risk appetite at a time when they should be looking for opportunities in a more volatile environment. Expect a shift to things like money markets or cash aka withdrawal from markets, further depressing prices (but not value). You or I losing a grand in the markets doesn’t spook us but the average joe blowing a month’s pay won’t want to go near markets for a while. The irony here is that a bunch of people won’t want to believe things are going south, hence the battle cry “fake news” until some point where they lose so much they have to sell off. I personally see a btc crash catalyzing a bad downturn, not unlike housing in 2006-7.
Sentiment? It was increasingly confident, as evidenced by growing participation for the better part of a decade. Now it’s approaching irrationally euphoric, convinced of its own genius, expecting riches, and indulging in FOMO and excess....which never end well.
The things that can salvage the current economic position won’t happen. Rates certainly won’t be lowered and wages won’t go up fast enough. While rates are low, Japan has already deployed negative interest rates thus proving it possible...but let’s be real, it’s politically infeasible here at this point. And it’s true that a handful of companies are touting one time $1000 bonuses (500 bucks after taxes lol) for some employees or whatever nonsense but that’s hardly enough to prevent a price drop caused by static demand and over supply of all asset classes. People have to have more money in order to spend more money! Consumer debt rising would only delay and intensify a blowout. The only things that push wages up in any meaningful way over the long term is either legislation raising the floor (minimum wage hike will not happen in current political environment) or sustained low unemployment...but if markets are tanking then rest assured unemployment will rise.
Even if the tax cut talisman somehow caused the economy to somehow simply outperform and beast mode through the next year, it wouldn’t change the outcome. Globally, so much conflict and disruption is brewing that it would be a drag on all growth. N Korea is seeking to become an Iran type regional player, Iran has become a regional player, Uk is tearing itself away from Eu, Turkey and half a dozen other countries are poised to tear themselves apart....and how about Greece and a dozen other unresolved messes. I don’t care to build out the list but feel free to add on.
And even that would be fine; US policies could be a source of mitigation but I frankly don’t see it happening. Despite large amounts of aggrandizing talk, the only meaningful policy deployment in a year was a tax cut, but in every other instance it appears some strange deliberate mismanagement is rampant. The upcoming congressional elections will only push the partisans to their corners, making support for real solutions unlikely. Thinking a tax cut will solve the world, well, history tells us otherwise. Let’s wait and see how that goes. Don’t bet the farm on it!
The closest to any reinvestment in the US economy I see is the sad used car salesman act hilariously trying to get the American public to pay for a border wall. Walling the US off from a neighboring ally is in the same ill conceived vein of thought as picking a trade war with China....and that looks like it’s going to happen too lately. (Never mind the libertarian view that it is now harder for Americans to LEAVE if they wanted, and US citizens now have less absolute freedom). Maybe companies will put repatriated cash to work, but not enough is coming home given other countries are cutting taxes to keep the capital there. Plus let’s be real, companies don’t prime the pump, they drink from wells other people dig.
Bush overextended us, Obama was wayyyy too reluctant to get entangled in international affairs, but trump and his crowd don’t even seem to have any clear grasp of how to understand what is going on...and no will to be global leaders. They seem to think everyone should applaud the opportunity to service the US, so, I find their approach laughable. They’re like Sacha Barron Cohen’s character in “The Dictator” who acts like people should feel honored to blow him. Good luck with that.
What I was hoping to see....a massive infrastructure redevelopment campaign....has been substituted with massively corrupt appointments, gross incompetence, social discord, scandals, an active FBI probe, and a president more interested in maintaining a strong social media presence than spending even one solid day learning from career experts how anything works. And I’m watering down the criticism as much as possible given this is an economic analysis and not a political brainstorm. One does not have to be a democrat to see this as self evident.
I’m not optimistic and have moved to cash positions, and I look forward to some extreme bargains. Actually, full blown financial panics are not always a bad thing...from a certain point of view.
Or who knows, maybe I just have too much time on my hands and the DOW will be at 50K next year. Anything is possible.
+1. Please write more.
You said, "I personally see a btc crash catalyzing a bad downturn, not unlike housing in 2006-7." Could you expand a bit on your reasoning for this?
