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Bloodbath!

Wednesday, October 10, 2018 15:33

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“Bloodbath!”

by Brian Maher

“Horror returned to Wall Street today… The Dow Jones plunged 832 harrowing points – its worst day since Feb. 8. The S&P gushed 96 blood-soaked points itself. More than half the stocks in the index were in correction territory today. The broad index is also sunk in a five-day losing streak – its longest since 2016.

But tech stocks were the scenes of greatest bloodshed today. Amazon – down nearly 4%. Netflix – down over 6.3%. Facebook and Apple – down over 2% each. In all, the Nasdaq plummeted 316 points by the closing bell.

Meantime, our old friend VIX, Wall Street’s “fear gauge,” jumped above 22 today – its highest reading since March. MarketWatch is on hand with today’s summary: “U.S. stocks slumped Wednesday, with major indexes breaching key support levels and extending their downward spiral, as rising bond yields continued to weigh on market sentiment.”

Ah yes, the stock market’s latest bugbear, the Treasury yield, was at its tricks again today. The 10-year Treasury yield was up to 3.225%… squarely in what Deutsche Bank’s Aleksandar Kocic calls the “danger zone” (3.20%-3.70%).

As explained in Friday’s reckoning, it is not so much the rise in yields… as the speed of it all: “Rapidly rising yields over a short time frame [could lead to] a simultaneous sell-off in stocks and bonds. ”Jeremy Klein, chief market strategist at FBN Securities, further explained today: “Portfolio managers tend to move to the sidelines in a skittish tape out of fear of suffering from a quick and sharp pullback.”

More to come tomorrow. But here at The Daily Reckoning, we rise above the heat of the day… and take the long, cool view of things… We suspect the latest rough house will ultimately extend the life of this this aging bull. How so? That is because we have taken aboard Sir John Templeton’s famous maxim: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”

Now wrinkled with age, the bull market in stocks has entered its ninth year. It was born on pessimism in March 2009… when most investors were swearing off stocks forever and ever. Many a time and oft its end has been announced. Around every next bend lurks the roaring bear, we have been endlessly warned. But step by skeptical step, this bull market has climbed the worried wall. Bad news has been, in effect, good news.

Bad news has kept fear in its saddle… euphoria in its cage… and the bull in stride. It has frightened the herd… and shaken out the weak hands. From a sturdier base the bull market could then resume its defiant advance. In summary, this bull market has been, in Bloomberg’s words, “derided as fake, doomed and history’s most hated.” That very hatred has kept the bull running under silent but steady steam.

But by 2017 investors had grown skeptical of their own skepticism. Skepticism was finally caving in to optimism… as records fell day upon optimistic day. By the time 2018 was underway, euphoria was coming to its legs. The stock market began “melting up”… and the only fear in evidence was the fear of missing out. But then came February’s 11% “correction.” The Dow Jones plunged 1,175 points in one day alone – its greatest single-day point drop in history.

Fear was once again high in the saddle. Stocks spent the next six months inching their way back up the wall of worry. By August they made it over, and February was but a memory. As we noted, mockingly, on Aug. 30: “Nothing remains of February’s correction but a quaint memory. The stars are back in their courses… the angels are back on duty… and the Perfections are back within sight.”

Fools were once again rushing in… and betting heavily against safe-haven assets. And as we revealed recently, investors had also recently reduced their cash allocations to “rock-bottom” levels. That is, they had gone “all-in” on stocks. The “melt-up” was back in prospect.

But by last week the Treasury yield chased euphoria out the open window… and fear came barrelling back in. It remains yet – and how, after today. But we suspect the current fears over Treasury yields will blow on through soon enough. As Jim Rickards explained yesterday: “It’s true that bond yields have backed up sharply and prices have come down in recent months. Yet we’ve seen this movie before. Yields went from 2.4% to 3.6% between October 2010 and February 2011 before falling to 1.5% in June 2012. Yields also rose from 1.67% in April 2013 to 3.0% in December 2013 before falling again to 1.67% by January 2015. In short, numerous bond market routs have been followed by major bond market rallies in the past 10 years.”

Then markets will probably resume their climb up the slippery pole. And so the bull market likely remains on the tracks – for now. We still suspect the business will all come to grief sometime next year or the year following. We will be officially concerned once euphoria returns…”

- http://www.thedailyreckoning.com

Source: http://coyoteprime-runningcauseicantfly.blogspot.com/2018/10/bloodbath.html

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