Over the last couple of week’s most of the weekend reading list has been attributed to the market’s stumble since the beginning of this year. Importantly, as we rapidly head into January’s close, there seems to be little to reverse the negative tide sweeping through the market.
As I wrote earlier this week, this isn’t a good thing.
“It would seem logical that a weak performance in January would lead to some recovery in February. Markets are oversold, sentiment is bearish and February is still within the seasonally strong 6-months of the year. Makes sense.
Unfortunately, the historical data suggests that this will likely not be the case. The chart below is the historical point gain/loss for January and February back to 1957. Since 1957, there have been 20 January months that have posted negative returns or 33% of the time.”
“February has followed those 20 losing January months by posting gains 5-times and declining 14-times. In other words, with January likely to close out the month in negative territory, there is a 70% chance that February will decline also.
The high degree of risk of further declines in February would likely result in a confirmation of the bear market. This is not a market to be trifled with. Caution is advised.”
In other words, there is a real probability that if the markets don’t get a lift between now and the end of the month, February could be the beginning of a technical bear market decline.
But were could that lift come from? The first is month-end window dressing by fund managers after a brutal start to the new year. After much liquidation, fund managers will need to rebalance holdings.
The second is the potential for Central Banks to intervene which could embolden the bulls as further support could temporarily delay the onset of a bear market and recession. Note: I said temporarily. Pulling forward future consumption is not a long-term solution to organic economic growth.
Not to be disappointed, the BOJ announced a move into NEGATIVE interest rate territory to try and boost economic growth in Japan. (Interestingly, however, was the lack of increase in QE.) The announcement was a shock to the markets as the BOJ had just stated last week that negative interest rates were not being considered. Here are some early takes on the BOJ’s move:
- World shares heat up as Bank of Japan goes sub-zero (Reuters)
- Stocks Rally With Bonds as BOJ Ends Grim January on High Note (BBG)
- Japan Follows Europe Into Negative Interest Rate Territory (WSJ)
- BOJ Move Resulting In Currency Wars & Global Slowdown (ZeroHedge)
That move, on top of the latest FOMC meeting, more market turmoil and bond yields flip-flopping around 2%, has made this a most interesting week. Here are some of the things I am reading this weekend.
1) Why Junk Bonds Will Sink Stocks Further by Yves Smith via Naked Capitalism
“Investment lore is full of sayings as to how the bond markets can send false positives about lousy prospects for the real economy and the stock market. However, as Wolf sets forth below, a new Moody’s article makes a compelling case as to why the high risk spreads in the junk bond market bode ill for the stock market.”
But Also Read: Credit Cycle In Full Collapse Mode by Myrmikan Research
And Read: We Should Be Terrified By Junk Bonds by Rana Foroohar via Time
2) If It’s A Bear Market, It Ain’t Over by Joe Calhoun via Alhambra Partners
“The real enemy of investors is not these fairly routine 10 or 20% downturns. The real enemy is the bear market that is associated with a recession or crisis, the one that knocks your equity block down by 40 or 50%. And actually it isn’t even the depth that is the real enemy. For most investors the enemy is time.”
But Also Read: El-Erian: Day Of Reckoning Coming by Mohamed El-Erian via CNBC
Opposing View: Don’t Do Anything, Just Stand There by Wade Slome via Investing Caffeine
And Also: What Investors Shouldn’t Do In A Bear Market by Peter Hodson via Financial Post
3) 34 Charts: This Time Is Different by Will Ortel via CFA Institute
“In October, I asked whether the market could have its cake and eat it too. The hope was for persistent low interest rates and consistently appreciating securities.
Somebody seems to have remembered cake doesn’t work that way.
According to some, this buying opportunity is brought to you by the letter “C”: China, commodities, and the now questionably healthy consumer. Reaching towards risk feels sensible. It’s been nearly 10 years since it wasn’t.
But today, growth, like certainty, is hard to come by. We hear the word “recession” again. There have been more Google searches for the phrase “sell stocks” this month than at any time since October 2008. And January is not over.
To some strategists, the writing is on the wall. I wrote recently that anyone who says they know exactly what will happen is wrong, cheating, or both. I still think that. So before getting into what I see, I want to tell you what to do: your homework. Now is the time to distinguish yourself as an investor. So as you read through everything below, remember: I’ll be disappointed if you wind up agreeing with everything I say.”
Also Read: Why Dip Buyers Will Get Clobbered by David Stockman via Contra Corner
Watch: Recession Fears Grow Louder by Heather Long via CNN Money
4) The Time To Sell Has Passed by Doug Kass via Yahoo Finance
“The time to sell has likely passed. Those opportunities had been in place since last spring and were the outgrowth of a deteriorating fundamental and technical backdrop that many investors ignored.
But while I have a more-constructive market view for the short term my confidence level isn’t high. In a fragile-growth setting, too much can upset the apple cart.”
Also Read: Sellers Are Still In Control by Michael Kahn via Barron’s
Further Read: It Wasn’t Oil, China Or The Fed by James Juliand via RTW
5) Feldstein: Let Markets Fall, Fed Should Hike Rates by Greg Robb via Market Watch
“In an interview with MarketWatch, Feldstein said stocks are overvalued. Any signal from the U.S. central bank that it may pause from its plans to continue raising interest rates would only create the impression that there is a “Fed put” on the market. A put is an option that protects an investor from losses.”
But Also Read: The Fed Doesn’t Understand Liquidity by Louis Woodhill via Real Clear Markets
And: Did The Fed Make A Huge Mistake? by Matt O’Brien via WaPo
- Myth Of The 10 Best Days by Meb Faber via Faber Research
- Why The “R” Word? by John Shmuel via Financial Post
- 15 Things Productive People Do by Kevin Kruse via Forbes
- Why Does Pessimism Sound So Smart by Morgan Housel via Motley Fool
- Here’s Why All The Markets Are Falling by Tyler Durden via Zero Hedge
- Where’s The CapEx Boom? by Buttonwood via The Economist
- Don’t Say You Weren’t Warned…Again! by Michael Lebowitz via 720 Global
- Relief Rallies Truncated By Awful Losses by John Hussman via Hussman Funds
- What Follows The Most Epic Reach For Yield by Jesse Felder via The Felder Report
- Will January Volatility Wreck The Year by Dana Lyons via Tumblr
- Peak Profits by Chris Brightman via Research Affiliates
“I can calculate the motion of heavenly bodies, but not the madness of people” – Sir Issac Newton