What The Heck Is Going On In The Stock Market?
I'm glad you asked. As I remarked in the comment section last week, a lot of people were caught unexpectedly by this move. The market was very oversold on a short term basis but I think most people expected a rally then failure. A few big futures traders I know were building large short positions and. I would guess Wall Street saw what many clients were doing and decided to give them some superior customer service by blowing them out of their positions.
One simple data point I like to watch is the SOX or Semiconductor Index. Semiconductors always give us an anecdotal look at sentiment in the market. The SOX is comprised of many highly speculative stocks that are often the last to run to the upside before market weakness. Why is that? When the market neophytes become super-bullish, they have delusional fantasies about a re-ignition of the late 1990s tech boom. If nothing else, semiconductor stocks provide a look at the risk appetite of market participants. Remember there is substantially more data in the SOX than just the price of semiconductors. It contains anecdotal data about the overall market including positions in market options, futures, exposure to risk, etc. In other words, when semiconductors are running, the speculative juices in the market are always flowing. That confirms many other data points showing market participants are taking on substantially more risk. And as we talked about some years ago, semiconductors can also give an overall indication of where money is flowing compared to other industries. At that time money was flowing out of capital equipment and into commodities.
You can see on Thursday we ran right up to the limit of the SOX's Standard Error Channel and on Friday the index fell back. We are told this weakness was because of Microsoft earnings but many companies have recently reported data that clearly foretold of weak PC sales. Microsoft's earnings were not a surprise regardless of the dumb-founded comments in the financial press. The weakness in the SOX is because of traders taking high probability bets off the table at its upper channel. Not because of Microsoft's earnings. That Microsoft fell substantially on Friday was likely due to a pump and dump.
Each time we have hit the upper band of this channel, the market has pulled back. Judging by prior pricing action in the SOX since this channel started developing, we might anticipate coming stock market weakness if this pattern holds. This next few weeks will be interesting because there is also the possibility that a price vacuum was created below this recent move if much of it is from jamming short positions. But, the overall pattern of the SOX has not been broken. ie, No really serious threats of a substantial market correction except the March sell off. This perfect pricing pattern is highly indicative of a trader's market.
By the way, when the likes of Cramer and other uninformed Wall Street personalities were hopping all over technology and harping about a new tech bull market back in 2007, we wrote that it was nothing of the sort. Technology stocks were likely moving higher because they were shielded from the coming liquidity shocks we expected. In other words, it was a rotational move that people like Cramer (Who believe the market is all knowing) misread as being driven by improving fundamentals. That likely contributed to speculation by uninformed investors. ie, Cramer-types. Today many of the carnival barkers are again talking about the same bull-oney about a new run in these stocks based on an expected improvement in fundamentals. As I have said on here for years, fundamentals for technology and semiconductor stocks has been weak for the last decade. Fundamentals are now horrendous and will get worse. These are not the leaders of a new bull market. Just a few months ago order bookings went from years of notable weakness (that we highlighted before the market collapse) to a complete collapse - the worst in semiconductor history. Bookings in the U.S. have now improved to just really bad.
I suspect what we might be seeing is again another rotation similar to the one we talked about before the market collapse. Is there finally a growing realization by some smarter money that we are going to see a commodities bust? (The anecdotal answer right now is that most investors are going down with the commodities ship.) It's too early to tell but many commodity stocks, which were heretofore leaders of this rally, have lost some momentum over the last week or so. The SOX is up 20% in that time frame and has made a new rally high. Fundamentals do not warrant any of the move in semiconductors. So, again we could be seeing pure rampant speculation or speculation accompanying a sector rotation.
If the world's traders and investors are finally starting to wake up to a commodities bust, we could see hot money push into equities and out of commodities. This is a possibility but we need to see more evidence. And given Wall Street firmly believes that commodities are still in a bull market, I am stretching on the rotation possibility. But if some of this money is moving out of commodities, and this rally could have the legs to go higher. Regardless, none of this reflects fundamentals. But who ever said it did? We wrote quite a few months ago the low for the year is likely in and the next low probably isn't until May or October of next year. I'm surprised on one hand but on the other, how are banks supposed to clean up their balance sheets? Make loans in a collapsing economy or rampantly speculate in highly liquid markets they believe they can exit on a moment's notice? (ie continue to steal from society in a rigged market and do so with government endorsement.)
As long as Wall Street has a stream of liquidity flowing into its coffers, financial market action is going to be bullish. Until liquidity is withdrawn again because of a shock in the economy or on Wall Street's balance sheets, this market could remain very unpredictable. On other words, the inmates are running the asylum again. But, remember, the inmates ran the asylum for years during the 1990s technology bubble and really gained control over this past bull market cycle. In other words, stupidity doesn't necessarily give us an indication of market direction. Liquidity does. Liquidity in the global economy is evaporating at a rapid clip. It should also be worrisome that the Fed is drawing down many of their liquidity facilities. The economy is not ready for this potential shock. We shall see future financial market crises. The only question is if it is next week or next year. This environment is very difficult to project more than a week or so in advance because of the tremendous cross currents of collapsing globalization dynamics and a Wall Street pumped up with taxpayer money. There are so many global crises in the making. Forecasting has become completely unpredictable. So we take what the market gives us. For me, that means anyone in the markets should have a time horizon measured in days. Ironically, that is confirmed by the insanity of very short-term trading that is now dominating Wall Street.