Recessions and downturns are part of normal activity, but a crisis typically has a triggering event. The actual damage from the trigger event sometimes isn’t even that bad but it destroys confidence and causes people to bid down prices or pull money out, or demand their manager do so. Here’s an interesting article from the last few days or so that takes a look at this: https://heisenbergreport.com/2018/02/06/why-cboe-is-plunging-retail-inv…
Now this is a great piece ! Makes coming to WSO all the more worthwhile
:D thanks dude
Really good post but there's something I disagree with. The US doesn't need to be a global leader, nor it can afford it any longer.
The collapse of the US middle class has been going on for decades now, nobody managed to turn it around. The middle class are the moderate voters you are seeking, their numbers are shrinking, which leads to polarization and partizanship and that's what you have. If the US loses its bulwark of economic stability, then you can forget about internal political stability as well. No kind international agreement or invovement can fix that.
From the outsiders perspective, if you are economically and politically unstable, you lose your moral ground to lecture anyone else on their system. You can't afford global ambitions when your backyard is a mess.
There's an even bigger problem: not so many realize this and even those who do, have no good solutions whatsoever.
Maybe. Maybe not.
Isolationism always seems to come back and bite us in the ass. It’s in vogue lately, but so are the hot iron and tide pod challenges. It’s a travesty that the perception among the citizenry that global stability is “too expensive” at a time when we “can afford” tax cuts. There’s no such thing as a power vacuum, someone always steps in to be in charge...the only pertinent question is who? America’s role in the world is a separate conversation, or maybe its own forum completely, so I’ll just leave it at that.
Disagree with you on BTC catalyzing a big downturn like 06-07. BTC is nowhere near big enough to cause that sort of disruption. Moreover, financial institutions are not holding BTC and are not levered to the hilt while doing so (as they were with subprime). BTC is mostly retail investors and tech anarchists with tinfoil hats.
What I do think could cause a more serious downturn is 1) surprise appearance of much higher inflation than expected, 2) somewhat related to the first point, but a more rapid increase in rates than expected at a time when there is still a lot of leverage in the system. This would cause debt burdens on consumers and the government to jump handily. This could lead to more political dysfunction around deficits and income inequality.
That said, financial institution balance sheets are in much better shape than they were in 06/07. We may have a recession, but I don't foresee anything close to an 06/07 crisis.
The average person has started putting money....too much money....into these toys. They’re getting burned now, and they’ll also want to dial down as much other risk as possible. More to the point though, it’s the crisis of confidence in markets that this causes. Even if a financial advisor knows better, when your client calls you up and shouts MOVE ME TO CASH, you do it. BTC is going down around the same time as the general markets? Must be time to pull my money out, goes the thinking.
To be fair: you’re right. Overall the the economy is much stronger but looks who’s at the helm. Accomplishment in a whole year: tax cut aaand basically picked a fight with everyone who isn’t in his immediate circle. Too busy with nonsense to deliver anything else and it only looks like it’s going to get worse. Get mad, blame the dems, it doesn’t matter...I’m pointing out how it is. There should have been mobilization efforts around an infrastructure plan a year ago, instead we are in a Twitter war with third world banana republics.
The confirmation of incompetence will be when they start beating the war drum. Then all hell will break loose.
As stated above, I’m not optimistic right now.
Maybe I just need coffee.
I don't follow. Are you saying that investors will rotate from equity to debt positions because of an increased return on fixed income relative to return on equities in a rising rate environment? How will that result in declining debt market prices?
Yeah that part isn’t worded well. Like I said...spitballing. The point is that the typical inverse relationship between debt and equities isn’t going according to plan at this point. Equities have been inflated by a decade of QE and now that they’re showing signs of going the other way, you’d like to put your cash into debt instruments. Here’s the catch though: rates aren’t going up fast enough to make it worthwhile. The hunt for yield is coming up empty handed. Also, as rates go up, many companies won’t need to borrow because they have oodles and oodles of cash on hand. Between tax cuts, repatriating some money, and the ginormous cash reserves they’re sitting on....what use do they have for a 5% loan?
So the investor is left with assets whose price is declining....but no real good options. For a while at least.
Damn. I guess I will graduate into a recession.
Put another way, you will graduate into an opportunity. The average person hears the job market is tight and gives up. You will see that after a recession, there’s usually a boom, and you want to be there for it...so you get in now, wherever you can. Even in the worst recessions people are hiring.
you're clearly intelligent, so I'm not going to name call and launch ad hominem attacks. I'll just suggest that you seek opinions from both sides, because it's quite obvious you have a glass half empty view of the world and have probably held this thesis for many years and are now feeling vindicated that you're seeing a 10% decline from a record high.
