Following Fed Powell's FOMC press conference a few weeks ago, one would have thought markets would be done and dusted for 2018, as everyone wrapped up and switched screens off for the holidays. That would perhaps have been wiser than actually looking at one's screen, because if one did, one would see the stocks at exactly the same place, as opposed to tracking them through Christmas Eve and the days that followed.
The S&P 500 is down 15% from its highs reached in September, bringing the year to date down around 7%, but it is down 12% in December alone. That is the shocking part. What was supposed to be a "quiet" month ended up being the most historical. Christmas Eve saw the biggest flush out ever seen, with markets down 3% in one day and flirting with being down 20% from its highs (textbook bear market territory). Just after many could not digest their Christmas dinner, given the nausea experienced the day before, on Boxing Day markets rallied 7%. What is happening?
December is usually characterized by low volumes, especially in the last two weeks. Trading during these times, let alone making money, is almost as rare as sighting Pluto with the naked eye. But 2018 has been anything but ordinary and predictable. It is a year that has taken serious casualties in the hedge fund space, with some of the smartest and largest operations down 20%-30% this year alone, asking them to question their trading model amidst the new paradigm of machines dictating the speed and extent of the moves witnessed.
Faced with serious redemptions in the fourth quarter, the market has continued to see sell programs every day to meet those requirements. The macro picture is quite bleak, as the market awaits news on the outcome of U.S./China Trade War settlement, no end in sight to Fed quantitative tightening (for now) and asset classes slowly imploding. With a vacuum of positive news flow and lack of "natural" buyers, these sell orders can tend to have an overwhelming influence during quiet days.
President Trump seems to benchmark the success of his presidency with the performance of the S&P 500, ludicrous as it may sound. So he tries to steer the market higher, tweeting "very positive talks are being made with China" every time the market dips below another crucial level. But it only offers relief for a day, as the market knows the President has cried wolf one too many times. We need to see an actual agreement to see a sustained move higher. That is perhaps one of the biggest overriding negative factors hanging over the market. If not resolved, no investor will be able to believe their fundamental models -- and the valuations being spit out by those models.
Something interesting seems to be happening in the markets in the last few days following Christmas. At around 2 p.m. ET, the market has witnessed NYSE Tick (an indicator showing relative buy vs sell orders) prints in excess of 1700, signifying the biggest buying program on record. It happened on Wednesday.
There were whispers of pension funds coming in, allocating capital towards equities out of bonds. One wondered when pension funds would come in to rescue the market, especially given the divergence seen between the two asset classes. This caught traders by surprise, especially the algorithms, as their "sell" signals got wiped out in a matter of minutes as the market squeezed viciously higher. No one was around to be long for it. Friday saw similar higher TICK prints close to 1600 pushing the markets even higher. Now the S&P 500 is up 7% in 3 days alone.
These are not normal or healthy markets. This sort of price action is seen during inflection points in the market or at the end of cycles. It is virtually impossible to trade or invest, given the volatility, especially if one is levered -- it is game over in a few days. Over the weekend, Trump tweeted "just had a long and good call with President Xi," which has helped the S&P 500 move above 2500 Monday morning. The technicals still point to a downward trend until we can breach 2600 sustainably.
We are entering 2019 a lot cleaner in terms of extreme positioning, as funds are less levered having reduced their gross and net books. Until markets manage to regain their 200-day moving averages, or any positive news on the Macro front is received, the market is vexed by machines leaning over the tape mixed with redemptions from hedge funds, despite how "cheap" stocks or commodities (oil, copper etc.) appear to be. It is all part of the same trade, for now.