Slow Bleeding The Aging Bull

It looks like “slow bleed”/”death by a thousand cuts” is the new market narrative.

That’s to be distinguished from the rapid systematic/technical drawdown that sent U.S. equities careening lower on October 10.

The evolution of the narrative is pretty interesting. The bear steepening that preceded the early October drawdown was generally seen as product of the bond market “catching up” to the reality of the overheating U.S. economy. Equities digested rate rise well on October 3 – it was the “good” kind of bond selloff, driven by expectations of economic outperformance. The next two days (October 4 and 5) stocks’ interpretation changed – yields were rising too far, too fast. That threatened to flip the sign on the equity-rates correlation, leading to “diversification desperation”. That bear steepening episode also appeared to catalyze a rotation out of “slow-flation” plays or, more to the point, a Growth-to-Value rotation which in turn precipitated a Momentum unwind.

That was the setup for the October 10 technical selloff. The Long/Short crowd was already de-risking (underperformance in crowded longs), the sign flip on the equity-rates correlation sparked jitters about risk parity (and balanced funds more generally) and the downward pressure on equities eventually flipped the momentum signals, prompting deleveraging from the trend followers. Option hedging flows contributed. Etc. etc.

Fast forward two weeks and folks are worried about peak profits, end-of-cycle dynamics and a Fed that’s seen as too aggressive, even as the econ continues to generally support gradual hikes. Somehow (think: Donald Trump), the market seems to have flipped from being convinced that the economy’s blistering pace was well ahead of the Fed’s tightening pace, to the other way around in the short space of a couple of weeks.

Given the new narrative, you’re getting exactly what you’d expect. Texas Instruments added insult to injury for semis on Wednesday, and now you’ve got the index down a laughable 13% this month – that’s on pace to be the worst monthly performance since the crisis.

The auto parts and equipment subindex is a disaster, down a truly egregious 28% (give or take) from the highs. It looks to me like it’s only had a handful of winning days all month long.

Homebuilders are obviously under siege – the following chart is a nightmare.

The KRE looks like it’s in a death spiral, having fallen into a bear market since June. As hard as this is to believe, it looks to me like it’s fallen ~1% or more on eight separate occasions in October.

Also, it’s not great that positive days are far harder to come by now than they were during the February rout.

Finally – and this is a largely useless visual, but people like pictures so I’ll give it to you anyway – the last time the S&P fell in 12 of the previous 14 sessions (as it had through today) was in March of 2009.

On the bright side, March of 2009 was when this rally started, so this is either poetic justice, or a sign that you can expect another decade’s worth of gains.

You decide.