I suggest letting the data guide your thinking. yes, we're overvalued, but show me when there's been a bear market without an economic recession? also, show me an economic recession with an upward sloping yield curve. all of those factors can change on a dime, yes, but right now, I'm not seeing any reason to hit the panic button.
you've put your money where your mouth is, I've put about 20% of my reserves to work. let's discuss this again in 12 months :)
to clarify, I define a bear market as a 20%+ decline that takes at least a year to unfold. there have been only 2 times when the market declined significantly outside a recession and it was over in 6 months of less (cuban missile crisis and 1987 crash). in other words, if there's not gonna be a recession, there's not a reason to act like it.
furthermore, this is only the US, there's plenty of opportunity outside our borders, despite what ray dalio just did
Not at all. An entity failing to take its own stated commitments seriously while cutting revenue and arguing for a debt limit increase...you'd short any company acting this way, and in this case that entity is the US government and affects every economy everywhere. Anyone with an overly rosy perspective at the moment should revisit their assumptions. Waiting for some 5-10 year lows to buy in, then rotating into a glass-half-full kind of feeling.
+1 not because I agree with the majority of your analysis, but it was a good read, and required some mental capacity to write lol. Anyone who writes something that long deserves come credit.
I can respect that, +SB
@UFOinsider great note, and quite a number of points right. Very curious to have your views, after what has happened in the last YTD and is about to come. Thanks again, the stuff that makes this site interesting!
Correction after FED starts tapering and raises interest rates? I am absolutely shocked. Bull market continuing after FED announced both of these is the definition of irrational exuberance.
Well, you just made my post redundant. In about a thousand words less!
Markets had to come down a bit, but now that they’ve been bid up into insanity, when it goes the other way people freak out. People always overreact and bid things down too far. Which is great if you have lots of dry powder
I would advise you not to think in terms of football or sports by trying to dissect the motivations of possible players.
If you’ve been sitting on cash and have a long-term horizon, start buying this morning.
I would be shocked if the overnight low doesn’t get traded during regular hours, not necessarily today, before any constructive price action occurs.
Id give it another 3-9 months, then start buying. Anyone buying now is just going to have to wait another decade to turn a profit. But hey, you tanked one of the oldest banks on Wall Street so you know better, right?
Talk about volatility - up 350 pts at 10:00
Nothing but noise! The markets are nothing more than a distraction for seasoned investors.
There could still be several days or weeks of heightened volatility, but this was nothing more than a technical correction. Once the selling started, triggers were flipped, which begat more selling. Hence the major sell-off recently, and the reversal and oversold bounce today.
Perfect illustration of market momentum in one direction or the other. This is gravy time for us options guys. Heightened VIX during earnings season!? Time to make some dead-presidents!
Good call. I always knew you were a genius... Hahaha
Let's see where the markets are by the end of the year. Yeah, I think it was a good call.
I'm not a tactical trader. I buy and hold mostly, and actively trade options. Plenty of money to be made without buying or selling a single share.
You think a 5% correction is the beginning of the end? I knew you were a genius..........
SPX bounce off 200MA, + weekly finish in green? This is the correction markets been waiting for. Plus, crypto trading created a wave of retail traders, fear at its finest
Bring on the fear. The VIX has been stifled for such a long period of time, options premiums have been subdued, arbitrage opportunities have been very difficult to find, and until very recently, quality of a companies balance sheet, debt-to-equity ratio, etc. meant absolutely nothing. With volatility finally starting to re-enter the markets, equity traders will be able to separate the wheat from the chaff, so to speak.
Don't know that cryptos had a great deal of impact on the overall markets, but with the CBOE adding credence to cryptocurrencies by allowing them to be traded on the derivatives markets, that has added some juice back into the sector. That said, my concerns on cryptos are far and wide. Some of the major economies around the world have effectively banned transactions made with cryptos, and there have been a number of recent stories in the media of large sums of bitcoin being stolen by cyber-criminals.
I hope all you folks who choose to invest in cryptos make a mint. I have researched this "asset class"/"alternative currency"/"store of value" as it has been referred to. My job gives me access to myriad white papers and research material on a weekly basis. Even with all of this material, I still stand by my position that I will never again invest in anything I do not fully understand. Learned that lesson 1 time, over 20 years ago, and I've never had to learn it again.
