Step inside where your true self awaits
Find your will and then you'll find your fate
This room of nightmares, so much to see
This room of nightmares, shall set you free
Set you free
Close your eyes
And you will see
-- "Room Of Nightmares" Zakk Wylde (Black Label Society) 2017
Inside the Room
A friend called on Monday. A seasoned trader at that, one whom I have always considered more talented than me. "What the (bleep) is going on with this market? It's not supposed to be this easy. We're in for a rude awakening." I agreed, for the most part.
I have been expecting some kind of corrective market action in January for some time and have written so quite often since mid-December. Obviously, market conditions are different this time. They always are. Often in hindsight, we can see the rhyme as we look back, but really there is no rhyme here.
We have been through lengthy periods of accommodative monetary policy before. Never this aggressive though. We have been through, not individually, but as a people, long periods of loose fiscal policy due to the harsh realities of conflict that cost too much in both lives and treasure. As a nation, we have even been through a pandemic that was both deadlier and tougher on the economy than this one, though for some reason, the generational memory of such negative periods in our history have been allowed to fade, as if that was then, and this is now.
That, there may just be our problem, as well as our salvation. This is indeed now.
Equities needed to hit the pause button after a seemingly endless march into northerly territories coming off of a short-term bottom in late October. The cyclical trade was on. "They" bought discretionary names, they bought energy stocks, and they bought financials. "They" even bought small to mid-cap stocks. Did they ever.
They were supposed to cashier the pandemic plays that got them here -- the tech stocks and "tech adjacent" stocks such as the internet names found in the Communication Services sector. They tried to rotate, but for the most part, these stocks would move higher as well, albeit more slowly. There was no rotation we soon found out, this market behavior was more a broadening of what had over the first nine to ten months of 2020 had been a rather narrow rally.
We all enjoy looking at our P/L statements. While those with 401(k) plans or IRAs giggle with excitement as recent monthly or quarterly statements wander in through snail mail, it becomes easy to become detached from reality. The reality of a nation divided might seem merely frustrating on Facebook (FB) as friends remembered from simpler times engage in verbal jousting matches that make both sides seem dull and unimaginative. That reality plays out in real life in the streets, on the steps of the U.S. Capitol Building, and on your television screen. Everyone on both sides at least in their heads is defending our "democracy."
The left and the right both believe in the ideals of republican government, because that's what representative government is. We have never been and have never even attempted to be a "democracy." One might think with similar sounding objectives that finding some middle ground should not be so hard. Right? I mean if he was your friend in high school, and you prayed for his family when they had Covid, then should it matter much that he leans left or right politically? You made sure there was food on his front porch when he and his wife were down with this awful virus. Even if he has been "taken in" by the cult (can be applied in both directions), you cared deeply until he and his spouse showed signs of recovery.
I think, and I could be wrong, but I have always felt that the vast majority of people of all types are generally good. I believe that most conservatives, in their heart, think that the president should have conceded weeks if not two months ago. I believe that most liberals, in their heart, know that the entire electoral process has serious deficiencies in transparency that need to be corrected so that this excuse for increased division can never again be exploited for political gain.
Both sides do have one thing in common. As cities burned over the summer, liberals claimed that it was mostly either pro-Trump agitators or Antifa that was really doing the damage. As half-crazed lunatics stormed the Capitol Building last Wednesday, the script read almost exactly the same. This time it was either mostly communist agitators, or again Antifa that led the violence. Supposedly. Both sides would probably be correct in their assumption that the violent few did not truly represent their majority.
Know what? There's a whole lot of room in the middle. In fact, there's room for all of us. Out on the extremes is where you'll find those willing to exploit. No problem with leaning one way or the other, just be willing to hear, and play ball with the other side. Remember, most elected Democrats liked President Reagan personally. Most elected Republicans liked President Clinton personally. I don't think we've seen anything like that since.
No, Monday was not, in my opinion, the start of the January correction. One might be tempted to think that there was an algorithmic response to the delivery of an article of impeachment for "incitement of insurrection" on the House floor, as well as a misleading screenshot posted by a disgruntled staffer at the State Department that had some thinking that President Trump was about to resign, and that may have had some minor impact.
The fact is that the U.S. dollar has stiffened against most of its reserve currency peers since the middle of last week, and held those gains on Monday, despite the persistent rise in U.S. 10-year Treasury note yields that even this morning continues. As I bang out this early morning note, I see the 10-year giving up more than 1.16%. Now, the Bureau of Labor Statistics will release its CPI (Consumer Price Index) data for December tomorrow (Wednesday). Expectations are for a headline inflation rate of 1.3%, up from 1.2% in November. (The Core CPI is expected to repeat at 1.6%.)
