We continue to surf in headlines-driven market environment, where stocks move based on speculations of what European leaders will do next. Even Santa Claus is turning bearish on Europe and the mess coming from there is confusing for even the most experienced and calm market participants.
You would think that no one in Europe, or in the world for that matter, has the incentive to see Italy and Spain locked from the credit markets, but yet German and French leaders dangerously continue to gamble and to play with the patience of investors. What is going on now in Europe is completely politicized and could be easily averted with the introduction of Euro bonds.
The current turmoil in the financial markets is taking real victims in the economy and affecting everyone’s life. European banks are afraid to lend to each other. No one wants to sign long-term contracts with European companies due to the higher than normal uncertainty there, which impacts negatively economic readings. Bad newsflow further influences investors’ behavior, which leads to lower prices and ultimately to a negative feedback loop with no end in sight.
The U.S. equity market is part of the world equity market and as such it suffers when the Return Of Capital becomes a priority over the Return On Capital. Objectively, U.S. stocks are cheap by many measures, but currently emotions reign supreme and they scream to play defense.
Earnings season is almost over. The readings are at record levels and yet $SPY is more than 20% below its 2007 highs. The market has discounted a severe recession in Europe and its potential implications for the rest of the world. What the market has not discounted is a credit freeze and the recent advance in the TED spread is getting worrisome. Why credit markets are so essential? Look no further than the following quote from Michael Lewis’s book “The Big Short”:
When banking stops, credit stops, and when credit stops, trade stops, and when trade stops – well, the city of Chicago had only eight days of chlorine on hand for its water supply. Hospitals ran out of medicine. The entire modern world was premised on the ability to buy now and pay later.
For the week, the St50 Momentum index lost 4%, just like the Nasdaq Composite. The S & P 500 fell 1%. High dividend stocks outperformed as capital flew to perceived safety.
At some point last week, crude oil broke above $100 per barrel for the first time in 5 months on concerns of escalating conflicts in the Middle East, but it quickly retraced as fear of European contagion took over investors’ minds. Refiners’ stocks ($DK, $WNR, $TSO) were taken backstage and shot in the head. All of them reported record earnings recently, but the crack spread (which defines their margins) has recently plunged and as forward looking mechanism, the market has discounted that weakness.
Gold miners ($GDX) gave away half of the ground they gained over the previous three weeks, proving once more that there is no place to hide (baring cash and U.S. Treasuries), when investors run for the door at the same time. The underlying metal ($GLD) itself continues to prove its controversial nature. Just when it looked broken and hanging on a cliff last month, it reversed furiously higher. Just when the news flow turned positive, it did not manage to hold gains.
High ticket, large cap stocks are also taking it on the chin, which is a major indication of institutional distribution. A quick look at the charts $AMZN, $AAPL, $CMG, $PCLN and plethora others will tell you everything you need to know about the current market sentiment.
The announcement of Warren Buffett’s first purchases in tech stocks was like a breath of fresh air for the market, but the enthusiasm did not last long.
The market is trading like there is no tomorrow or more precisely like it has no clue what tomorrow will bring. Sometimes it just makes more sense to stay on the sidelines if you are not willing to compromise your time frame of operation or your style.
In bull markets there are both winners and losers, but most stocks gain ground. There is something for everyone. During bear markets, stocks move together in both directions, but mostly down. If you haven’t noticed, the correlation in the stock market has been quite high for the past six months
The market has a crisis of confidence and only higher prices will resolve it. We have all become technicians in one way or another and watch each other’s actions for confirmation of our own biases. Still, most of us just don’t want to believe that Europe will be left to sink, but in the same time we are reluctant to step up and allocate money to equities for more than couple hours at a time.
This is not an easy market to trade or invest. In the stock market, I don’t want to pick battles that are not easy to win and cause myself unnecessary aggravation. Life is too short. Remaining open-minded, nimble and flexible is as important as ever. Everything could change super-fast and a couple of days could make a huge difference in terms of market setups.
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Have a Great Weekend!
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