Imagine oversleeping on Friday morning and waking up to find the Nasdaq down 100 and the Dow up nearly 50. You probably would’ve thought you were dreaming. Perhaps you’d roll over and go back to sleep. In this new era of strange trading days, Friday had to rank right up there with the strangest of them.
First of all, futures brokers could have raised day margins on Friday like they did for our election and the French election. They did not. Once news started to leak out Theresa May was losing control of Parliament, the British Pound tanked and our E-mini 500 gapped down. It looked like it could be one of the days as the news didn’t get any better. Who knows? There might be certain elements we’ve discussed previously who liked this news. But if the markets rallied after Brexit, they were awful strange after this result.
I told clients Friday could be one of those "noise panic" moves. It was but not for the reasons I thought. Let me show you how the Nasdaq looked (see the chart below).
This leg rolled over precisely at 161 hours off the prior low. But the psychology of it is very troubling. By now, everyone knows tech is being driven by those heavily weighted names like AAPL, GOOGL, AMZN, FB and the Bill Gates company. Goldman Sachs came out with a report their volatility has become extraordinarily low. The CNBC story I quoted states these names are now correlated to safe haven plays like bonds and utilities.
Traders were spooked and started selling those names. But oddly enough, they didn’t sell much of banking, housing, transportation or other groups; and it had nothing to do with the UK election or anything pertaining to James Comey. As far as I’m concerned, I’ve put you on notice weeks ago this market was getting ahead of itself. You should stay with it as long as you can but don’t be the last man standing when the music stops. As far as the other cycle work is concerned some of the market bottomed on November 4 on the 14th. The SPX responded to the former and found a high right at 144 days. But these big tech names are positioned from Nov. 14, which meant this event happened two days early. For the 144 window, it’s a two margin of error and while we prefer no more than one, sometimes it works out this way.
What is troubling about all of this is people could finally be waking up to the fact things have gone too far without a correction and its due to overcompensating because we haven’t had one. On the flip side, you can see if there really was a bubble nobody would’ve paid attention to such a report. But since the VIX is so low for so long there is a problem.
The problem continued into early Monday trade and the Dow started getting into the act. Many of you know I’ve often quoted Reagan’s OMB guy David Stockman and this morning I went on Twitter to see how they’ve ridiculed him again. A lot of these bearish types think when they see the trouble the market ought to get hit immediately or soon. You know I’ve never subscribed to that. Rather, I’ve been cataloging the growing storm clouds. Here’s what he said after the Comey hearing,
“This is a huge nothing-burger, but you don’t take comfort from that. You get worried about that because the system is determined to unseat Donald Trump. If the Senate can involve itself in something this groundless, it’s just more hysteria about Russia-gate for which there is no evidence. If they can bog themselves down in this, then we have a dysfunctional, ungovernable situation in Washington.”
This is now the middle of June and there are only seven weeks to go before Congress hits the August recess button. Say whatever you want about Stockman, he’s been right about one thing. Congress does not appear to have the political will to properly tackle the tax reform issue.
The market comes back to the same problem we’ve discussed here since almost day one. Personally, I believe people can accomplish anything they want if they have the intent to do so. What I see every time something happens, be it terrorism or attack Trump is the insanity never ceases. It just seems to metastasize to new even more insane levels.
The situation in the UK is close to being out of control. It was just a year ago Brexit won and many felt hope for a new future. Brexit was the legitimate democratically elected will of the people. But the Prime Minister they chose was lukewarm about at best. The election results blew up in her face only days before the Brexit negotiations are to begin. Sure, we understand it was a close election and a big portion of the population voted to stay. At this moment May is trying to cobble together enough of a coalition to run Parliament. Even if she can it will be by the smallest of majorities. But the bigger problem is confidence in her is shot. I am projecting down the road but one must wonder how high is the probability for serious social unrest when the locals realize Brexit exists in name only?
Markets can only ignore the critical problems of the day for so long. The crowd has done an exceptional job of burying its head in the sand to this point. But the market is a self-serving mechanism. It’s only when they come to realize the politics is going to interfere with earnings does it wake up.
The bottom line for today is Comey testified, and the attacks on President Trump have not stopped. There were two attacks in London in two weeks. They are no closer to solving the problem today as opposed to three months ago. You have to wonder how things could be different if political leadership here and abroad had the will to deal with our problems as opposed to running and deflecting. As the famed sports philosopher Chris Berman likes to say, Congress is now on the clock.