I will offer some commentary about today’s market action. I wasn’t expecting to write this so soon.
Back on December 20 (which was less than a week ago!), I wrote the following:
My gut feeling suggests that we need to see more of a washout. We are likely to see a huge market rally at some point in the near future (you’ll see the S&P 500 jump up 5% over the course of a few days), and this will simply punctuate the next part of the downtrend – recall that the biggest rallies occur in these down trending markets. It is exactly designed to coax non-committed capital into the marketplace under a false pretense.
When closing the part day on Christmas Eve, the S&P 500 powered down over 2% and given what has happened during the month of December, I do not think traders wanted any risk positions exposed during Christmas.
Now we’ve got our market rally. It’s happening right now, all in a day. There will be a week or two of more positive market action. We will get a partial recovery and institutions and investors will feel more comfortable again. We are going to hear headlines such as “the economy is fundamentally in great shape”, and “unemployment is low”, and “America is still the economic engine”, etc, etc., but all of this is going to be a complete smokescreen.
Now that the mini-break period is over, today we saw the S&P 500 rocket up nearly 5%. The TSX is closed for Boxing Day, but it is very likely to trade up on Thursday as a result. It will get sold after the morning – when this will start, I don’t know.
In bear markets, the rallies are the swiftest and the most punishing for short sellers. There are a few reasons for this. Rationally, you have some balancing re-allocation from fixed income to equity from portfolio managers that keep fixed allocations of asset classes. The more emotional component is that money flows back into the market to avoid missing out on the bottom (the so-called “buying opportunity of the year”). For the past decade, participants have been conditioned to believe the the markets will bounce back. We saw this in August 2011, October 2014, February 2016 and even as recent as this Spring, where markets took a 10% dip and recovered to all-time highs.
I will claim things are different. What is different this time? The state of monetary policy. I have written about this in detail in previous posts.
Keep solvent. Cash is always a valuable commodity, but especially during these times. Preparing to watch out for forced and spontaneous liquidations will be the best way to make money in 2019, not by index investing. Indeed, those with the buy-and-hold mantra will have their nerves continually tested in 2019 – how much bleeding can they take before they will cash themselves out?
Investing is never easy, nor will it ever be. Looking at the retail side of things, firms that make ETF investing and robo-investing sound easy as opening an account, funding it, and choosing some mix of ETFs make the financial markets look like automated cash machines. Now these same people are realizing that there is indeed a flip side to the proposition – markets can also go down.