Best of luck to all of you out there willing to take the risk.
none of this hints at an underlying fundamental issue. right now there is global growth synchronization, GDP increasing, US consumption strong, wages and capex increasing, solid earnings growth, rates still accommodative, inflation relatively benign globally...the list goes on. credit spreads have leaked wider a bit over the last few days, but really the only movement has been in CDX (fast money driven perhaps?). FX vol has remained surprisingly low. really seems like a technical story confined to equities.
I would be more worried if market events like this did not happen. the market seemed to be getting a bit unhinged with that run up the last few months. this price action makes sense to me given many investors kept pricing in the optimal goldilocks scenario and now we have to readjust with inflation possibly back from the dead (look at the recent rise in breakevens) and less monetary support/slightly more hawkish Fed.
this will probably wash out some of those overextended positions and create some decent buying opportunities
This correction has been great. I had a lot of cash in my 401k that I refused to buy anything with until a correction happened. Also recently cashed out a lot crypto last month.
Also sold as much ES vol I could when the VIX was at 50. I have no delta to hedge, and some beefy theta.
That's good but it's a little odd to brag about a paper account
Sorry to inform you but I do trade vol...
This version of the interface isn't even available on a paper account. Fellow IB users can confirm. Were you short XIV??
When/what will cause a long due market correction (Originally Posted: 01/29/2018)
SeekingAlphaMale, hey, look at the bright side, at least you didn't get a ton of monkey shit thrown at you...here is my best guess on threads that might be helpful:
Maybe one of our professional members will share their wisdom: courtneyland onlythestrongsurvive GutShot
I hope those threads give you a bit more insight.
Timing the impending market correction (?) (Originally Posted: 03/18/2013)
It's barely 2,5 months into the year and the DOW has already risen by nearly 11%. At this rate we're looking at a 50%+ gain this year, which is clearly unsustainable; there's got to be a pullback (or less likely, a period of sideways movement)...and when this happens, it's the ultimate profit opportunity for contrarians.
The question is...when? Everyone who matters (ie big banks, money managers, analysts etc.) is so ridiculously bullish right now with talks about record corporate profits, the "great rotation," the "averted" fiscal cliff, etc. etc. etc. Usually when everyone's singing "happy days are here again" it's the time to be extremely cautious. After all, those big trading firms have to make their money somehow, and often times it's by pulling the plug when all the muppets are piling on (see Apple)
I could definitely see a short-term pullback happening before year-end, and a longer-term pullback (bear market) before the end of this decade, if not midway through this decade. This current bull market has already lasted longer than the average bull market.
When do you think the next short-term dip will happen, and what will be the catalyst for it? For those of you intending to short the market (if you haven't started already), what are your planned entry/exit points? DOW 15000? SPX 1600? 5% pullback? 10% pullback? Is anyone so confident about a pullback that they're employing a risky strategy (for example, buying a few grand's worth of DOW/SPX puts every month until that dip happens?) Or is the consensus here that the rally will continue through the end of the year?
duplicate post - sincere apologies
On the 27th of July.
My guess is a slowdown of growth at the end of summer / early fall window of time. I don't see a pullback though: average total growth yoy is something like 7 or 9 percent, so 11 isn't pushing things to the point where there has to be a collaps. Again, I see it slowing down to slower growth, but there's no "bubble" to pop.
If the DOW was going up at 15% or 20%, well then hell yah I'd be shorting it.
I could see 20% gain for this year but there would need to be sideways movement for a while, or a pullback before another gain. If we're already at 10% less than 3 months into the year, returns haven't come this easy for more than a handful of times in the last century.
do not underestimate the politicians devotion to the "not on my watch" which loosely translates to I wont be blamed for it if it doesnt happen during my tenure. They will print and promise and build the bubble bigger and thinner. Still long on some specific things atm, but will be closing these soon. There's still quick cash to be made in the next few months.
remember there are a lot of smart people in the markets. You are not the only one that thinks that things are overextended. But honestly, if it seems so obvious to you. You are probably one of the suckers I've been taking money from in the past few months.
Thank You :)
I'll be the first to admit that every fund I know, including my own, has had the roundtable discussion about buying some protection in case of a somewhat significant market correction. The one thing that all of these incredibly smart funds seem to agree on, while some ultimately decide to get some protection and others don't, is that they have absolutely no clue when the alleged correction will happen. So I'm not sure if timing it is a very promising endeavor, and honestly not even sure that it's going to happen all at once like people are expecting.
