Markets often do the unexpected -- particularly in a market dominated by products and strategies that worship at the altar of price momentum.
Few expected the September, 2018 - December, 2018 market fall -- and even fewer expected the subsequent strength of the recent two month rally.
Back on Dec. 26, 2018 (with the S&P at 2350), at a point in which stocks were in a free fall, I wrote a column that proved prescient, "The Top 10 Possible Surprises That Could Deliver an Immediate +5% Move in the Market (In One Day)." The column mostly fell on deaf ears.
Here is that bullish analysis from exactly two months ago.
Now We Need a Place to Hide Away?
I continue to be of the view that 2018 marked the beginning of the end of the 10-year Bull Market and that an important top was in the process of being established last year. All signposts lead me to conclude that the topping process is still very much in play.
As noted previously, the principal sources of my concern are continued political turmoil, the risk of policy errors, an unstable Administration, an untenable level of private and public market debt and a less-promising outlook for U.S. corporate profits and global economic growth.
The U.S. and worldwide bond markets continue to signal an important message and I am fearful that there are now -- with a burgeoning U.S. deficit/debt load and a low by historical levels of interest rates -- few monetary and fiscal tools left to catalyze global growth.
It is my view that the market opportunity in late December has turned into the market vulnerability in late February.
Today we explore the vulnerability of the markets and offer reasons why the S&P could fall by at least 5% (in one trading session):
My Top Ten List That Could Cause Stocks to Decline by at Least 5% in One Trading Session
- Domestic economic growth weakens further (and supply side economics is further discredited), Chinese growth fails to stabilize and Europe enters a deepening recession.
- U.S./China fail to agree on trade. (My baseline expectation is that investors will view a likely, superficial agreement as no agreement at all). We will find out shortly whether my view is accurate that President Trump thinks in timeframes of a tweet and President XI thinks in timeframes of decades - and that there will be no big deliverables with regard to IP theft and/or technology exchange. The same applies to the current summit with North Korea - which may yield little in the way of substantive agreements (transparency, a freeze, etc.) despite the Administration's optimism.
- After high profile failures with China and North Korea, a frustrated President lashes out in a series of policy mistakes and over reaches, rattling market confidence. (As an example, President Trump could institute an attack on European Union trade by raising auto tariffs).
- U.S. Treasury yields (the 10-year yield is down to 2.63%) continue to fail to ratify an improvement in economic growth. A move under a 2.50% in the 10-year yield could be a market trigger.
- The strong market price momentum to the upside seen in January-February abruptly reverse and the machines and algos (with strategies all on the same side of the boat) go into sell mode.
- We begin to see more first quarter earnings warnings - amid growing recognition that S&P earnings might decline in 2019 - an unlikely backdrop for expanding valuations.
- Like the historical precedent of Clinton and Nixon, President Trump faces domestic pressures which overwhelm him. A Mueller report jeopardizes Trump and damaging Cohen testimony further adversely impacts the Administration. (The Democratic Left gains even more support - the markets see this as increasingly dangerous and as a threat to a continued market advance.)
- A hard and disruptive Brexit.
- Crude oil supplies spike and oil prices collapse - taking down the high-yield market (which has recently rallied in a brisk manner).
- European Central Bank President Draghi is replaced by a hawk.
"A wiser fella once said, sometimes you eat the bar, and sometimes, well, the bar eats you. (and then the Dude asks if this 'is some kind of eastern thing'). "
-- The Stranger/Narrator, The Big Lebowski
A changing market structure has produced a new regime of volatility, unexpected and violent moves and binary outcomes.
A weakening global economic recovery, a faltering corporate profit picture, untenable debt loads, political turmoil (and the risk of an increasingly untethered President) provide an unsound foundation to markets that have had such a spirited rally.
The possibility of an abrupt change in market complexion and momentum is rising rapidly.
The recent mov(i)e may soon move into reverse.
(This commentary originally appeared on Real Money Pro on Feb. 27. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen and others.)