Climbing The ‘Worry Free Wall’

Climbing The ‘Worry Free Wall’

Don’t call it a “selloff” yet.

After two straight weekly declines and losses in eight of the last 10 sessions, the S&P remains just ~3% from the highs, a testament to all manner of dynamics, from the esoteric to the obvious.

One thing that’s become clear enough is that people know when the dips are coming. Or, wait. Scratch that. Market participants know when the door is about to open to a wider distribution of outcomes, and that may be encouraging some folks to front-run potential index “movement.”

“Monthly options expirations are now socialized,” Nomura’s Charlie McElligott said Friday afternoon. They’re the “‘known’ windows for pullbacks and vol expansions,” he added.

BBG, Nomura annotations

The “socialization” of the options cycle dynamic eventually prodded the financial media into running a series of articles documenting the predictable monthly mini-swoons, thereby making the story more ubiquitous still. “The stock market has effectively become a derivative of its own derivative,” Bloomberg’s Lu Wang wrote this week. “A tail wagging its dog.”

This is the furthest thing from “news” to professionals. And it’s been a fixture of weekly commentary in these pages dating back years. But in 2021, it’s highly amenable to mainstream coverage.

In addition to serving as a kind of visual CliffsNotes for the socialized OpEx pattern, the chart above also suggests that US equities continue to garner support from the 50-DMA. Consider the figure (below).

It’s been 219 sessions since the S&P closed below the trendline for two straight trading days, the longest such stretch in a quarter century.

Admittedly, I struggle with the kind of self-referential “analysis” that sometimes (ok, always) accompanies these kinds of factoids. In an article dated Friday afternoon, Bloomberg’s Wang and Vildana Hajric quoted Seema Shah, from Principal Global. “Should investors keep the habit of buying the dip at the 50-day average, more gains may be in store,” Wang and Hajric wrote, summarizing Shah’s thoughts on the matter.

Why, yes. If people buy stocks, it’s possible stocks will rise. And, as it turns out, they (people, but also machines) have been buyers in and around that trendline this year.

Of course, you have to be careful about mocking the trivial. Because in a world of abundant liquidity and unprecedented policy support, there’s an argument to be made that the more superficial your approach to markets, the better you’re likely to do.

I’ve been waiting for an opportune time to quote a September 12 note from JonesTrading’s Mike O’Rourke. Journalists don’t seem to understand this, but sometimes, it’s best to save good soundbites, knowing that eventually, the perfect opportunity to utilize them might present itself.

With that in mind, I’ll leave you with the passage (below), from O’Rourke. As is the case with several other folks I quote, I don’t always agree with what I perceive to be an opinion on matters of policy evident in the cadence, but O’Rourke’s dailies are always incisive. And that’s welcome in a world where incisive analysis is in short supply.

The market’s list of headwinds grows with each passing day. The risks are easily ignored as FOMO has combined with YOLO thinking to create pervasive complacency. Consider the laundry list of actual and emerging challenges in the current environment. There is the incredibly intractable global pandemic. We have likely witnessed the peaks of absurdly historic levels of monetary and fiscal stimulus. Personal and Corporate income taxes are set to rise. The nation will be breaching the debt ceiling in the next few weeks and there are no prospects of an agreement to raise it. Inflation is at its worst level in decades and rising as fast as it did in the 1970s when Congress introduced the Fed’s price stability mandate. Raw materials shortages and supply chain disruptions are expected to last well into next year. We are in the midst of an escalating Cold War with China, easily the most important trade partner that does not share a border. The deflationary globalization trend that has symbiotically benefited corporate profits at the expense of labor and GDP has halted. Amidst a labor shortage, the only way workers will benefit is if wages increase, further fueling inflation. In the meantime, real wages are contracting. This is an era where the 1999-2000 equity bubble’s “pro forma” earnings have been replaced by “adjusted EPS.” Therefore, any aspect of the business or challenges the company faces that are atypical (even if lasting years) is non-recurring and does not impair those adjusted earnings. In short, collectively, investors currently don’t care about earnings. Historically, market participants might call an ascent in the face of headwinds climbing a “Wall of Worry.” This is not the case here. For it to be such a climber, the market would need to have at least mildly reacted to the negatives to acknowledge they exist. This has been a worry free wall.


7 thoughts on “Climbing The ‘Worry Free Wall’

  1. I wonder if it’s worry free or numb from worry. I’m at an age where perhaps I should be free from worry, instead I find myself worrying about everything particularly children and grandchildren. When contemplating the market by various routes, they always lead back to equities, particularly US. Is there someplace else where money is treated better?

  2. Great quote by O’Rourke.

    In a world of Monopoly money, you can’t hold dollars, so you better hold either stocks or real estate.

    It can’t possibly end well, but it’s been ending quite well since 2010. Even a pandemic can’t budge this market for more than a few months.

    The only real risk to capital at this point is social instability. If it costs a million bucks for a two bedroom, that worker making $15 an hour isn’t feeling too great.

  3. There is a finance website I used to occasionally visit many years ago, for perspective, called Calafia Beach Pundit. The main thing I liked there was his “Stocks Climb a Wall of Worry” chart, which used the VIX/10 yr yield as a barometer, set against the inevitable increases in the S&P500 performance.

    That indicator was amazing to watch around the end of March last year!!!

    I went back a few days ago and noticed he had modified his worry chart to simply compare the VIX to S&P, in what seemed like an attempt to add fear into his analysis and provide an image of future catastrophe. As background, one reason I never took the site seriously, was because of his increasingly supportive views on the trump economy and bad mouthing the Obama era, which obviously helped almost any republican that was invested in stocks … Furthermore, his message board was generally filled with like-minded political confusion.

    Thus, it’s interesting to see how the wall of fear, in its previous iteration, that had been posted for many years, is now un-useful, and if anything a hinderance in his economic insight. It’s as if too much de-wormer has clouded an objective view of reality.

    I recently reminded him of his old chart in 2 posts …

    1. My Calafia off-ramp was its barking religious conviction that $300 a week in extra unemployment benefits was inviting lazy losers to sit on their couches while streaming and shopping online, thus undermining American meritocratic exceptionalism. H might or might not be among the 1% and has isolated himself from much of the rest of the world, but I know of no other blogger/analyst/commentator who seems better in touch with the other 99%. That is one of the things I like best about THR.

      1. I check in to Mr. H on Twitter and it’s always nice to see the ongoing gain in followers. The content here is second to none.

        As for Calafia, I wasn’t at all surprised that he didn’t respond to my (two) comments on, “What’s wrong with gold?” — but he did sort of comment on the recent “Money and inflation update”, by saying: “At the suggestion of a reader, I’ve updated Chart #7, a chart I have been featuring for many years now. ”

        Unfortunately he decided to not change his Stocks Climb a Wall of Worry chart and use a ratio between VIX and 10yr — but as I mentioned before, too much dewormer in ones plasma can disturb cognitive functions.

  4. Buying the dips works until it does not. When the market clacks about earnings and not about balance sheets you are in a bull market. Nobody cares about balance sheet and risk until things turn down-then everybody cares. Retail sales numbers looked good in August, but I have noticed nobody is talking up the fact that back to school shopping is a major tailwind for retail sales and it did not exist in 2020. Next month we will get a much cleaner read on the economy as some of the fiscal props come out. It won’t be a surprise to see a slowdown. We may see years of subpar growth starting in 2022. Be careful of slavishly following economic statistics. Right now they can be misleading….

  5. H-Man, cudos to O’Rourke for summarizing the current state of affairs. If those factors don’t meet the “Wall of Worry” test, you wonder what negatives have to surface for the wall to emerge.

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