For what it's worth, we have a bazooka full of cash on the sidelines and we're not buying protection any time soon as a result. Things aren't as cheap as they used to be, so I'd love to see a pullback and start bargain hunting again.
There won't be a major market correction until the Fed slows down their QE strategy, which is clearly not going to happen any time soon.
October 19th, 2013 b
"It is different this time." - Rate hikes, Dollar strength, S&P 500 correction incoming? (Originally Posted: 09/29/2014)
Is it really different this time round? More often than not that phrase tends to go around the room, with various reasons justifying how the current scenario is different from the previous ones and the implications around it.
Whilst backward looking, history tends to be one of our favourite indicators at predicting market tops and bottoms because it projects a false (subjective) sense of security. So how is this incoming rate hike different?
1994 versus 2015 (predicted) -> Alan greenspan versus Yellen Alan pretty much dropped the bomb on the rate hikes whereas Yellen steady like a dove has been injecting dovish comments all year round, indicating that the impending rate hike will be slow.
However I have my doubts about the market's ability to effective factor these subtle differences into bond prices. Or perhaps the capitulations of short bond positions over the past year has injected sufficient fear to shake investors off the eventual, yet unassuming hawkish story.
On first thought, any news of a confirmed rate hike should send bonds on a bearish run, equities to tumble and USD to rally. And it does seem like the market is getting ready to position itself for this - USD strength is beginning to extend, 10yr yields are rallying. But the missing piece is still the EQUITIES picture. S&P 500 just refuses to step down from its 2000 pedestal.
So, is this an opportunity or a divergence? ( Is it really different this time round?)
Another troubling thought is the ECB's QE in this phase and it's effect on the markets. I am unable to fathom the implications with this mixed picture. Any thoughts?
P.S. Apologies for the messy writeup, just chucking various thoughts in there.
I've written a few times about this subject so you'll have to forgive my brevity. In my opinion a normalized interest rate and credit standard world implies an S&P 500 level of about 1225. I don't see a reason to believe it will be different this time.
I am personally bearish on EQ, i believe it is lagging the other markets. Vol is still trading ridiculously low, puts are insanely cheap. Fantastic risk-reward ratio there, it'll take a fool not to get some puts now imo.
Btw any link to your writeups? keen to read more.
@"Marker" hit "track" after you click on his username, they're all over the place.
this time is never different, trees don't grow to the sky, those who don't know history are doomed to repeat it, all of those little quotes you hear regurgitated a lot are good and pretty indicative of what I think. I think @"ArcherVice" knows what he's talking about, though I do not share the intensity of his bearishness.
couple of things at play here: interest rates, equity market valuations, geopolitical crap.
geopolitical crap: needless to say several individual companies will be affected, but unless there's outright war I doubt this stuff will be anything more than distractions, possibly some buying opportunities, albeit brief. in short: nothing material that we can forecast/prepare for
interest rates: I think that unless foreigners stop purchasing our bonds (caused by wanting to manipulate their currencies or because their bonds yield so little), the 10y will have a hard time staying much higher than 3.5 a few years from now. think about it: if you're getting barely positive rates in Japan and half the yield in Germany, what would you do? you'd happily get 2.5% yield, so while Americans are complaining and stomping their feet for more yield (or in some cases going down the capital structure, out in maturity, or lower in quality), the rest of the world is buying our bonds because their version of the 10y is just as bad if not worse. this affects the next thing...
equity valuation: we are elevated for sure, and what worries me moreso than the multiple on the markets is the share of earnings growth coming from the top line. it's improved for sure, but I would not be surprised to see slower earnings growth for a few years. one thing to remember kiddies, GDP has very little impact on stock market performance. some could argue that it's a leading indicator for revenue growth which then goes into earnings, but I don't think you can make meaningful amounts of money in the stock market if you're using GDP as your main forecasting tool (aside: forecasting is a fool's errand). if you believe wholeheartedly in CAPE, you'd know that at current levels (26x+) the next 10y will have an average of 0-1% +/- 6% return. I personally feel like the jury is out on CAPE being a forecasting tool, that it's better to stay invested long term but certainly take gains when a story has played out, but if you believe in CAPE and the worst case scenario comes, we're looking at 30-35% drop top to bottom (ex-dividends). we're still invested but have some of the higher cash balances we're held in a while, we'd certainly deploy cash if we found any good ideas out there, but many of the companies we like are just a bit expensive right now.
