In the short term, news, sentiment, investor positioning, buybacks, and performance chasing will play a large part in affecting price. A couple of things surprised me in the past few days. 1) How quickly the post midterm election equity gains were taken away plus more. 2) Dollar continuing to rally and crude oil plunging. This is not a healthy bull market. It is an aging bull with a growing list of health problems.
The biggest thing is the leadership that has led the bull market for the last several years is cracking bigtime. The growth tech names are rolling over, and the latest one is AAPL. That is in the face of what are sure to be daily heavy buyback activity coming from AAPL headquarters. The market should have been able to maintain a more solid bid with all the buybacks roaring back after the October blackout period but it hasn't been able to support this market. A bad sign.
It seems like all the bulls are hoping that year end seasonality, currently bearish sentiment, and stock buybacks will bail them out. But those are not long term drivers of stocks. They are just tactical plays looking to sell to the bigger sucker at higher prices. The poor earnings guidance, slowing global growth, and a stubbornly hawkish Powell are the fundamentals that make this overvalued stock market a toxic long term hold. It doesn't mean that stocks will roll over and immediately enter a bear market. But it means that the probability of this becoming a bear market are much higher than they were a few months ago.
By the way, the trade war is the most overhyped reason for this market's weakness. It is great news fodder, and I expect a trade deal to eventually get done over the next couple of months, because China wants one, needing the dollars to keep the yuan from imploding, and Trump wants one. Why else would they keep pumping out trade deal rumors every other day when the stock market is going down. They are trying to keep Wall Street happy, and the Trump administration believes a trade deal will make stocks go much higher, and they admitted that their scorecard is the stock market. When stocks were going higher in the middle of the year, there was no sense of urgency. Now that stocks are going down, and there is a G20 meeting coming up, there is a renewed sense of urgency to get a deal done. The Chinese will pretend to go along with the trade deal and later not honor the more important aspects (IP theft, forced technology transfer, etc.).
We've gotten another gap up after a weak close, of course. It is natural these days for the market to go down during US cash market hours and then grind higher in the overnight market, getting help from the "invisible hand" and giving bulls hope. It is a staple of the ES market, and don't expect it to go away, even in a bear market. I am a temporary bull hoping for trade deal optimism in the coming weeks to sell my longs and enter long term shorts.
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2 comments:
Very well said as always. I am curious what your gut feeling is on how "long" the long term shorts may last once we get to that point?
Long term shorts could be anywhere from 6 to 12 months, depending on how fast stocks go down. I expect 2019 to be a tough year for bulls as valuations are still high, tech earnings guidance shows little growth, and Powell refuses to be as dovish as the market wants him to be. China is a slow motion crash with much deeper problems than just a trade war. Yesterday, Powell seemed to soften his hawkish rhetoric, but he still seems intent on raising in December and probably at least once next year.
It is a perfect storm for 2019.
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