Orphaned Markets

From Peter Tchir of TF Market Advisors

Orphaned Markets

I've used the analogy that the markets have been relying on doting "parents" such as the Fed, IMF, ECB, EU, DC, etc.   On many days, the upward move in stocks has been based on either outright support or the hope of outright support from some government entity. 

Whether the parents are dead may be debatable, but they are certainly missing.  The Fed statement was the last straw for the markets.  Ben disappointed.  Plain and simple, Ben delivered nothing particularly new and exciting.  It is not the fact that he mentioned the economics risks are increasing that caused the sell-oof, it is that he mentioned that without giving a nice shot of QE.  Did they avoid QE because even the Fed now realizes it increases commodity prices along with stock prices while providing no real benefit to the economy?  Whatever the reason, the result has been lost faith in the willingness of the Fed to boost stocks at every opportunity.

Similar reaction occurred when after 2 days of "conference calls" for Greece and the IMF resulted in only an announcement that the inspections would continue.  There was no instant gratification for the markets, and if anything, it was made clear that this is near the end of the line.  It shouldn't have been a disappointing outcome, but yet it was.  Why?  Because they under-delivered.  The markets have come to expect so much, that only real action will help now. 

Story yesterday of "helping" the weakest 16 banks in Europe to recapitalize was met with a strong rally, quickly followed by a sell-off to new lows.  The realization that the EU has gangrene and decided to deal with some warts brought back the fear the the governments are once again behind the curve and just don't get it.

Then we rallied into the close because the G-20 would of course save us.  So far, not so much.  A wishy washy statement is just not enough for a market that has come to expect (if not depend) on more. 

The BRIC's are supposed to ride to the rescue, but in Brazil, the currency has been getting crushed, Chinese CDS is hitting new wides.  Brazil is busy imposing tariffs on China.  Russia is complaining about Chinese dumping.  Hardly the signs of a co-ordinated effort to rescue the world. 

So many people have been asking "What has changed?" in the past couple of days.  "How can we have gone from 1,220 to 1,120?"  The answer, to me is clear, a loss of faith in the ability and willingness of the governments to write checks to support the stock market.  I ask what happened to make stocks futures go from 1,120 on the 12th of September, to 1,210 by that Friday?  That to me is just as legitimate a question.  And the answer is clear - the market still believed that the governments were there to give the market whatever it whined for.  Every pop that week was directly a result of some government or quasi government action or rumor.  That rally occurred with Retail Sales disappointing, surprisingly bad Jobless Claims, weak Empire Manufacturing and Philly Fed. 

Rather than looking at the past couple of days it is better to look at the market over the past 2 weeks.  During the past 2 weeks we are about 10 pts lower on the SPX.   Given the awful data coming out across the globe and the admission that many policies have done almost nothing to solve the core problems, maybe we shouldn't be so excited to "buy the dip"  And in spite of how weak the market has been, about 90% of what I have read or heard today, tells me investors are still dying to get long.  Everyone seems convinced we bounce.  Even the bears are more willing to wait to see if we break down before adding to shorts.  Please look at the other rants or useful comments you get and see how many are saying this market should be sold?  The stuff I am seeing is overwhelmingly of the nature "it is bad, but it is priced in and we are due for a massive bounce".   Some of these talk about the G-20 and even the Fed adding some QE.  If anyone things that a 10% move in stocks in a couple days will make Ben change is mind, I think they are horribly wrong.  In fact, maybe this move will make him realize he has done too much and he has to let things settle.

We may get the relief rally everyone is looking for, but I have believed stocks should be below 1,100 for awhile.  The data since I felt that has been supportive of my view.  The (in)actions of the government now make it more likely that we get there or much lower.  Play the dip if you want, but I think that is being far too cute with your money in a very dangerous market that more and more has to stand on its own and can't have its hand help by "Ma and Pa" Fed.