Anything is possible, including the Fed hiking rates 2+% in 2015. If this were to happen, yes, Spooz are going to get a proverbial spanking. However, I don't think that even the meanest bond bear, in their most vivid of wet dreams, can currently imagine Aunt Janet being quite so adventurous.
So no, 2015 ain't looking like 1994, at least for now, which means "Keep Calm and Buy Stocks". Moreover, since yields are reasonably low and interest rate vol is cheap, you can easily hedge your particular nightmare scenario.
@"thebrofessor" @"Martinghoul" I have to agree with you, it is never THAT different and it all boils down to investor psychology and behavioral finance.
I am not a huge bear but I guess it really depends on the time frame in which one looks at. Generally equity markets don't start correcting more than 5 months before any real rate hikes. And of course, with inflation not being a real concern here, Yellen has more room to be a granny and take it slowly.
I guess the right thing to do is to hedge and keep current equity holdings, I personally wouldn't jump onto the bandwagon at this levels unless I were to do individual stock picking and find a couple of gems.
That being said though, what are your thoughts on Europe's QE affecting the macro picture and outlook? Would it hit home?
I think we're at a point where equities are roughly fairly priced relative to the alternatives, and obviously with rates far below historical norms that means that stock returns will likely be [and should be, if the market is at all efficient] below historical norms.
But there's a big difference between saying that stock returns over the next 5-10 years are likely to be lower than historical averages, and saying that equities are overpriced or due for a correction. Comparing Shiller P/E, P/E, cash flow yields, etc. across time periods is useless because valuation multiples should be different across time periods, because they are directly dependent on rates. It's hard to say that current valuations are anything close to the danger zones of 2000 - at that point P/E ratios were nearing 30x for the S&P 500 and the 10-yr was ~6% or higher, vs ~19x now with 2.5%.
Sure, Europe and Japan policies have something to do with it. The Fed would probably protest suggestions that U.S. policy need to heed monetary policy elsewhere but global weakness argues for a more careful approach. That we didn't see a collapse in certain EM countries during the aftermath of taper tantrum is rather fortunate. Geopolitical risks are relatively high.The bid for Treasuries early this year has been attributed to many factors - I'd probably attribute a good deal of the price action to unstoppable Foreign bids: there are big players in this arena that many have not heard of, whose demand far outstrips that of any other market partcipant. Question is whether the fundamentals in the US is deemed consistent with this buying.
An initial attempt at putting a fundamental backdrop to the curve flattening I've seen went along the lines of "the US economy is in no danger of oveaheating, moreover the Fed will hike before there is risk of overheating". Not much of a description but think it's consistent with the data. US data, while improved, is nothing to write home about: still too many part timers out there that can't find full-time work, many job gains still in service sector (though PMI has been solid), wage compensation though improved recently still isn't convincing. On this latter point, one also has to consider whether higher prices will lead to workers successfully demanding higher wages - I'd argue no. Rates are low, but mtg. underwriting standards are relatively high vs. 2006. Increased bank regulatory pressures can translate into tighter money going forward. History is useful, but let's not forget Taper tantrum which tightened financial conditions and set us back. Yellen has rationalized the move by arguing it snuffed out some financial instability, but rate hikes to snuff out financial instability is off the table - there was never such a third mandate. The Fed is not a democracy, hawks can make as many speeches as they want, but the doves hold more sway. Tightening is on the table, but many considerations will give the doves pause.
Onto practical matters, where my own opinion on conditions has little relevance, the market seems to be setting up for Wednesday's FOMC. Some attribute this to the talk of forward guidance revision and research papers (SF Fed and Street FI Research) arguing that the curve is priced too dovish. The papers are nothing new, everybody knows the curve has been priced dovish vs. FOMC dot charts, if some re-pricing occurs so be it. Lot of Fed speak getting bent out of shape about the "considerable time" phrase. It's a bit silly from a communications standpoint that the consensus is for this to be dropped, yet the rather explicit dot chart doesn't seem to receive as much scrutiny. Risks have definitely shifted to a hawkish outcome, but even if fwd guidance is changed and dot charts move steeper, I suspect tactical hawkish re-pricing will be re-traced again. We're not in 1994, and concerns about 1937-1938 are not altogether unwarranted.
