Putting The Market Mayhem Into Perspective

Tyler Durden's picture

Submitted by Lance Roberts of STA Wealth Management,

A recent CNBC article by Jeff Cox discussed that the current market rout stating:

"As hard as policymakers have sought to assure markets that they stand at the ready when conditions weaken, lack of a consistent voice has only spurred weakness, according to an analysis released Monday.  Emerging market economies are in turmoil as the Federal Reserve and its counterparts around the world look to unwind all the largesse of the past four-plus years.


Though economists are almost universally dismissing the impact of these smaller countries on U.S. growth, Wall Street is clearly on its heels after the worst January in years, and recent economic data show the recovery remains uneven at best."

I have discussed this issue numerous times in the past suggesting that when QE came to an end, so would the market rally.  What the Fed giveth, the Fed taketh away.  Jeff Saut recently summed this up well stating:

"Hedge funds have been borrowing money in Japan (again) at very low Japanese interest rates, obviously denominated in yen. They then convert those yen to, say, the Brazilian real, Argentine peso, Turkish lira, etc. and buy Brazilian bonds or Turkish bonds using 10:1+ leverage. Accordingly, when such countries jacked up interest rates overnight, their bond markets collapsed. Concurrently, their currencies swooned, causing the 'hot money' investors to not only lose on their leveraged bond positions, but on the currency as well.  If you are leveraged when that happens, the losses add up quickly and those positions need to be sold. So the bonds were sold, and the pesos/lira/real that were freed up from those sales had to be converted back into yen (at currency losses) to pay back the Japanese loans. And as the bonds/currencies crashed, the 'pile on' effect exaggerated the downside dive."

As the Fed continues to extract liquidity from the financial markets, it is likely that we will continue to see increased volatility in the markets.  However, despite the ever bullish calls by the mainstream analysts, the current market rout has awoken many overly complacent, excessively bullish, investors.  While the headlines make statements like "the worst start to a year since...," or "biggest one day dive since...," it is crucially important to retain some perspective. 

First of all, I have written multiple articles (see here, here and here) discussing the excessive extensions in the markets and that a correction of some magnitude was likely to occur this year.  However, the correction to date, is not "one of magnitude" as of yet, but rather a "dip" within the ongoing uptrend.  The chart below puts the current cyclical bull market, and current correction, into perspective. 


From the closing low of the markets in 2009 through today, the S&P 500 has risen by a total of 157.7%.   During that ongoing rise, there have been 13 corrections of which only 3 have been shallower than the current decline.

After an increase of nearly 30% in the markets in 2013, of which I have suggested numerous times that one should consider taking some profits from, it hardly seems alarming that the markets would experience at least some sort of mild correction.  So, at this point, will you please put your head back into the moving vehicle?

Now, before you think I have gotten all "bullish" on the markets, I assure you that I have not.  It is simply important, as an investor, to keep things in perspective in order to eliminate emotional investment mistakes.

“Acting without knowing takes you right off the cliff.” 

That quote from Ray Bradbury's "Something Wicked This Way Comes" has always stuck with me.  It epitomizes the actions of most individual's who invest in the markets.  They buy as stock prices rise and some guy is throwing bulls at the T.V. screen shouting "buy, buy, buy."  However, once prices begin to fall they fail to sell, well, because some guy is throwing bulls at the T.V. screen telling them not to.  Eventually, prices fall to a point where they push the "panic" button and dump their holdings into the market.

The problem is that most individuals act with knowing.  We witness the same behavior time and time again with an outcome which has never been good.  Despite words of advice from some of the great investors of our time such as:

  • "buy low and sell high"
  • "cut losers short and let winners run," or;
  • "buy fear and sell greed"

Retail investors repeatedly do the opposite.  As markets rise, and reach extreme levels of exuberance, it is only then that retail investors believe it is time to jump in.  Unfortunately, as shown in repeated academic studies, much of the average individual's behavior is driven by the self-serving interests of the Wall Street community that profits the most from retail investor's emotionally driven decisions. I discussed this at length in "The Truth About Wall Street Analyst:"

"Not surprisingly you are at the bottom of the list.  The incestuous relationship between companies, institutional clients and Wall Street are the cause of the ongoing problems within the financial system.  It is a closed loop that is portrayed to be a fair and functional system; however, in reality it has become a 'money grab' that has corrupted not only the system but the regulatory agencies that are supposed to oversee it."

