The market took off out of the gate Tuesday morning
after the release of the CPI report. Just a
couple hours earlier the futures were deep in the
red but the CPI seemed to stimulate come
buying as the report came in below expectations
meaning a tame inflationary number. That is
good news, but then why did bond yields move higher?
Because bond yields tend to move higher when either
the economy is running fast, which is not the case
now, or inflation is higher that comfort levels
might allow, it is a mystery why they moved higher
yesterday. And because of that action in the
bond market (bonds move down in price when yields
move higher) you almost have to discount that the
early rally in stocks was due to the CPI. I suspect the rally was more of a result of
the overly bearish herd buying. Either way,
the early rally seemed emotional and it wasn't too
much of a surprise to see a sell-off by the end of
the day.
Now if you just watched the Dow Jones Industrial
Average (The Dow), which is compilation of the
largest companies in the US market, you would think
we had a good day as it was up 37 points. But
like the day before,
there were nearly 2 stocks down for every 1 that was
higher on the NYSE and Nasdaq.
Caution - Conspiracy theory ahead!
If you were a big money manager trying to unload a
lot of stock, what would you do? A big money
manager like you may need to sell 500,000 or 1M
shares of a stock so you can't just put in an order
to sell at the market price. You would keep prices
in the world's largest stock index up as you slowly
dumped you smaller stocks out the back door - ala
late 1999 and early 2000. So when the herd listens
to the news they are hearing that the Dow was up and
made another new high today. They don't want to be
left out so they buy - the stock you are dumping.
Meanwhile the underlying market is not seeing the
same success as the Dow. Eventually something has
to give, and we get a correction.
What happens then? The herd gets nervous and as
things get worse and worse, they begin to sell more
aggressively. And who is doing the buying? You -
the smart money manager who unloaded your shares
while the market was doing so well just weeks before
while people were so willing to buy. Now the bids
are gone and you are scooping up those same shares
at a big discount. How smart of you. And that's
why the smart money usually outperforms the herd in
the long run.
In a morning update yesterday I showed that China's
Shanghai Composite Index was down 3.6% the night
before last. That is some serious selling but the
fact that the Shanghai Index is up nearly 60% in two
months makes it seem like just a pebble in the
road. As I write this on Tuesday night, the
Shanghai is up 0.60% about midway through their
trading session. I'll update the box at the end of
these comments in the morning with the final
results. If we do start seeing more serious selling
in that index, I doubt the U.S. markets will ignore
it. It could set up at least a small correction.
We desperately need another pullback or the indices
will be looking over a very steep precipice from
which to fall. Support gets further and
further down and the pullbacks will become steeper
when the do come. Of course the buy and
holders have again made their money so a pullback is
just another pebble in the road, but for those of us
on the sidelines it is another opportunity for us to
get onboard.
Yesterday's midday reversal to the downside looked
ugly, but in reality the S&P 500 is still above the
20, 50 and 200-day moving averages, and actually
held up above Monday's low. Not
terrible. It was a reminder, however, of how
quickly things can change.
Today we get the new housing starts and the building
permits reports. They go hand in hand and anything
lower than expected may spook the market. The
market still seems to be in the “bad economic news
is good news” when considering the interest rate
picture. At some point in the slowing economic
cycle, bad news stops being good news and it becomes
bad news. That's when The Fed will finally start to
lower the fed Funds Rate. There is no way they will
do that when the market is making new highs.
So, my expectation is that we will see a sell-off in
the coming weeks. We can use that to be
buyers. The Fed will get the green light to
lower rates. The market may continue to move
lower as they interpret the drop in rates as a
warning that the economy is really in trouble - just
as you'd expect stocks to rise. Eventually,
the market will bottom out as the herd finally
finishes selling and the smart money is fully
invested again.
Hey, it could happen.
Trader Fred's
TSP Trader System
remains on a sell signal for now. Read Fred's commentary on
the system page.
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