So forget all that you see
It's not reality, it's just a fantasy
Can't you see what this crazy life is doin' to me?
Life is just a fantasy, can you live this fantasy life?
-- "Fantasy" Aldo Nova (1982)
Guitar intro. (Really, play it on YouTube while you read. You'll need it)
So, Is This It?
What is this "it" you speak of? I know what you want to ask me. The same question runs a few laps around my head as I think my way through the apparent blackness of late night.
Late night that now melts into early morning. The warrior sleeps only as necessary. The warrior lives. I peer over the top of my computer's monitor. The man in the blackened window as always.... is still there. Always knowing. Always silent. How does he always know? Is he as confident as he seems? Better work quickly. Only have the man in the window a few hours until the aura of morning's gray light rises from the east. He then fades until this evening, leaving the warrior all to himself. He is old now. That said, taking him lightly would be unwise.
He is energetic this morning. I can see the urgency in his silent work. Finally, I ask. "Is this the correction that we have all been looking for?" Does this selloff end the month of January in anger, and then seep into the month of February?
February is arguably the most dangerous month of the market year, at least recently (I have been through a few gnarly Septembers and Octobers). There is no doubt that major market indices had already been rounding. There is no doubt that groups most beneficiary of early cycle economic activity, such as transports and small-caps, had been acting poorly. There is no doubt that we had expected either the industrials to pull the transports out of their funk, or those transports would wrap their nasty arms around the industrials and pull them under. Quicksand.
The man in the window, holds one hand up. He stops me where I am. Rarely he speaks. Today is different. He says there is more to what we see before us. He says that it was not just retail traders goose-ing highly shorted stocks. He says they had merely started a fire, but the fire had spread to fast-money, or momentum-type traders. These types of traders were once humans and almost as slow as the rest of us. Now, the "fast money" boys are actually the "fast money" bots, and now they no longer move like lightning because lightning is too slow. Price discovery overshoot is all but guaranteed, in fact the exacerbation of perverse price discovery is the very goal of these traders in this environment. That, my friends, has been our problem for years.
The Ying and the Yang
What many across the realm are missing in this story, at least in how it is reported, is that even as a handful of highly shorted names with poor underlying business models run north on high volume, forcing large short-side investors such as hedge funds to take unimaginable losses, there must be an outlet. The funds must react elsewhere.
Sure, there has been some old-fashioned earnings-related profit-taking. Sure, the market often reacts to an FOMC press conference with a certain level of violence. Fact is that for some of these funds, the ones most severely damaged, they now have huge bills to pay. They must liquidate other positions, in order to meet obligations. For those funds damaged, but less severely so, there must be a simple reduction in long side exposure in order to keep their math correct, now that these funds have been forced to reduce short-side exposure. Balance.
You kids follow? In this sense, Wednesday's broad market selloff becomes the mere logical output of a series of negative inputs. The short answer, and I hate to be non-committal in this way, is that I don't know if this is the beginning of a textbook correction. That depends on...
One: How much more damage is there that we just do not know about yet.
Two: How much the fast money bots will move, and how quickly. Remember, these algorithms care not about direction, they don't hold large positions overnight. They only force momentum.
Three: And this is the big one. Public sentiment. If the public believes that financial markets are in a good place (not money managers), then at least for the moment it is. If the public sours on the markets, they'll reach to preserve capital, even at poor prices. Many funds, even those undamaged, will experience outflows.
Everyone gets frightened. Everyone fears the water moccasin when hip deep in the swamp. Everyone fears what they cannot see, and what they do not understand. The public, especially those who generally do something else occupationally are no different. The bots will try to herd these folks if these folks start to move.
Yes, there's still more.
What I Think
Technically, the upward trend of the marketplace remains unchanged. However, this trend is at this point more fragile than that ceramic thing that your mother loved that you accidentally broke with your Nerf football when you were seven years old (We've all been there).
On Wednesday, losers obliterated winners at both the New York Stock Exchange and the Nasdaq Composite. The action came on overwhelmingly large aggregate trading volume across the exchanges.
This is where it gets a little murky.
Advancing volume beat declining volume at both exchanges, but we know that much of the "up" volume was concentrated in names of poor quality. So we look at an intraday chart of the S&P 500, and we eyeball it, old school. What do we see? We see on a one-minute chart that almost every green candlestick is preceded and succeeded by red candlesticks of higher trading volume. The takeaway there would be that every time markets gave thought to rallying the higher quality names, there were fewer participants joining the fray, and each time they were met by more participants willing to make that sale.
This is obviously negative, and illustrates broad professional distribution. In fact all 11 S&P sectors closed Wednesday's regular session deep in the red. The weakest industry groups came from where there was indeed profit to be taken.