The 5-panel chart below really tells you all you need to know about the current market environment.  We are overbought, over extended and exceedingly bullish.  The combination of these metrics has a history of bad outcomes.  Unfortunately, because these measures are generally overrun in the short term by price momentum and sentiment, they are disregarded as "this time is different."


While the current correction has certainly gotten everyone's attention, it is not really all that surprising.  Two week's ago I issued an "alert" signal in the weekly newsletter followed by a "sell" signal last week.  With the markets now very oversold on a short term basis, the odds of a bounce are quite high.  That bounce should be used to reduce portfolio risk and rebalance allocation models.  

With the Federal Reserve now seemingly committed to withdrawing support from the financial markets it suggests that there could be another 'leg' down in the equity markets before a meaningful price low is reached as the "risk-off" trade potentially becomes more pronounced.  As I discussed previously:

"The first misconception is that when the Fed tapers its ongoing liquidity program; interest rates will begin to rise.  However, there is no anecdotal evidence that would be the case as shown in the chart below."


"In fact, the recent rise in interest rates should have been anticipated as that has been the case during both previous programs.   It was not until the programs began to 'taper,' and eventually end, that rates fell as money flowed out of risk assets in search of safety in the bond market.  This fall in rates also corresponded to economic weakness and expectations of an increase in deflationary pressures.


When the Fed once again begins to remove its accommodative support from the financial markets it will likely lead to a further decline in interest rates as 'safety' is once again sought over 'risk.'"

The current correction is certainly worth paying attention because of the triggering of the"sell" signal in our intermediate timing models.  This doesn't mean that the next great "financial crisis" is upon us, but it does suggest higher levels of risk currently.  While no one knows for sure what the future will bring, portfolio management is about the study of the probabilities of various outcomes both in the short term (technical analysis) and long term (fundamentals).  It is from this analysis that we can make calculated choices.  However, for most individuals who act upon headlines, and potentially biased commentators,"acting without knowing" generally leads to poor outcomes.

For many individuals, the best advice is to turn off the television, use the internet to view pictures of cats and leave the portfolio management process to someone who can remove the emotional bias from your money.

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HyBrasilian's picture

Look at all the pretty charts to explain the CTRL+P button!

The Fonz's picture

Wanted to say thank you to Tyler(s) for this article. I have been trying to sort out the implications of the yen carry trade for a while and this is the fist time I have gotten the model for what is going on in EM.

Occident Mortal's picture

It's interesting because outside of the USA nobody follows the S&P500, everyone trades the DJIA when looking for a USD index.


All European and Asian MSM reports the DJIA, nobody really reports the S&P500.


Yet inside the USA the S&P500 has much more focus, as it is more representative of the US domestic economy. But again, further afield, nobody is following the S&P, the wider world follows the Dow Jones.


Just saying.

youngman's picture

What was the life span of Twitter?????

Pool Shark's picture



Lots of "Angry Birds" this morning...


LawsofPhysics's picture

The only correlation that matters, if printing doesn't increase, the "markets" decrease.

Look, I am an eCONomics genius.


"For many individuals, the best advice is to turn off the television, use the internet to view pictures of cats and leave the portfolio management process to someone who can remove the emotional bias from your money."

All the while those "professionals" compensate themselves by stealing more of your portfolio.  Fuck the paper-pushers and their financial "products" of mass destruction.  They are of no value, aside from maybe soylent green.  manage your own portfolio/life.

Kaiser Sousa's picture

look at the fucking Dow...out the gate up 70 points....

based on what?????

shit is downright stupid....

Stoploss's picture

VIX is completing it's golden cross.

This is a bull trap, they will be relieved of their heads based on what's happening today.

Just saw a halt list of ten secs at the same time.

vie's picture

based on CTRL-P, BITCHEZ!

Pool Shark's picture



"As the Fed continues to extract liquidity from the financial markets"

Uh,.. the fed is still adding liquidity; just at a slower pace; that's what the 'taper' is...


Truther's picture

Dammed DELETE button is stuck..... Oh well. CTRL+P should do and save the day

ghostzapper's picture

Didn't make a single move yesterday as I didn't see anything I liked.

