Happy New Year! The markets are set to open 2019 sharply lower, with Nasdaq futures recently down over 2%. Will we see a bounce? Is the market setting up for more downside in 2019?
The seemingly endless talk we heard about markets that were too calm have morphed into talk about expecting even more volatility in 2019. Having the market have its worst year since the financial crisis in 2008 will certainly change the perspective for market participants.
It's impossible to ignore the change in market action from old reliable - Buy the Dip - to the new kid in town - Sell the rip.
Buy the rip ushered in record high upon record high, sell the rip has brought with it record losses for the market.
That was a December to remember.
From the deepest sell offs over the last almost 10 years, has emerged the next rally to record highs. Clearly that theme is now is question. And to build even upon that... is the top finally in for the market?
I'd say the top talk and those viewing the 2018 highs as a top have grown substantially just over the last 30 trading days.
The obvious answer to the top questions is... we will know after the fact. I always thought the market top would come when the massive corporate debt level started to become unserviceable, with the primary culprit being higher interest rates.
Increased interest expense alone will cut into profits for many over-leveraged corporations. However I don't think we are there just yet. I also think the recent market correction is going to lead the FED to take its foot off the brakes for a while and perhaps even put its foot back on the gas pedal down the road.
An interesting read this morning from bloomberg:
https://www.bloomberg.com/news/articles/2019-01-02/key-fed-yield-gauge-points-to-rate-cuts-for-first-time-since-08
It begs to question if the interest rate hike cycle is already over?
Can the economy really thrive or even survive amid higher interest rates? Clearly the pandora's box was opened in 2008/2009. Every central bank too the baton and ran with the FEDs QE and ZIRP.
Higher interest rates are effectively the Darth Vader Death Grip on the economy and the massive debt bubble.
We can speculate all we want on what lies ahead, however price action will be the ultimate indicator and price action continues to point to lower prices.
That December $SPY candle is unique since the lows in 2008 and one the worst Decembers and months on record.
Looking for a topping pattern? We had a h&s top with prices failing to take out the highs and meeting the left shoulder from the summer.
Charts are breaking down left and right. NYSE new 52 week highs / new 52 week lows has seen new lows winning every day, with some staggering numbers of stocks hitting new lows and only a handful at best hitting new highs.
It was the inverse throughout the move to record highs. Even during pull backs, New lows never reached the levels we are seeing today.
All the excuses to sell we have seen over the years have now become excuses to sell, with rarely a reversal. Price swings are typical of the ones we saw in 2008/2009 and not during the pull backs we saw in 2011, 2015, 2016, and 2018.
Does that mean we are close to a bottom?
The positives, at least short term, despite this mornings deep red 300+ point drop for DJIA.
Financials and small caps may be turning:
the VIX has a habit of reverting to the norm, with is the low teens 10-13
and finally some possible signs of capitulation:
Here we note four signs of potential capitulation.
Sounds like the famous @WarrenBuffett quote that it is wise to be “Fearful when others are greedy and greedy when others are fearful.”https://t.co/fivD9ddjZQ pic.twitter.com/So1cO9zeMP
— Ryan Detrick, CMT (@RyanDetrick) December 31, 2018
(1)Is the recent market correction the start of the long awaited next market collapse?
(2) Is the market already starting to price in a looming recession?
(3) or is this merely another pull back before a rally in 2019 to fresh record highs?
To many I imagine this has felt like #1. For those uber bears who have been calling this market a bubble every year since 2010, clearly they feel they 2009 is finally 'that year'. Here comes that market crash. The FED has already opened the Pandoras box. Any deep market rout would probably get the FED into equities this time around. I don't think we will see a prolonged collapse of equity prices with a more hands on FED.
Perhaps the recent pull back is indeed the pricing in of the long awaited recession. If thats the case the FED may already be done with this rate hike cycle.
And if thats that case, and I think this is clearly not what everyone is thinking for 2019, we could see new record highs yet again. Imagine that.
Either way price action always dictates what lies ahead, with usually at least a 6 month time horizon.
Short term I continue to watch the VIX, financials, and small caps for signs a tradeable bottom is in. Also the early market action, with strength getting sold aka sell the rip, continues to point to a market that wants to trade lower. The morning dip buyers have yet to emerge, and until they do, this market will have a tough time rallying.