There is no surprise to why stocks are selling off today.
If anything, it was yesterday's surge that was quite shocking and caught everyone by surprise, paradoxically doing more damage to investor sentiment than an orderly decline would have done as it once again spooked retail investors by the senseless and very whiplashy moves the market is now subject to. Case in point: after yesterday's multi-year euphoria, investor sentiment is back to record lows [8].
As for the two violent selloffs this week: there is no mystery. Recall that Deutsche Bank warned late in the summer this would happen for one simple reason: there are just three more weeks of POMO left after which the Fed's balance sheet flatlines, and with it, the S&P500. The only question is whether those who "sell ahead of everyone else", manage to take the S&P far below "unchanged", as prior QE ends have done, proving once again that it is all about the flow not the stock [9], and as a result the Fed will once again have to resort to even more QE.
Recall from August [10]:
The risk sell-off we've seen in recent weeks frustrates us a little as the chart we've published most this year has pretty much predicted that tougher times would come around July. We've been paying it a lot of attention for over a year now but decided to wait until the autumn before we raised the warning flags. The chart in question (included in today's pdf) is the one showing the Fed balance sheet and the S&P 500 (as a proxy for risk generally). As you can see, since the Fed balance sheet was used as an aggressive policy tool post-GFC, the graph suggests that the S&P 500 is well correlated with the size of the Fed balance sheet with the former leading the latter by 3 months. Given that the Fed have recently signalled that they will likely be finishing expanding their balance sheet in October, 3 months before that was July. This is important as virtually all of the mega rally in the last 5 years has come in the Fed balance sheet expansion periods. The other periods have been more challenging for markets.
And then this a week ago [11]:
The risk sell-off we've seen in recent weeks frustrates us a little as the chart we've published most this year has pretty much predicted that tougher times would come around July. We've been paying it a lot of attention for over a year now but decided to wait until the autumn before we raised the warning flags. The chart in question (included in today's pdf) is the one showing the Fed balance sheet and the S&P 500 (as a proxy for risk generally). As you can see, since the Fed balance sheet was used as an aggressive policy tool post-GFC, the graph suggests that the S&P 500 is well correlated with the size of the Fed balance sheet with the former leading the latter by 3 months. Given that the Fed have recently signalled that they will likely be finishing expanding their balance sheet in October, 3 months before that was July. This is important as virtually all of the mega rally in the last 5 years has come in the Fed balance sheet expansion periods. The other periods have been more challenging for markets.
Another way to see it:
[12]
In other words, want to blame someone? Blame the Fed. But don't forget to also blame the Fed for the most artificial and rigged "bull market" rally in history from those distant 666 lows, which, if the Fed is indeed out, are coming back. But of course, the Fed is never out: all it takes is one market crash and the Princeton economists will be right back to micromanaging the terminally broken US capital markets and economy until there is nothing left.
