Originally posted at Briefing.com
The week that just concluded was supposed to be dull. Reports at the start of the week highlighted how it was a popular vacation week for senior staffers, that trading volume would be light and that S&P 500 would likely remain stuck in its longstanding trading range. Yeah, well, none of that proved true, except maybe the part about senior staffers being on vacation. Based on what transpired, though, we suspect those vacations morphed into "working vacations" for some.
The week that just concluded was one of those no good, horrible, terrible kind of weeks. The Nasdaq Composite plunged 6.8%, the Dow Jones Industrial Average dropped 5.8%, the S&P 500 declined 5.8%, and the Russell 2000 lost 4.6%.
It wasn't in my schedule to produce a column this week for The Big Picture, but market forces have dictated at least a brief note.
Why?
First, let me recount my assessment of what I thought was behind the serious selling this week.
The primary catalyst was concern about the global economy, which was fueled principally by China. That concern got the ball rolling so to speak and then the Federal Reserve bounced that medicine ball right on the market's head with the minutes from its July meeting.
Those minutes left an impression that the Federal Open Market Committee (FOMC) was unlikely to raise the fed funds rate at the September FOMC meeting. In leaving that impression, the FOMC also left the unsettling impression that (a) the economic outlook isn't that great and (b) it's as confused as anyone about what to do with its monetary policy at a confounding time like this.
[Read: Plotting the Fed’s Baby Step 1/8 Point Hikes; Yellen vs. Greenspan “Measured Pace”]
In brief, the minutes created a confidence crisis of sorts among market participants, who had reason to question the Fed's credibility and reason to question the lofty valuations in many stocks that were predicated on the global economy gathering strength.
In my Page One column on Thursday, I said, "...market participants appear to be losing faith in the persistently unfilled economic promises of interest rates at the zero bound and quantitative easing. That change in perspective is clashing with high earnings multiples and meshing with recent economic and financial difficulties for China, which are causing quite a stir in Asia while at the same time rattling confidence in more distant places."
And, boy, how the market's prior assumptions got rattled.
The fear of "things" manifested itself in the CBOE Volatility Index, which spiked 46% on Friday alone and an amazing 118% for the week. What that spike revealed is that investors weren't prepared all that well for what transpired in the past week and became fearful that further downside is in the cards.
There could be further downside, yet spikes like the one seen in the so-called "fear gauge" tend to be seen as suggesting a short-term bottom at least could be at hand.
Time will tell soon enough, but in the time that passed in the week that just concluded, market participants seemed as surprised as ever about how things unfolded. The surprises were rooted in the following dynamics to name a few:
- The buy-the-dip trade didn't work
- The trading range the S&P 500 has been locked in since early February gave way with a downside break
- Oil and oil-related stocks still didn't find a bottom
- Former leadership stocks were taken to the woodshed
- Momentum stocks saw buying momentum cut hard the other way with selling momentum
- Apple (AAPL) declined 9% and dropped more than 20% from its all-time high, which some people herald as a bear market move
- The yield curve flattened further as the economic growth concerns dialed back rate hike expectations at the front of the curve while dialing up buying interest at the back end of the curve as inflation expectations dropped
What It All Means
We can't say that we were totally surprised by the negative disposition.
In recent missives, we suggested the flattening yield curve was a flashing yellow light signaling to proceed with caution, that the market was basically in a no-win situation trading at a premium valuation that would be called into question if the Fed raised rates or the Fed didn't raise rates, and that burn units were standing by in case the Fed poured fuel on the market's fire.
What surprised us was the velocity of the move. To be sure, it wasn't the escape velocity we've all been waiting for.
Rather, it was an ejection velocity from risk positions because it hit people square in the face that the global economy isn't hitting escape velocity after six-plus years of extremely accommodative monetary policy and trillions of dollars of pumped-in liquidity from central bankers around the globe.
In some respects, the extent of the damage and the quick-trigger selling was an open admission that the market knew many stocks had gotten too far ahead of themselves and that this wish-upon-a-Fed star mentality has sadly remained an empty wish.
As I wrote in my Page One column Friday, "It's tough to come to grips with something that you thought was all that, but really isn't." In the week that just concluded, the Fed, China, the buy-the-dip trade, leadership stocks, and vacation plans for some clearly weren't all that.