What you have seen over several weeks is a market reacting to improved prospects for increased fiscal support reliant upon deficit spending. In plain English, the Fed is going to create large amounts of fiat currency that does not yet exist, so that the Treasury Department can borrow what it needs. This has resulted in a softer dollar as well as higher long-dated yields as expectations for inflation start to rattle a bit. That in turn, has U.S. 10-year yields threatening to surpass the recognized annual rate of consumer level inflation.
You still with me here?
Can real interest rates go positive? Sure, they can. Depending upon how much the yield curve steepens, the long end could in turn curb inflation all by itself. That said, we are nowhere near there, just yet. That said, beware, as the possibility of positive real yields moves toward public impact. At least one kind of investor, more interested in capital preservation than in risk, will move from defensive, dividend-paying equity into longer-dated sovereign debt securities guaranteed to pay something in real terms.
It's all about balance. In diversity of holdings. Not just across the 11 sectors in the S&P 500, but exposure to physical assets. Gold, silver, land, art, hubcaps, baseball cards, anything of value that you can touch, and and put aside. It helps if it can be used not just as a store of value, but also in times of strife as a medium of exchange, which excludes hubcaps, baseball cards, and for the most part, bitcoin.
Oh, I see a purpose in bitcoin. A means to move a weakening currency out of a totalitarian nation would surely be one. Bitcoin is so volatile, though. How does one ever figure out fair value in real time. From Saturday night through midday Monday, the value of one bitcoin lost more than $10K or almost 25% in value. From midday Monday through the wee hours of Tuesday morning, one bitcoin has already regained more than $6K of that $10K, without significant movement in U.S. dollar valuations. Imagine if during that time frame, one had used bitcoin to either purchase or sell anything. Quite clearly, I do not have the risk tolerance for the level of speculation necessary to trade this asset. Oh, look, my 1972 baseball cards. Reggie, Reggie, Reggie.
Bet You Knew...
1).... That the Dow Jones Industrials, Dow Jones Transports, Dow Jones Utilities, S&P 500, Nasdaq Composite, Nasdaq 100 and Russell 2000 all closed lower on Monday.
2).... That eight of 11 S&P SPDR ETFs closed flat to lower on the day.
Bet You Didn't Know...
1)... That losers beat winners at both the NYSE and the Nasdaq, but that advancing volume beat declining volume at the NYSE and absolutely crushed declining volume at the Nasdaq.
So most analysts will tell us that Monday was a down day on Wall Street, but that aggregate trading volumes were lower on Monday than on Friday, so that the selloff is indeed less meaningful. Note above, that I did not mention the S&P 400 (mid-caps) and S&P 600 (small-caps). Why? Because both were higher for the day. The S&P 400 closed up 0.23%, while the S&P 600 gained 0.42% in contrast to the Russell 2000 that closed fractionally lower.
So... not a down day? It depends who you are and what you trade. Know where the volume is, and know what the volume is doing. Is the game really that easy? No, but like my old friend mentioned up above, it has been of late. Be ready for change. I have no idea if markets turn before or after the inauguration. Thursday, President-Elect Biden lays out his economic agenda. Me thinks that there could be some algorithmic keyword readers working in overdrive at the time.
1) Boeing (BA) closed at $206.79, just above the 50-day simple moving average of $205.35. If you've been with me, we're up 35% on this trade. $205 is the adjusted panic point. The line can be pierced, but if it cracks with a vengeance or closes below, I get my tail out of this name, and watch for a lower point of re-entry.
2) Microsoft (MSFT) is going through the same test - closing at $217.49, above a 50-day line of $215.77. No, I will not get the heck out of MSFT, but I have no problem with reducing exposure, sitting on three-figure (in percentage terms) profits in the name.
Economics (All Times Eastern)
06:00 - NFIB Small Biz Optimism Index (Dec): Expecting 100.6, Last 101.4.
08:55 - Redbook (Weekly): Last 5.5% y/y.
10:00 - JOLTs Job Openings (Nov): Last 6.652M.
13:00 - 10 Year Note Auction: $38B.
16:30 - API Oil Inventories (Weekly): Last -1.663M.
The Fed (All Times Eastern)
09:35 - Speaker: Reserve Board Gov. Lael Brainard.
12:00 - Speaker: Cleveland Fed Pres. Loretta Mester.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: (KBH) (0.93)