Reality set in on Friday when the market came to the seemingly sudden realization that higher borrowing costs could put an end to this historic bull market. Odds of a rate hike soared nearly 100% late last week from 18% to 33%.
In response the market collapsed 2% sending those same odds down some 50% from last week to 21%. Phew. Another potential crisis averted.
As long as the cheap money tap stays open, this debt infused bull market will continue to run unabated to fresh record highs. If the cost of capital starts to rise, corporations will switch from debating how much they should borrow to buy back their own stock to wondering how they hell they are going to service all of their debt.
Everyone looks at the stock market as a barometer of the economy. However it is now more of temperature gauge of just how hot the Central Banks printing presses are.
JP Morgan Chase? Goldman Sachs? Wells Fargo? After years of backing up the truck on bonds, junk bonds, ETF's , gold mining stocks, mortgages, and their own debt in hopes of sparking a massive global economic recovery, Central Banks are now the Too Big to Fail.
For now, Friday's 2% collapse has brought back the rate hike odds to an acceptable level. Perhaps this will assuage investors and give them the confidence they need to continue buying the all time highs.
Short term we need to be watching key levels. This morning it was 2100 on S&P500 futures.
also let's keep in mind that these bouts of weakness have taken several weeks to stabilize, with the most recent Brexit sell-off being the one with the shortest duration.
If this recent pull back is like Brexit watch the VIX to lead the market higher. At the Brexit lows the VIX was down 10% with the S&P500 down 1.5%. The VIX was the leader for a move higher, which ultimately led to new record highs for the market.
We will have a better idea what lies ahead after today's trading session.