It's a mad, mad, mad world.
One simple data point I like to watch is the SOX or Semiconductor Index. Semiconductors always give us an anecdotal look at sentiment in the market. The SOX is comprised of many highly speculative stocks that are often the last to run to the upside before market weakness. Why is that? When the market neophytes become super-bullish, they have delusional fantasies about a re-ignition of the late 1990s tech boom. If nothing else, semiconductor stocks provide a look at the risk appetite of market participants. Remember there is substantially more data in the SOX than just the price of semiconductors. It contains anecdotal data about the overall market including positions in market options, futures, exposure to risk, etc. In other words, when semiconductors are running, the speculative juices in the market are always flowing. That confirms many other data points showing market participants are taking on substantially more risk. And as we talked about some years ago, semiconductors can also give an overall indication of where money is flowing compared to other industries. At that time money was flowing out of capital equipment and into commodities.
You can see on Thursday we ran right up to the limit of the SOX's Standard Error Channel and on Friday the index fell back. We are told this weakness was because of Microsoft earnings but many companies have recently reported data that clearly foretold of weak PC sales. Microsoft's earnings were not a surprise regardless of the dumb-founded comments in the financial press. The weakness in the SOX is because of traders taking high probability bets off the table at its upper channel. Not because of Microsoft's earnings. That Microsoft fell substantially on Friday was likely due to a pump and dump.
Each time we have hit the upper band of this channel, the market has pulled back. Judging by prior pricing action in the SOX since this channel started developing, we might anticipate coming stock market weakness if this pattern holds. This next few weeks will be interesting because there is also the possibility that a price vacuum was created below this recent move if much of it is from jamming short positions. But, the overall pattern of the SOX has not been broken. ie, No really serious threats of a substantial market correction except the March sell off. This perfect pricing pattern is highly indicative of a trader's market.
By the way, when the likes of Cramer and other uninformed Wall Street personalities were hopping all over technology and harping about a new tech bull market back in 2007, we wrote that it was nothing of the sort. Technology stocks were likely moving higher because they were shielded from the coming liquidity shocks we expected. In other words, it was a rotational move that people like Cramer (Who believe the market is all knowing) misread as being driven by improving fundamentals. That likely contributed to speculation by uninformed investors. ie, Cramer-types. Today many of the carnival barkers are again talking about the same bull-oney about a new run in these stocks based on an expected improvement in fundamentals. As I have said on here for years, fundamentals for technology and semiconductor stocks has been weak for the last decade. Fundamentals are now horrendous and will get worse. These are not the leaders of a new bull market. Just a few months ago order bookings went from years of notable weakness (that we highlighted before the market collapse) to a complete collapse - the worst in semiconductor history. Bookings in the U.S. have now improved to just really bad.
I suspect what we might be seeing is again another rotation similar to the one we talked about before the market collapse. Is there finally a growing realization by some smarter money that we are going to see a commodities bust? (The anecdotal answer right now is that most investors are going down with the commodities ship.) It's too early to tell but many commodity stocks, which were heretofore leaders of this rally, have lost some momentum over the last week or so. The SOX is up 20% in that time frame and has made a new rally high. Fundamentals do not warrant any of the move in semiconductors. So, again we could be seeing pure rampant speculation or speculation accompanying a sector rotation.
If the world's traders and investors are finally starting to wake up to a commodities bust, we could see hot money push into equities and out of commodities. This is a possibility but we need to see more evidence. And given Wall Street firmly believes that commodities are still in a bull market, I am stretching on the rotation possibility. But if some of this money is moving out of commodities, and this rally could have the legs to go higher. Regardless, none of this reflects fundamentals. But who ever said it did? We wrote quite a few months ago the low for the year is likely in and the next low probably isn't until May or October of next year. I'm surprised on one hand but on the other, how are banks supposed to clean up their balance sheets? Make loans in a collapsing economy or rampantly speculate in highly liquid markets they believe they can exit on a moment's notice? (ie continue to steal from society in a rigged market and do so with government endorsement.)
As long as Wall Street has a stream of liquidity flowing into its coffers, financial market action is going to be bullish. Until liquidity is withdrawn again because of a shock in the economy or on Wall Street's balance sheets, this market could remain very unpredictable. On other words, the inmates are running the asylum again. But, remember, the inmates ran the asylum for years during the 1990s technology bubble and really gained control over this past bull market cycle. In other words, stupidity doesn't necessarily give us an indication of market direction. Liquidity does. Liquidity in the global economy is evaporating at a rapid clip. It should also be worrisome that the Fed is drawing down many of their liquidity facilities. The economy is not ready for this potential shock. We shall see future financial market crises. The only question is if it is next week or next year. This environment is very difficult to project more than a week or so in advance because of the tremendous cross currents of collapsing globalization dynamics and a Wall Street pumped up with taxpayer money. There are so many global crises in the making. Forecasting has become completely unpredictable. So we take what the market gives us. For me, that means anyone in the markets should have a time horizon measured in days. Ironically, that is confirmed by the insanity of very short-term trading that is now dominating Wall Street.
It's a mad, mad, mad world.
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