Ok, well it’s official. It’s a correction.
And predictably, it comes just two weeks after folks finished celebrating the longest streak in recorded history without a 5% pullback by dumping massive amounts of cash into U.S. equity funds (look at January):
pour out a little of your 40 oz. for the people who poured $40 billion into U.S. equity funds last month. pic.twitter.com/mKmMygtMtG
— Heisenberg Report (@heisenbergrpt) February 8, 2018
Obviously, the timing there was a disaster. And if you’re wondering what the breakdown on those flows is, I can tell you. The lion’s share went to, in order, SPDR S&P 500 Trust ETF (SPY), iShares Core S&P 500 ETF (IVV), Vanguard S&P 500 ETF (VOO), Industrial Select Sector SPDR ETF (XLI), SPDR Dow Jones Industrial Average ETF (DIA), iShares Edge MSCI USA Momentum Factor ETF (MTUM), Technology Select Sector SPDR ETF (XLK), PowerShares QQQ Trust ETF (QQQ).
— Dow (@mark_dow) February 8, 2018
Well unfortunately, all of the people who bought in January are now on the wrong side of “screwed”.
To be sure, in some contexts it’s impossible to be on the “wrong” side of “being screwed”. Unfortunately, this isn’t one of those contexts.
So the question now is obviously what comes next and that depends to a large extent on i) where yields go from here, and ii) whether the fear of systematic selling pressure is overblown or well founded. Opinions vary on that latter issue, but it’s worth noting that, as Bloomberg’s Ye Xie writes, “CTAs have lost more than 6% over the past five days through yesterday, according to the SG CTA Index [and] with the stock meltdown today, it may post the worst return on record.” So you can draw your own conclusions about what might come next.
As far as history is concerned, this is a good time to remind you of the following chart from Goldman which shows that the average correction that doesn’t morph into an outright bear market lasts 4 months and tallies 13% in terms of the drawdown:
There is one caveat: “However, compared with 22 previous bull market corrections, the current pullback has been significantly faster than usual.”
Right.
Meanwhile, back on the funny farm, Tammy, err, Sharon, was buying RIOT. What, a RIOT?
Can someone please, please help me. Every news story I hear says the “Fundamentals” of the stock market are fine. If CAPE is through the roof and the 10yr is blasting off like the Falcon Heavy, WTF “Fundamentals” are these guys talking about. The 2yr projected earnings? Like the execs that want to buy a house in the Hamptons are going to be honest about that? I can’t tell you how many times in 2007 that the “Fundamentals” of the market and economy are great. I think they should strike the word from the vocabulary and say exactly what data points they are talking about. I was just listening to MarketPlace, which I kind of like I”l admit, and they were saying “well if things were that bad then corporate bond rates would be going up”. You idiots IG will normalize to the 10yr over time because the 10yr carries no risk… sigh,
HY and IG spreads blew out today. SJB has been in the green for the past two weeks (or whenever that bond “rout” started). What the fuck kind of data points are they looking at lol?
Bravo. Very useful post.
“Everything is fine it’s just the market being the market”, “this might be a good time to buy the dip”, “folks no need to panic this is a needed correction”, “this really is healthy for our markets” (all said with a straight face). All possibly true IFFFFFF we were in a typical 3 year bull market not this bloated, gigantic debt infested, turd created by a bunch of FED heads wondering IFFFFFF this experiment will even work????? Well sh*t it should work in theory right Bill Dudhead.