Wednesday, October 17, 2018

If It Isn't Greed, It's Fear

People are asking, if the economy is strong why did the stock market fall 1300 points in two sessions? The answer is simple: Greed. However, there are other intrinsic aspects that one word does not answer or give the big picture. I will attempt.

First, the market is no longer swayed by individual buyers. The retail customer has little push on listed companies. The number of shares that they buy is in the hundreds whereas when funds buy, it is in the hundreds of millions. In many instances, a customer buys exchange traded funds in his pension, 401K, or other retirement programs and they are run by professional managers. This brings us to the second point.

Secondly, institutions, hedge funds, professional managers are the sources to move the market. In most cases, these agents have billions to invest. They move the market. One other point to this point. With the addition of so many exchange traded funds, the market is effected by trend. When the market moves higher, these managers must buy. Conversely, when the market drops, these managers must sell.

Thirdly, the intangibles. These are the geo-political concerns. The present tariff trade wars. The emerging markets who are under duress due to currency swings, the strong dollar and the outflow of investment money in their economy. There are other factors like hacks, new government regulations and all the tit-for-tat going on between nations in the social media. Recently, we had the situation with Saudi Arabia, Brexit and elections in Germany. There is also an unreported aspect that US manufacturing workers are seeing their company make more money with nothing for them in security in wages in health or their pensions. Strikes by workers is coming! After January the market will be extremely volatile.

Lastly, this point is an effect due to the causes expressed in the third aspect. Use some logic. You are a fund manager. You begin to see in price caused by some of the points that interact with the market. You also understand that high evaluations will have a hard time to climb higher. In addition, earnings estimates are too high as many companies are telling analyst to lower expected earnings. You realize that there are less than 60 trading days left in the year. You look over your portfolio. Apple is up 30% for the year. Can it move higher, you think? Yes, but there are more headwinds like the tariffs like possible regulations and the cyber spy thing. Maybe I should sell and take my profits. If I look around, I see Facebook. It was $218 and now, only $153. In fact, it is down for the year. Why should I risk my bonus on greed?

The point is the call of greed is diminishing as the siren of fear gets louder. The manager sells. Funny thing. It seems the consciousness of the same perspective hit at the same time. After all, it is October.

Friday's bounce...

After two big selling days with fear on the breakfast table, the big boys pulled out the old playbook from no other than J. P. Morgan himself. They buy whenever everyone else is selling. It makes perfect sense. These managers got into the market at the lows. All they are doing is cross adjusting buying. In more times that can be counted this maneuver works. The buying steadies the market. "Buy the dip" mantra is heard. It convinces the herd that small corrections are inevitable, but the market will move higher. The selling ends. The point that Sebastian is trying to stress is this. In the next couple of weeks, study the volume. He believes the correction is just beginning and distribution will verify that feeling. You are going to have to do your homework. He believes that the market will be range bound until the end of the year. At that point in time all of the above will determine which way the market moves. At this point in time he sees high volatility in 2019.

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