Let me preface this commentary with the proviso that none of us has any idea the extent to which the Fed and the Working Group On Financial Markets, which has its offices in the same building as the NY Fed, has the ability to prevent a stock market accident.
Having said that, a large portion of the stock market has been in a tail-spin. The Dow Jones Transports Index is down over 18% from its peak last November; the SPDR retail ETF, XRT, is down 15% from mid-July this year; the iShares Biotech ETF, IBB, is down 18% since its high close in mid-July – perhaps ironically one day after XRT closed at its high; AAPL is down 20.3% from its February 23, 2015 all-time high – technically AAPL is now in a bear market; Dow Jones homebuilder/construction index, DJUSHB, is down over 10% from its high close (not even close to all-time high) in August – notwithstanding all the other fundamental headwinds starting blow at housing with full force, hiking interest rates will act like a roadside bomb on the housing market.
The point here is that many sub-sectors of the NYSE, sectors which had been extraordinarily hot as stock trades, are now reflecting the truth about the deteriorating condition of the U.S. economy. (click on image to enlarge).
We can dissect the debate over the reasons why the Fed has decided to start “normalizing” – whatever that means – interest rates now. The fact of the matter is that it is impossible to know for sure why the Fed decided to nudge the Fed funds rate up by one-quarter of one percent. What we know based on reams of empirical evidence is that the U.S. economy is now collapsing at the rate it was collapsing in 2008/2009. Unless the FOMC is completely brain-dead – a consideration I would not fully dismiss – the Fed must have had some ulterior for setting a posture of tighter monetary policy.
With the high yield, and now investment grade, bond sectors imploding (I suggested over 2 weeks ago that the virus infecting the junk bond market would spread to investment grade), the next part of the capital structure that will be attacked is the equity “layer.” Many of you might have missed this news release yesterday: Fed Votes To Limit Bailouts. The Fed is now restricted legally in the scope of its ability to prop up crashing banks. There has to be a reason this legal restraint was allowed to be executed, because certainly the big banks and the Fed had the ability to derail it. Perhaps it’s just putting window dressing on impending market developments that the Fed is now powerless to prevent anyway.
I have suggested for quite some time that eventually the natural forces of the market could not be prevented from seizing the S&P 500 and pulling it down to a level that reflects the true underlying economic and fundamental conditions from which markets derive their intrinsic over long periods of time. History has already shown us many times that market interventions never work indefinitely. Just ask OPEC.
Again, it’s impossible to time the markets perfectly, but the probability of a big downside event in the stock market is now highly skewed in the favor of those who set up their market bets to take advantage of the coming downside action. My SHORT SELLER’S JOURNAL is a weekly subscription service, delivered to your email on Sunday night or Monday morning, is a market briefing with two ideas for shorting the market. I also include some market comments not covered in this blog.
This week I will be featuring a financial stock and some interesting information on the housing market that you won’t see anywhere – at least not at this point. You can subscribe to this service by clicking here: SHORT SELLER’S JOURNAL. If you subscribe by Sunday afternoon, you’ll get last week’s report plus this upcoming report.