Thanks for insight, much appreciated. +SB
I agree with the FOMC being the key this week and with the way the current market is positioned for, chances of a pullback are pretty lean imo. The market know yellen is gonna come out and say something dovish and unless she beats that expectations by saying lame stuff like not hiking for a year, i personally believe the dollar and yields rally will continue.
I guess my main issue here is with the equity markets not conforming to any real risk of a rate hike. I suppose the Ali baba IPO might give some hints to where the market stands with risk equity assets.
Still bearish for a ~10% correction in the next 1 year though...
Don't know enough to comment intelligently on this, but as a layman I will add that I seem to be hearing a lot more people saying "this time is no different" and positioning for a crash (or maybe I am just more tuned in to the doomsayer crowd this time). The market can keep going higher as long as these people are positioned short...when the last holdouts can no longer take the pain and flip long in spite of themselves, that's when the market will run out of gas...we won't see a capitulation before then
...or at least that's the reasoning of those who take the "psychology" approach to such things. What do you all think?
even a broken clock is right twice a day. there will always be doomsayers, but it's best to form your own opinions. markets could crash and the probability of that is higher than the street wants to recognize. at higher valuations, it's simply easier for things to fall quickly (think of a fire in a movie theater with one door, everyone tries to get out at once). what I don't think will happen is a longer term thing like 08/09. it wouldn't surprise me at all to see a 10-20% drop a la end of summer 2011.
many seem to forget that the bond market had a big sell-off last summer (2013) when valuations were indeed crazy.. Right now pricing in the bond market isn't that far away from what is likely...a modest hiking cycle of about 100bps/year starting in mid 2015. So I don't see the massive mispricing in the bond market that needs to be corrected unless Yellen changes course dramatically or inflation goes up to the point that it forces the fed to hike faster then what is priced. Neither of those things seems ikely right now. I do see some other bond markets in other countries that may be wildly mispriced if the global economy firms up, but not the US market.
So equities may stop going up or even might go down but I am sceptical that it will be because the bond market implodes at least not in the next six months.
http://www.multpl.com/shiller-pe/
I get the concern. However, timing the market is a pointless exercise. Jesse Livermore may have done okay over time but he was taken to the woodshed a fair share.
At the end of the day we have cheap money, which has inflated valuations and made credit available to those who otherwise may be SOL. You have so many smart money managers saying they're not overly concerned. Conversely, you have other people saying that the sky is falling. Look, if strategists are way off the mark (as they often are) then who are we to predict what the future has in store.
My strategy, which may be meaningless but I'll post for the hell of it - dollar cost average into a broad U.S. market index fund over time. As it goes down increase your allocation. Same with an obviously smaller allocation for something such as a global MSCI index. Money into real assets, hold cash, and some allocation to what I will call my 'alpha' fund. No need to massively diversify if you find something with a truly wide moat and can weather the storm over time.
It is sickening to hear people talk about how valuations are stretched - a general observation within my office and from the media. In the words of Sir John Templeton, 'Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria.' We are not yet at the euphoria state. Until cabbies are recommending stocks and retail flows get completely out of control I think we'll all be 'a-okay'.
/rant/
Is a Correction Right Around the Corner? (Originally Posted: 05/09/2015)
With the S&P (up 211% since march 2009) recording its longest period without a correction since the mid 1940s and U.S. equity flows completely abandoning a correlation with S&P price action, a correction may be quickly approaching.
I believe a correction is long overdue. What do you guys think are some underlying reasons contributing to a looming correction, if any?Article
"With the S&P (up 211% since march 2009) recording its longest period without a correction since the mid 1940s " What is the definition of a correction?
I don't think that anything will happen until the Fed makes a move and when it happens, I would be surprised if the correction was anything significant and long-lasting. Eurodollar rates imply that the market seems to be pricing in rates at 1% (+-0.2%) between now and June '16.