The Dow Jones U.S. Travel & Tourism Index was beaten for an ugly 5.3%. The Philadelphia Semiconductor Index was slammed to the tune of 5.2%. The Dow Jones U.S. Internet Index took a 3.9% hit. Indices representing Hotels, Mortgage Lenders, Nonferrous Metals, and Tires... yes, Tires, all lost close to 4% or more. What does that tell you when Goodyear Tire & Rubber (GT) gets taken to the woodshed?
Hard to Say
Even harder to hear. While trading volume always picks up with about 90 minutes to go on a daily basis, this time there was an edge to it. That edge, my friends, was the thrust of a Roman gladius from behind the cover of the traditional rectangular long shield. It broke our formation. Though Fed Chair Jerome Powell did his very best to thread a needle between saying too much and offering too little on Wednesday afternoon, it was his honesty that rattled investors trying to make a last stand as their legions were ambushed and outmaneuvered as at Teutoburg Forest.
Was Arminius loyal to his people or a traitor to Rome? Depends on perspective. It is believed that among the 22,000 or so Roman soldiers who took the field that day, between 16,000 and 20,000 never left. Arminius had been raised in Rome, but he was Cherusci, and he was honest to "his" people.
On Wednesday afternoon, the FOMC released their official statement. Policy would remain aggressively accommodative or "unchanged." We expected that, and our lines held. For a while.
From the statement itself: "The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook." Sounds dire, unless one realizes that the words, "over the medium term", had been removed from the end of that sentence. Suddenly, the statement seems to put a shorter-term outlook on our nation's economic misery. There was hope. For a moment.
A short while later, at the press conference, Jerome Powell stated that, "(The economic) Path ahead remains highly uncertain." In addition, separate but related, the New York Fed announced that it would now scale back on intervening in short-term borrowing/lending markets, as U.S. dollar overnight funding volatility had smoothed out over time. Really? You had to announce this right now? The ambush was set. It does not matter if you read it that way. That's how keyword reading algorithmic traders took it and that's who decides direction.
The fires were lit. Our units were separated and could not support each other. The barbarians had taken our position. The legions had been reduced to stragglers and would never return.
Now, you know what happened on Wednesday.
-- I initiated a new long position in ServiceNow (NOW) on Wednesday. ServiceNow hit the ball out of the park, and I am a huge fan of CEO Bill McDermott. No, I am not some kind of savant, I had regretted ever getting out of the name and simply waited for a retest of the early January lows. The position is too small for now, so I will be comfortable adding to the name up to the 50-day simple moving average, currently the $530 level.
-- Yes, I saw Advanced Micro Devices (AMD) take that beating on Wednesday. I wrote to you Wednesday that my price target was $106. I did not mention that my panic point was $88. That level held on Wednesday, and has been pierced but not broken overnight. I tried to add late last night and my system crashed. I took that as a sign and put off that decision until this morning. Reminder, I am deeply biased in favor of CEO Lisa Su, so even if I add this morning, that does not mean I am correct. That said, I am more likely to add than to take profits.
-- Apple (AAPL) simply hit the ball out of the park. My intention is to add something on this dip down to $138. If it gets worse than that, I'll pause and probably sell something derivative against the position (That's phoney elite "speak" for covered calls). On that note, the guys you see on the tube every day are not smarter than you. OK, some of them are, but not most of them. Rock and Roll.
-- Yes, I do want to get long Tesla (TSLA) again, but this is not cheap enough for me. Not yet. We'll see what happens. The 50-day SMA is just a cool $674. The stock closed at $864 and is trading around $822 in the cloud somewhere. Still a 22% premium. I am not comfortable at more than 8% to 10% for anything more than a day trade. I don't think I ever told you that rule. Well, now you know.
-- Facebook (FB) is still Facebook. What does that mean? That means that even if they beat on EPS, and beat on revenue, and then buy back an additional $25 billion in stock while selling a boatload of advertisements, I don't want to own the stock. The stock price can quadruple. I don't care. I trust this management team about as far as I can throw an elephant.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Last 900K.
08:30 - Continuing Jobless Claims (Weekly): Last 5.054M.
08:30 - GDP Growth (Q4-adv): Expecting 4.1% q/q, Last 33.4% q/q SAAR.
08:30 - Wholesale Inventories (Dec-adv): Expecting 0.2% m/m, Last 0.0% m/m.
10:00 - New Home Sales (Dec): Expecting 863K, Last 841K SAAR.
10:00 - CB Leading Indicators (Dec): Expecting 0.3% m/m, Last 0.6% m/m.
10:30 - Natural Gas Inventories (Weekly): Last -187B cf.
11:00 - Kansas City Fed Manufacturing Index (Jan): Expecting 15, Last 12.
The Fed (All Times Eastern)
No Public Appearances Scheduled.