After the Fed reined in its hawkishness and Donald Trump eased trade pressures with China the market was supposed to be in good shape to take advantage of positive seasonality into the end of the year. Some pullbacks and profit taking were expected after the recent run but few were expecting the fast and furious selling that occurred today.
The losses were huge, breadth was terrible and the Russell 2000 ETF (IWM) suffered its biggest loss since 2011. Everything was taken apart with lone spot of green being gold-related stocks. Breadth was 5 to 1 negative and many stocks were bidless.
The business media is blaming the selling on doubts about Trump's China deal and worries about a slowing economy. Some pundits blame the selling on valuations and poor technical conditions. There is no doubt that there are many negative issues but what really drove the action today was a major shift in bonds.
We have not seen a move out of stocks and into bonds like we experienced today in a long time. The best way to see what happened is to compare the 3.2% loss in the S&P 500 to the 1.68% gain in the 20+ Year Treasure Bond Fund (TLT) . To complicate matter further is that the flows into bonds were uneven and caused short-term bonds to rally more than long bonds which caused an inverted yield curve.
These shifts accelerated massive reallocation by big hedge funds like Bridgewater which has over $120 billion in assets under management. They are buying bonds and dumping huge baskets of equities as they realign their risk. Whether stocks are cheap or expensive is not relevant and the news flow is secondary. It is just a strategic move that causes the average market player to think that the financial markets are crashing.
The good news is that this action has nothing to do with the merits of individual stocks. There are some great companies being sold simply because they are held by ETFs or other instruments which are the vehicles used by hedge funds to implement their strategy.
Eventually the "good" stocks will come back to life but the problem is that there is no way to know how much longer the pressure from these strategic moves are going to last.
The news media are going to publish blaring headlines trying to explain this action and most of them will be wrong. It has little to do with news or fundamentals. That doesn't make the losses any less real but it does provide a reason for some optimism about a rebound in the near term.
Don't forget the market is closed tomorrow to honor President George H.W. Bush. I will see you on Thursday.