I've got a bracket currently between 1740 and 1760.  neither are "key levels" for me but worth noting but entry points that do not represent the highest probabilities of success.  

1772-1773 still the key level but given the missed opportunities to jawbone new scams/QE/printing it will take quite an effort to break back above this.

adjusted my downside target keeping the 1646ish but open to a violent spike to 1628 which would still allow for the expectation that a legit rally could launch from 1646ish.  all I can do is monitor and try to make the best decisions.  

ghostzapper's picture

So . . . . . . . today's trade was the break above 1760 to this 1772-1773 key level it just so happened to hit.  as I stated I didn't view it as having as high of a probability of success as others I've posted here but nonetheless thanks to usdjpy momo monkeys it worked.  i did not catch the whole thing but most of it because i wanted to feel better about it really moving off of 1760.

If they close this thing above 1773 I will likely have to adjust the levels I mentioned here above.  I don't think they can but humility is the best way to go.  

FieldingMellish's picture

"For many individuals, the best advice is to turn off the television, use the internet to view pictures of catsand leave the portfolio management process to someone who can remove the emotional bias from your money."


So... an advertisement appearing as an article. ZH loses yet another point of credibility. As the market climbs ever higher, ZH gets more desparate for clicks and revenue.

falak pema's picture

ZH has been doing this for 5 years and still wears rose tinted--IMO-- "Ayn Rand capitalism mantra" glasses to summarise its excellent analytical skills displayed here daily. Pity.

Every time we pull a von Mises rabbit out off the bag we hit the ideological blind spots of the TDs. 

Just to liven up the debate from a more conventional perspective, here is a take about WHY the Austrians are simplifying their analysis of current fiat bonanza...

Nate Heckmann: Peter Schiff is Wrong About Everything | naked capitalism  

It concerns a vociferous "gold bug" who is much quoted here at ZH like a son of the Messiah RP.

Not saying I am competent to tell Austrian truth from those of other schools. Just saying economics is at the intersection of political power plays and mathematical modelling of human impulses. Very grey and interactive area where the uncertainty principle is a huge fat tail that can waggle before you can say "hey presto". 

As an example I picked out one phrase that encapsulates this recurrent ideological debate amongst economic shamans : 

“I never said the money printing would cause inflation. I said the money printing is inflation.”

Any student who has taken macroecon 101 knows this is an overly-simplistic view of inflation. It’s hard to believe that an “economist” holds this view....

The floor is yours TDs.

Spastica Rex's picture

After hanging out here for five years, I've come to believe that "economics" is mostly a pseudo-science that defines and/or describes the societal game-rules that distribute privilege. Different games, different rule-sets.

How's that for heresy?

falak pema's picture

Inherently truthy and undoubtedly if you lived in Utopia you would be respected as a Perfectus (also because of you tobaccan avatar! In those days it was a novelty; unlike today.)

But down here in the real, dystopian world,--(alas the term is not a cliché but more like "touché")-- you have as much to risk when you say this as the man who wrote the treatise on Utopia and who was hailed in those times as a true Hookah pipe smoker of "truthium"; until his lord and master Henry VIII decided it was time to brand him as Papal shaman and said "off with his head".

He does lie with the fish since then, forever mourned as a sacrificed perfectus on the alter of reason of state; along with his predecessor Becket. 

Those guys, up there somewhere, must pass around the peace pipe amongst themselves while they ponder our current predicament --- I hope in a state of incredulous laughter.

Imagine the dialogue in that hot spot ; "that guy looks like Henry VIII--- No, no more like Henry II Plantagenet--- Are you sure? -- How about like Richard III at battle of Bosworth? --- Anyways, I think I'll opt for Charles I on the scaffold. Makes a change if they beheaded a king instead of us poor buggers labelled as heretics for telling the truth." 

FieldingMellish's picture

The Austrian view holds that an increase in the money supply is the very definition of inflation. There is a factual, data-driven basis to this except in the case of reserve currency where it causes dislocations to the holders of said currency rather than the printers. Economics is about as scientific as teenage romance. To even hint at any mathematical or scientific basis to economic theories is to disgrace real science.... but that is JMVHO.

falak pema's picture

if its by "definition" then its dogma. Amen to that! 

No way you can debate "definition". Its like the eternal being. 


