By: Steve Smith
What a wild week. During this week’s market watch, the old saying of “you take the escalator up and the elevator down” was updated to “take the elevator up and then cut the cable and free fall down.”
After going a record 405 days without even a 3% pullback, the market currently faces an official ten percent correction. And it was a fast one. This was the first time in history the S&P 500 went from a new all-time high to a ten percent correction in nine days or less.
It took the rise in interest rates to halt the bulls’ inexorable march higher, which culminated in January’s parabolic move. The unwinding of years’ worth of levered short volatility yield harvesting cut the cable and exacerbated the velocity and magnitude of the move.
Or maybe the cable was swapped for a bungee cord, as we are opening with our second big bounce in the last three days.
The market watch question is this: where is the floor? I think we are close, but not quite there yet. The obvious target would be the 20 dma, which for the SPY is about $253.
Michael Batnick notes that of the fifteen true corrections from record highs since 1928 (prior to this one), ten turned into full-blown bear markets, while five did not.
Who knows if this will become the 11th time. There are years of accumulated profit that have had no real reason to sell.
TINA (There Is No Alternative) shifting to FOMO (Fear of Missing Out) is now confronted with higher rates, which makes valuations less attractive.
The steady low-volatility bull market also made it easy for people to keep riding it higher, as they were sitting on ever larger profits and never had to feel the pain of being underwater. They also never made the tough decisions about whether to sell. Now, though, these traders need to a closer look at their monthly statements.
And everyone who fueled the largest inflows into equities in over a decade during the month of January might not like they see.
In fact, they are already jumping ship, as this week is set to show the largest weekly outflows in over a decade.
Thanks for playing. Come back real soon!