However, we must also take into account the global economic environment right now, despite the high market valuations and strong earnings for American Equities; we must also take into account the effect of foreign securities in our markets. As you know the ECB just started QE in hopes that economic growth in Europe will restart; however the constant news about the possibility of Greece defaulting in their sovereign debt, and exiting the Euro has many investors worried that this will not only cause a devaluation in the currency but that it will have a similar toxic effect to the 2008 crisis and affect weak European economies that are starting to see some recovery (ex. spain, Italy, Portugal). So depending on the expected economy growth in the States for the rest of the year and the recovery of the European economy plus the resolution to the Greek crisis will be able to give us some idea of a possibility for a correction for the end of this year, and an increase in the interest rates.
market correction (Originally Posted: 02/23/2011)
I feel like the market was overbought and due for a sell off... but noone saw whats spreading and continuing mess in the middle east
like to hear your thoughts on what its means for the future
...me... i feel like oil will continue to slowly climb industry stocks will soften, and oil stocks will rise as will inflation
Well I think the Fed wants a QE3 for one. Second, I don't think the market will truly correct until the Fed puts the Volker stop in, aka 70's style interest rates. Bernanke thinks he can fine tune the economy, which is wrong on so many levels. I think it will be obvious when its really time to get out, because inflation will spike- not bad for stock because the dollar will be devalued greatly. Then the Fed will try to suck up the extra liquidity with an overbearing interest rate or not enough, continuing the inflationary spiral. I don't see this as a correction rather its all because of Libya and Gaddafi being bat-shit crazy. Its hard to "correct" when the Fed is propping up prices across the board.
A market correction? (Originally Posted: 07/03/2014)
Hello WSO community.
The S&P 500 is reaching new highs and moved further with the jobs report. At this point, anyone who soaked up excellent gains in the past 5 years would have to ask themselves "What action should I take next?" What about the guy who increased his holdings in higher beta stocks back in 09? Is it time for him to move to lower beta?
Maybe this guy should be more concerned with sector exposure.
-----S&P 500 sector returns in the last year of bulls since 1972----- In the last year of a rally, we like: Energy 34% Health Care 27% Tech 23%
but not: Telecom 8% Financials 2% Utilities -1%
(Source: CNN Money using Ned Davis Research, InvesTech)
Thoughts?
Aut tempora eos reiciendis autem. Ipsam molestiae qui magnam voluptatem consequuntur esse et. At ratione saepe fugit et molestiae ratione. Eum omnis cum iure nostrum qui eligendi dolorem exercitationem.
Vitae illum molestias assumenda consequuntur cupiditate sed ut. Laborum qui distinctio ut dolorem. Qui consequatur ut iusto temporibus possimus.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...
Officiis quas eum blanditiis et aliquam est. Doloremque atque veniam incidunt aliquid sed. Cupiditate laboriosam iure blanditiis in. Sit maxime qui totam sint repudiandae hic illum.
Voluptatem rem repudiandae exercitationem explicabo recusandae voluptas. Aspernatur veniam voluptatem est rerum consequatur dolorem. Dolor aut qui omnis quo eveniet consequuntur. Deserunt totam quia eaque aut placeat.
Culpa voluptatem sed molestias nesciunt esse. Eum incidunt fugiat non voluptate excepturi voluptatem.
Sapiente placeat perspiciatis architecto. Fugiat neque molestias doloremque quis est. Non et placeat cumque qui et. Molestiae minus eum quam corporis et.
Totam est enim veritatis assumenda veritatis. Veritatis eius pariatur aut laudantium vitae nisi quam saepe. Eaque sunt dolore sit perferendis et.
Saepe in sint sint rerum nihil commodi nobis et. Repellat occaecati aut porro exercitationem qui iste id. Veniam quaerat eaque debitis placeat. Dolores commodi ut qui.
Explicabo alias reiciendis voluptas facilis et assumenda quos. Dolorem quia ut perspiciatis et perspiciatis. Dolores dolor et consequatur.
Voluptatem harum magni vel repellat soluta qui. Quae eaque vel eligendi unde porro. Numquam quam nihil est sequi consequuntur est at. Rerum qui mollitia non alias. Modi consequatur in at dolorum.
Ipsum ratione unde nobis est. Quae rerum id et eos quidem officiis.
Sunt quo doloremque accusamus molestias. Quis itaque at qui autem. Eligendi debitis rerum quas quis est illum dolor earum. Veniam voluptas repellendus ad similique aut itaque.
Aliquid quas ab vitae voluptas totam aut veniam. Adipisci voluptatem voluptas sint neque.
Minus ut tempora ut quia. Modi nobis et repellat amet quaerat eum vero. Magni ullam et tenetur quod autem. Aut placeat aspernatur doloribus. Id quae quia iste at quo. Accusantium eveniet deserunt quis.