Spastica Rex's picture

This is a central problem of our postmodern world; argument by re/definition. We pretend we speak the same language, and that language has temporal continuity. Language is quickly devolving to mere jargon.

I want to know how the Orwells, and the Huxleys, and the P.K. Dicks, and all those other guys saw the future.

Jocko Homo

FieldingMellish's picture

Sure you can. Definitions can be wrong as are most of the sssumptions made by economists. Inflation means "to expand", the only argument here is what is expanding first, price or money supply? 

falak pema's picture

now you're being logical...and thats what the anti-austrians say that gold bugs are not. 

Their view is that austrian logic is so narrow it cannot tolerate any alternative look at the "rubic" cube of economia. 

I'm not taking sides. I'm just saying don't believe in dogma.

LawsofPhysics's picture

"I'm just saying don't believe in dogma."  - That's good, because dogma is irrelevant.  People, countries, and eCONomies will have the energy and resources available for consumption, in order to actually do things and service their liabilites or they won't.  It's really that simple.  The one thing that all these paper-pushing hucksters ignore is scarcity.

Fuck em all.

Spastica Rex's picture

No, you really can't. You can choose to agree or disagree with a definition, to accept it or reject it. It's an aspect of Agrippa's trilemma.

Of course we can argue about definitions, including the definition of "debate." Epistomology is a bitch.

moneybots's picture

"Sure you can. Definitions can be wrong as are most of the sssumptions made by economists. Inflation means "to expand", the only argument here is what is expanding first, price or money supply? "


If the FED prints up 10 trillion dollars and puts it directly into the economy, what happens to prices?

LawsofPhysics's picture

So Nate thinks that everything is fixed?  Like Krugman, and the MIT project, Nate also ignores food and energy costs in his analysis.

Good luck with that. 

"Create" all the paper promises you like, without food or consumable energy you can't do shit.

Ban KKiller's picture

Good article. "Money grab" unfair system shows we are IN a financial crisis where Banksters are in control hence we see their crimes exposed every week. Too truthful to call it fascism? Market is so rigged the truth is long gone. 

The money printing will not be tapered...just change from one central bank to another.

Captain Obvious, over and out!

Fix-ItSilly's picture

The Fed is not "extracting liquidity from the financial markets".  It continues to pump liquidity at historically high rates.  Maybe those in-the-know are seeing the reservoir disappearing?

After all, even Dorothy had to first suspect something before reaching for the curtain.

LawsofPhysics's picture

What's your take on the recent 100 billion dollar REPOs then?

Randoom Thought's picture

A. If you want to use the timeframe from 2000 on then the slope of the curve appears to be wrong. The starting pointing seems to be randomly chosen, rather than fitting the curve. If the starting point is adjusted up to abou 7800, then it makes more sense.

B. It looks as if there are actually two slopes with a dislocation occurring in 2011. It is easier to fit a slope to the second half of the curve after the dislocation.

C. It is still my expectation that there will be a major crisis in 2015 (not 2014). However, that does not mean that a 2014 fall in the market will not exacerbate the crisis. The market is managed by those who control money and price. If the market rises, then you know who to thank. If the market falls then you know who to blame. But regardless, they benefit more than you do.

... and it is possible that 2014 will simply be volatile.

Music101's picture

Great charts as usual! See how KARL DENNINGER'S STOCK PICKS have been working out below:


Rising Sun's picture

the lamestream media pumps the herd - shitbags like Cramer and Krugman consistently bullshit to the masses without repercusssions


and then there's the banksters that use client data to set themselves up on the opposite side of the market - only problem is that it's not working this time



RockRiver's picture

Well written with some good insight into how the sheeple tend to manage their money.

He does put this latest move into proper perspective in that this must still be considered a correction in an ongoing bull market until proven otherwise. We have seen warning signs on the chart, IE: bereaking the 100 bar simple moving average and also taking out a median line drawn off the last three major pivots but it's not at all conclusive yet.

MeelionDollerBogus's picture

When will suckerz ever learn: you CAN'T apply a linear "trend line" to a curved graph & get useful results, rigged or not.

Mad Muppet's picture

Fucking bankers. If I've heard a more apropriate word than "Bankster", I can't remember what it might be. Everything they touch turns to corruption.