Shock Market

These are not your old fashioned markets.  There is very little short term money controlled by human discretionary managers.  The short term money is now mostly quant strategies or simple CTA models.  Stock mutual funds are fading away into the sunset, as that is what the baby boomer generation grew up on, and now its either bond funds or equity ETFs. 

Bond funds don't move the market, and equity ETFs aren't really a factor either.  What moves the markets in the short term are hyperactive quant strategies and CTAs, which go from leveraged long to leveraged short within days.  What happened in the stock market post FOMC meeting and post Trump tariff announcement was mostly quants and CTAs going bananas, all going from big net long exposure to neutral and probably now to net short exposure.  It doesn't take them long, and they are not price sensitive.  They are trend sensitive, and don't want to be caught on the wrong side of the trend, even if its for only a few days. 

We are seeing a repeat of August 2015, February 2018, October 2018, and May 2019 (mini version).  It is no coincidence that these shock drops in the stock market are happening more frequently.  It is rooted in the trend of quant based strategies which encourage overshoots on the way up and on the way down.  On the way up, the market grinds higher, longer than most humans expect, and then without many clues, suddenly plunge as the fundamentals don't support prices and the process repeats. 

One of these days, the trend will stay down and keep going lower beyond comprehension.  It nearly happened in December 2018, except for Powell throwing in the towel and going super dovish.  Next time, that won't be enough.  The stock market will demand faster and bigger rate cuts, and eventually QE4.  It is not as far away as it seems, another repeat of December 2018, which is likely within the next 12 months, will be enough to force the Fed's hand, and the bond market will price in ZIRP and eventually expect QE4. 

The Fed is no longer an independent institution.  It is controlled not by the President, but by the financial markets, which have veto power over their actions.  If they don't get what they want, all hell will break loose.  December 2018 was a perfect example.  Powell is well on his way to being totally neutered by the markets.  He tried to resist at first, wanting to run wild, and sow his oats.  But the market won't let that happen.  The market is a stern teacher, not just towards traders, but towards Fed chairmen.  It wants easy money.  The market is the veterinarian and Powell is the dog.  The veterinarian will win all the time. 

It doesn't matter who the Fed chairman is anymore.  In this new age, the chairman of the Federal Reserve is the SPX and the Treasury market.  And that's not going to change anytime soon. 

Well, that escalated quickly.  From SPX 3020, to SPX 2960, to SPX 2920, to SPX 2780.  All in 4 trading days. 

Don't blame Trump.  The market was vulnerable to any little shock to the system and was ready to blow.  The global markets and the US stock market breadth gave you those warning signs.  And it is blowing up.  This is not because of a trade war.  This is because there is no earnings growth.  That is not due to a trade war, but because of late cycle dynamics of higher wages, slowing growth, and market saturation.  The easy excuse is to blame Trump and his tariffs.  That is meaningless in the grand scheme of things.  10% of $300B is $30B a year, that's literally pennies now in this money bloated financial world. 

No, its not the tariffs.  The problem is the underlying fundamentals of no earnings growth, grossly high valuations, and pitiful amounts of potential monetary stimulus available with these already low interest rates.  And 2020 will be a horror show if the economy weakens and nails the coffin in killing Trump's chances of winning reelection.  A Democrat president would be this market's worst nightmare, as the threat of tax increases and a breakup of the tech giants would be a monster 1-2 blow.  That isn't on anybody's radar now, but it will be all the market will be thinking about in 2020. 

The strategy is to add to shorts on bounces, and wait for a move down to 2720 to cover all.