Sunday, December 16, 2018

What In The World Is Going On With The Stock Market?

Why are stocks falling like this?  That's the question I've been hearing from a number of investors and traders.  In the previous post, I posed the question of whether we might crash.  That post has received almost three times as many hits as my average post--and that is just in two days.  That tells me uncertainty is high.  The sentiment, as I noted in that post, is bearish.

But the question posed with anguish is *why* this is happening.  The U.S. economy is not in such bad shape despite political turmoil in the U.S. and concerns about tariffs and trade wars.  Nor do we have a Federal Reserve that is aggressively tightening monetary conditions.  Inflation overall is tame and there are few signs of overheating in the economy.  Indeed, with solid employment numbers, we were not so long ago hearing about being in a sweet spot of economic growth.

Alas, U.S. investors and traders can be horribly U.S.-centric.  One thing I love about working out of London is that the perspectives tend to be more global.  That is important when markets--and those managing capital--are so intertwined.  Perhaps what is going on in the U.S. stock market is not about the U.S.  Perhaps it is not about President Trump; not about the daily dose of polarized, politicized commentaries from MSNBC, FOX, CNN; and not about chart patterns and wave counts of American markets.

Consider an excellent article in the Washington Post reflecting upon the difficulties of Britain, given the problems associated with Brexit and the problems associated with remaining in the E.U.  The author poses the scenario:  Suppose Italy defaults on its debt and Britain is asked to bear some of the load.  Will its citizens really want to take on more debt?  Will the Yellow Vests of France want to step up to the plate and shoulder that debt?  What happens in the event of sovereign debt default?  Could Italy be the epicenter of a crisis that the ECB would have trouble responding to, given already low rates?  As Robert Samuelson notes, the ingredients of a crisis are present.

So now let's look at some charts of banks.  Here is Deutsche Bank:

Here is Credit Suisse:

Here is Goldman:

Here is an ETF for European stocks:

Uniformly, it's been a straight shot down from early January, unlike U.S. stocks, which peaked in September.  Now, however, U.S. stocks are moving down alongside their European counterparts, with banking shares among the downside leaders.

Here is one last chart.  This one is a cumulative running total of all NYSE stocks trading on upticks minus those trading on downticks.  The measure is updated every second of every trading day.  It's one of the most sensitive indicators of buying and selling pressure, as it reflects the aggressiveness of buyers (lifting offers) and sellers (hitting bids).

Notice how, during the decline of early 2018, the cumulative uptick/downtick line did not move significantly lower and indeed held above its February lows when we bottomed in the spring.  The cumulative TICK line was not able to make a new high going into the ultimate peak in SPY and, indeed, started trailing off before we actually peaked in the index.  That was one yellow caution light I noted in September.

From there it has been straight down in the cumulative measure, reflecting aggressive selling across the entire stock universe.  In that respect, this decline has not been like the previous one.

As I mentioned in the previous post, my job, both as a trader and as an investor of family capital, is to stay open minded and consider a range of possible scenarios.  That means looking beyond the U.S. and trying to make sense of areas of the financial world that are weakest.  It also means collecting data that others overlook and looking at time frames wider than the norm.  My goal, per Helen Keller, is to ensure that my sight enables me to also have vision.  At the moment, I can't say I am comfortable with what I see.

Further Reading: