Trader: "Stock Slump Clears The Decks For The Real Storm"

By Bloomberg Markets Live commentator Christopher Antsey

It’s been said of the Roman army that their training drills were like bloodless battles, and their battles like bloody drills. Something similar may be true of the market this year: the sell-off across asset classes is like a tough drill that will leave it in a stronger position to cope with the real battle ahead -- the reversal of QE.

The near 7% tumble in the S&P 500 Index from its record high has been termed a “healthy correction” by so many that it’s practically a cliche by now. But as short-volatility trades clear out, a swathe of speculative and leveraged positions will have been removed.

Retail investors will also have had the fear of the gods put in them: clients at TD Ameritrade had boosted equity allocations for 11 straight months through December, pushing the brokerage’s Investor Movement Index, which tracks client positioning, to a record.

And traders are unwinding positions at a time when liquidity is still abundant -- the big three central banks are, on a collective basis, still expanding their balance sheets. Contraction probably won’t begin until October at the earliest, when the European Central Bank could end its asset purchases.

In addition, the shakeout comes at a time when the underlying economic fundamentals are solid -- the world is still enjoying the glow of a synchronous expansion. The IMF less than three weeks ago boosted its global forecasts for 2018, seeing the fastest growth since 2011.

So even though the sell-off in stocks and bonds in recent weeks will end up being painful for many, it will build up some scar tissue for the far more serious challenge to come: coping with higher borrowing costs as the unprecedented balance-sheet unwind begins in earnest, removing a backstop for markets that’s been there for a decade now.

Comments

SwapThis DownWithYogaPants Thu, 02/08/2018 - 09:54 Permalink

Agree, at least for now, but if Trump can make gains in #Russia #U1 #ClintonFoundation claims against dems and make the odds better for 2018 elections to support his agenda, mood should turn again.  Greed is easier to sell and stocks need a wall of worry anyway to climb anyway.  Fear is just to get the greater fool to sell.  Too much money around, TPTB will use this as a reason to delay rate hikes and that will be a market boost.  Everyone and I mean Everyone loses if 10Y above 3.2% from what I can tell. Looks to me like we go Japanese until we can get folks to take a BIG haircut on USTs

In reply to by DownWithYogaPants

swmnguy SwapThis Thu, 02/08/2018 - 10:39 Permalink

I think you're correct, but wrapping my head around your reasoning made my head spin.  I gave you a down-arrow, but then I changed my mind and went greenie.

You're correct because this situation is such incredible bullshit it's hard to restructure my Point A - to Point B - to Point C brain to comprehend a system that is pure human psychology, un-anchored to any concrete reality.

Trump should be, by any reasonable reckoning, completely dead in the water.  All the hysterical running around and complete nonsense being spouted by everyone in an official capacity is an elaborate diversion from the real issue, which is that our Finance system, which has taken over the world, collapsed in 2007 and has been kept in a state of suspended animation ever since.  

Most people find it inexplicable that the Democrats can't make any headway despite the utterly feckless shitshow that is the current Administration.  Except--the Democrats can't face, much less tell, the truth about the Finance system.  When you absolutely can't mention the obvious Elephant In The Room, what you do mention is going to be absurd, and you will get destroyed by people who also won't mention The Elephant In The Room, so all they have to do is undermine the silly stuff you say.  You (meaning in this case, the Democrats) will always lose in such a situation.

It's like Benghazi.  Everybody in both parties knew damn well the US Consulate in Benghazi was also the CIA station house, the "dark site" torture prison, the headquarters and armory for the foreign mercenaries brought in to destroy civil society in Libya (call them "Al Quaeda," or "ISIS," or "Charlene," for all I care).  So the locals got fed up and tore the place down and killed everybody they could catch.  That's what happened in Benghazi.  But the Trey Gowdys and Devin Nunes' of the world knew the Dems couldn't tell the truth about that, so they were free to say whatever nonsense they could think up, and gullible people (especially in the media) ran with it, to keep hidden the truth of the matter.

Same thing going on here.  We never fixed the crisis of 2007-2009 because that would mean undoing the accumulated advantages of the Oligarchy which caused the collapse in the first place.  The basic problem is that you can't use debt at interest as money without infinite inputs of money, resources, energy, and markets.  Ours being a finite world, only money can be made infinite, and that only by making it abstract.  This produces a lot of "perverse incentives," with the result being that actual productive economic activity becomes a whole lot less profitable than abstract paper money manipulation.  So everybody plunges into abstraction.  We get to a point where our society and economy have very obvious needs, like food and water and healthcare and infrastructure, but Finance makes it impossible for anyone to meet those needs.  The system begins to tear itself apart.

But nobody is going to talk about that.  Trump started to as a candidate, but was obviously warned off that line of reasoning.  Sanders talks about it all the time, but he's been effectively sabotaged and sidelined, despite being easily the most popular politician in America.

So instead we get the utterly dumbfounding bullshit about Nunes' memo, the "sudden discovery" that the FBI, DOJ, IRS et. al. are political police forces (anybody who was ever involved in Civil Rights or Anti-War movements will laugh in your face that you didn't know that by, say, 1960).

Any solutions to the fundamental crisis of our version of Corporate Finance Capitalism are obviously not going to come from the political class in America.  They're going to keep using Central Bank manipulation to keep the appearance of functionality, until the entire structure totally collapses and can't be kept alive anymore, like pumping plasma through a corpse until it just starts squirting out of tears in decayed flesh.

We're on our own.  Which scares the hell out of most people, so they'll cling to the bullshit narratives put up by partisans.  Because that's more comforting than realizing they have their own lives in their own hands.  Some of us prefer that, but we're in the minority.

So I think you're correct, and the manipulation games will continue--until one day they stop with a grinding, shrieking thud.  Best to use this temporary respite--who knows how long it will last--to eliminate personal debt, trade FRN's for useful items, and get one's thinking adjusted to accommodate a lot of things we thought we knew for sure turning out to have been falsehoods all along.

In reply to by SwapThis

Arnold Thu, 02/08/2018 - 06:22 Permalink

I'm guessing, but confident that very few of the weak hands have folded so far.
A great deal of carnage to come, once several more asset classes are involved.
October eh?
Unlikely, as it would really screw up our midterm elections.
I suspect sooner, but probably later than this article expects.

Nothing Thu, 02/08/2018 - 06:26 Permalink

There are stocks like Apple, Netflix, Yelp and even GE having their all-time highs in the rear view mirror already.  Once people begin to realize that everything under the sun does not always go up,up, up relentlessly, there will be a trickle headed for the exits and the trickle will turn into a mad rush rather more quickly than anyone expects .....

Nomad Trader Thu, 02/08/2018 - 06:27 Permalink

Question - What was the all time high for the S&P500?

2872.87. 

And where did the market close last night? 

2,681.66.

Which means we are exactly -6.66% from the top.

Oh shit!! What do we do?!?!?!

Dah dah dah! Dump dump dump!

Anyone selling vol here at 25 is gonna get volporized. 666 could easily kick off a 15% crash yes siree no problem at all. Powerful muddafukers them 6s. You better watch out.

Oxygen Nomad Trader Thu, 02/08/2018 - 08:43 Permalink

Nice find! 

I would add the fact that Dow Jones close at 26 616,71 on 01/26/18

Exactly on week later, on 2/2/2018, the Dow Jones close 666 points down

Yesterday high on Dow Jones was 25 293,96 (239, 666)

S&P 500 yesterday 2 681,66 (666)

Look like the devil is in the stock market right now!

A crash won't surprise me at all today or tomorrow. 

 

In reply to by Nomad Trader

Pandelis Nomad Trader Thu, 02/08/2018 - 08:46 Permalink

adding a few more observation to that number:

 

666 drop of Dow on Friday, a signal?

3 days later, the biggest drop in history.

following day Dow drops 567 then close up exactly 567. a coincidence might say some ... may be

(btw, 567 is a covered 666 since 5+1=6; 7-1=6; so 666)

 

i wonder who has the address 666 in New York City or other major cities for that matter ????

 

In reply to by Nomad Trader

swmnguy Pandelis Thu, 02/08/2018 - 10:43 Permalink

I believe one such address is owned by one Jared Kushner.  And it's the albatross around his neck that has driven him to the edge of insolvency, and into the arms of very shady lenders of very dirty money; and into a web of sloppy and amateurish lies and evasions that make him the most obvious lever to pull down the Trump Administration.  Mueller is very methodically preparing the ground to do just that, and all the political and verbal nonsense we're being inundated with is in reaction to that ongoing development.

In reply to by Pandelis

JerseyJoe Thu, 02/08/2018 - 06:34 Permalink

In addition, the shakeout comes at a time when the underlying economic fundamentals are solid 

"The world is enjoying the glow..."   LOL

Bumbleburg never misses an opportunity to push the narrative.   All the bonuses are spent...what's next?  The quick one-hitter high is gone...  So when corporate America pulls money out of foreign markets and bring it "home", what happens in the vacuum that follows?  Their "assets" were on some foreign bank's balance sheet.  

 

Last of the Mi… Thu, 02/08/2018 - 06:37 Permalink

Cryptos are in the land of pump and dump now. The wolfpack will hit it again, guaranteed.It's just the timing you'll never figure out. You will know QE is over when new automobiles, financed by government sub prime fiat have a zero percent increase or decrease year over year for the same truck. It's not happening, the Fed is still playing big time and saying otherwise. If obamagate has taught us anything, you never, EVER, EVER believe a government agency without detailed documentation and the Fed was purposely set up to never EVER give documentation in any way other than half-witted verbose bullshit answers. 

RabbitChow Last of the Mi… Thu, 02/08/2018 - 07:01 Permalink

Cryptos can be pumped and dumped, but if they are accorded the same liberties as in the other US markets (i.e. trading on credit) then there will be a bifurcation of actual ownership from 'paper'.  Happened with gold, silver, all other commodities, stocks and probably even bonds too.  I'm sure the Joe American investor will lose his money the old fashioned way every time.  Keep it all on account and we will try to give you credit for it, but we cannot guarantee against another MF Global.  Remember getting Corzined?  The investing public has a short memory indeed.

In reply to by Last of the Mi…

EddieLomax Last of the Mi… Thu, 02/08/2018 - 07:39 Permalink

All this cash that flowed into bonds, crypto's and stocks came from somewhere.

If the debts behind them are being wound up then it makes sense for the capital to be pulled back out.  China and a few others have horrendous debt problems that are going to blow up, on top of that stock returns are competing with bonds.

And then there is the recession, a recession is a excess of capacity, I can see plenty of that, but it doesn't mean that the capacity has to be cut everywhere.  Will we see the recession in the US exported to the world?  If the US's cash is repatriated along with large bonuses and tax cuts to stimulate it and barriers to imports then places like Mexico and Turkey will be the ones feeling the worst.

In reply to by Last of the Mi…

swmnguy EddieLomax Thu, 02/08/2018 - 10:51 Permalink

What happens to the purchasing power of all that US cash when it's repatriated?  Sure, Mexico and Turkey and places like that will be destroyed, but I can't imagine all that cash back in the US keeps its value at anything like current levels. 

As I said above, something like 80% of US Dollars in existence are currently used exclusively outside the US, between third-party nations.  I think it's a good idea for us little people to start thinking about an 80% drop in the purchasing power of each US Dollar. 

Which, if we all had 5x the amount of money we need to survive, is a major problem but not necessarily a disaster. 

When I see stories that even right now, most consumer spending is done by borrowing more debt while actual incomes are stagnant at best in terms of purchasing power, I start to worry about a lot of my fellow Americans.  Most of us don't really have even 1x of what we need to survive.  Going to 0.2x of what we need to survive will bring on some unpleasantness, one would surmise.

In reply to by EddieLomax

Catullus Thu, 02/08/2018 - 06:47 Permalink

And then someone tells them that the Fed has been selling bonds for 4 months already. And they're picking up the pace in Jan-Mar. Then again in April-Jun.

QE was only ever max $60bn a month in bond purchases. Except for the LSAPs  (Large) that they did very early on

OldFahrtyPants Thu, 02/08/2018 - 07:12 Permalink

Okay then, as one who was glued to "The Storm" in December on 4chan then it moved to 8chan, I looked yesterday. Can't find it anymore.

Where is the fucking Storm?

Roger Ramjet Thu, 02/08/2018 - 07:48 Permalink

In my view recent events point to loss of control by Central Banks.  Extremely low volatility and suppressed interest rates were orchestrated "by design" in order to support elevated equity values.  Sure, a lot of retail clients lost their shirts, but there was significant "institutional" involvement in historically low volatility extending for more than a year.

Now that volatility and risk free rates are both heading higher (and the budget deal will only aggravate the pressure for higher yields), stocks have lost their key ingredients needed to retain their bubble valuations.

Hey, lets be careful out there.

Ban KKiller Thu, 02/08/2018 - 08:17 Permalink

The FED sells? To whom? No way to unwind...it's a bluff.

I can quit anytime, I do it every night.

Ever see a junkie unwind month by month? Oh right. No.

Spectre Thu, 02/08/2018 - 08:21 Permalink

My "Implosion Flow chat" says Bonds 1st then Equities then scramble to Crypto's followed by immediate Crypto crash.  Gold/Silver then off the charts UP. Civil War on deck.

herkomilchen Thu, 02/08/2018 - 08:56 Permalink

Good article.  Credit and CB balance sheet expansion still inflating the asset bubble.  This flareup cleared out a lot of lowest, driest brush in the forest.  When the true conflagration gets started, perhaps end of this year or next, the selloff may have a less severe initial drop and progress slower than it otherwise would have.