Marketview: Enough Transparency

dog-pile

The FOMC rate decision lived up to the hype and kicked off a mini-crash in multiple asset classes. The news was that the Fed will be tapering the latest QE program at the end of 2013 and potentially wrap up the program by mid-2014. A very difficult week for markets in which every long position, particularly growth stocks, were hit hard.

When the market broke out and began a mindless march higher I felt caution was in order. By the time the S&P gave back around 80 handles, it looked like enough of the froth had dissipated for the long side to reestablish dominance. The market was clearly not finished auctioning lower. I still feel that the long side of the market needs to be respected, but there are several variables I want to discuss.

First, interest rate regime changes tend to take a while to work through the system. Interest rates touch EVERYTHING and understanding exactly how rising interest rates will impact stock returns on a day-to-day basis is absurd. So know that.

Second, the “continuous risk meme” is still in play. Last year it was Europe, end of 2012 it was the sequester, recently the Yen carry, and now SHIBOR. The important factor is not the individual themes of these stories, but rather the fact that they’re continuously being introduced into the investing psyche and stoking bearish tendencies. Markets on the cusp of crashing are not continually introducing knowable risk factors — this is the wall of worry. Broad-market crashes usually come about after a self-reinforcing group buy-in coupled with positive feedback of unsustainable returns coupled with difficult to identify dependencies. At first glance, the Fed’s various QE programs appear to fit the bill perfectly. The problem is most of the public view these programs with serious contempt and have not participated in the returns enough to make it self sustaining (mostly due to broad under investment). Add in the factor that the Fed is being excessively transparent and the Fed program become something we don’t quite have the ability to describe yet.

I’m certain (along with everyone else) that QE will crash the market someday but that someday will have to be a future which satisfies the criteria above. Until then, we should have normal corrections along a well established trend. Watch your leverage and scale back when others are getting too greedy. The market has matured, and the time for aggression has long passed. Leverage and lopsided allocation both make these markets much more difficult.

Energy, financials, and industrials lost the least this week. Utilities, basic materials, and consumer staples lost the most. It’s a curious phenomenon to see defensive sectors getting hit so hard in a broad selloff — I’m not exactly sure what to make of it. Overall, financials, industrials, and technology are the sectors with decent relative strength. If we rebound, those will be the strongest pockets in the market.

sector-rotation-june-21-2013

Take a look at the $OEX breadth. This is one of my favorite oversold indicators. Accumulating under the lower bollinger band has been a particularly effective way to enter the market at decent prices.

OEX-above-50-day-June-21-2013


Disclaimer: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please click here for a full disclaimer.

blog comments powered by Disqus
Dynamichedge Blog