Toward the end of last week, when the S&P jumped 58 points (3%) for the week, 46 on Friday alone. The negative interest rate announcement by the Bank of Japan triggered the move on Friday. Earlier in the week the bottom-callers in oil were on their megaphone proclaiming a new bull market in oil, which got the stock market permabull drones all giddy. The trading action last week was entirely characteristic of a typical bear market short-squeeze rally fueled by momentum-chasing hedge funds and daytraders who had piled into the short side of the market as they chased momentum lower.
Typically these bear market counter-trend rallies are short-lived and are followed by sell-offs to new bear market lows.
I was quite dismayed by all of the stock market bottom-callers who jumped out of hiding to announce that the stock market “water” was warm and that it’s safe to jump in. Several of these mentally challenged mutual fund manager drones were on bubblevision Friday. These guys are either complete morons or ethically challenged. If it’s the latter case, then they are breaching their fiduciary duty by encouraging the public to put more money in their funds.
An article in the Wall Street Journal featured a money manager who tried to make the case that the bottom is in. Again, I hope that view comes from stupidity rather salesmanship. And some guy named Rob Arnott who supposedly manages a zillion dollars was featured on a well-known podcast website encouraging listeners to put money in emerging markets. May as well take lighter fluid and a match to your money. At least that would be worth the heat you create from the fire.
It simply blows my mind that, after 6+ year bull market in stocks that was entirely a product of money printing by Central Banks globally, a supposedly well-educated market “professional” can announce that the market has bottomed after a paltry 10% decline. The directional movement of the stock market is now solely derived from the actions and words coming from Central Banks. The valuation levels in the stock market have never been more dislocated from underlying fundamentals than the present era and thus conveniently ignored.
But we can’t even begin to discuss a bottom until the entire investment universe is focused on real fundamentals. This guy Rob Arnott tried to make the case that the emerging markets represent “deep” value. That must be some kind of joke. Many of the emerging market countries are the verge of financial, economic and political collapse. If you put your money in Mr. Arnott’s fund you may never see it again. But just like every other big money manager, he’s motivated by selfish interests. If he were to preach the truth, his investor base would disappear and along with it the $10’s of millions in fees he’s making off of it.
I have a couple of friends who manage individual accounts. They both called me on Friday with the same story of taking multiple calls from clients asking if the sell-off was over and if it was time to move more money into stocks. That’s one of the surest signs that the move last week was nothing more than a bear market counter-trend rally.
Bear markets are designed by the laws of nature to inflict damage on as many people as possible. Weeks like last week are designed to keep the middle class invested in stocks while the market goes lower. The truth is that the entire global financial/economic system is collapsing. The stock market and credit market action in January was nothing more than tremors ahead of a massive “earthquake” that will inflict unimaginable financial damage.
It’s part of the human condition to believe that really bad things can’t happen. This is a big part of the reason it takes a long time for a bear market in stocks to unfold. That plus blinding greed. But the unfortunate truth is that more than likely the stock market in general will have to drop at least 50-70% before we can credibly discuss whether or not a bottom will occur. I say 50-70% because most people would not believe me if I were to disclose where I really think the stock market is headed before this over.