Manic Monday

Manic Monday!!  A song written by Prince and popularized by The Bangles also happens to be the term that best describes yesterday’s equity markets.  Equity markets followed on Friday’s weakness sold off and closed near session lows as they were unable to hold early gains.  Fears of contagion from Turkey’s weak currency served as the primary stimulus for the selling.  To cut through the haze for a moment, we need to be clear that the Turkish economy is small and has very little impact on US stocks or the US Economy.  In fact, as I described in yesterday’s note, even Turkey’s US Dollar denominated debt held by foreign banks is not significant enough to topple the emerging markets complex.  The real fear here, is (sorry FDR) fear itself.  The real contagion risk is that holders of all distressed European PIIGS debt decide to sell out of fear stoked by Turkey.  Remember that PIIGS is an acronym for Portugal, Italy, Ireland, Greece, and Spain.  Yeah, you remember those countries whose economies, under stress, had to be propped up by the European central bank.  If that happens, we could experience some market turbulence, but in these cases we need to step back and look at the big picture.  The US domestic economy is doing well and earnings have been extremely solid.  So, can a selloff in Portuguese sovereign debt affect US corporate earnings or purchases of heavy machinery and durable goods in the US?  Not really.  So why should we care?  Investor sentiment.  Bull markets are not directly caused by good GDP numbers or corporate earnings but rather investor sentiment and animal spirits.  Typically, late cycle trade is subject to investor sentiment tantrums.  Investors who don’t have a strong conviction can be easily scared into heading for the exits at the first signs of stress.  SO, we need to take note that “investors are skittish” and we are late in a market cycle.  While the markets may have some more upside from here, now is the time to be most prudent with investment strategy.

The S&P500 and the Dow had tough sessions yesterday, but they both remain above key support levels with positive secular trends.  They continue to be constructive as do the Russell 2000 and the NASDAQ 100.  The Turkish Lira as well as equity futures rallied overnight so equity markets will start the session on a stronger leg.  The VIX Index touched 15 in yesterday’s session and while this is not the danger zone (remember 18) it is the warning track.  The VIX index futures also calmed down in the overnight session and are around 13.74 this morning indicating that perhaps yesterday’s indigestion is behind us.  Bonds have also sold off a bit indicating that the flight to quality trade has subsided.  10 year yields start the session at 2.89% and 2 year/10 year swap is at 26 after touching 25 yesterday.  Bitcoin starts the session on a weak leg as it traded briefly below $5000 overnight.  While it is still above its key support level of 5774, the currency’s weakness is notable as there is some correlation to Asian stock markets and is thought of as an indicator of animal sprits (more on that tomorrow, remember yesterday’s teaser on Hyman Minsky).  Retail Sales numbers come out tomorrow but we get some big retailers reporting starting today with Home Depot which announced a solid beat.  Also reporting tomorrow and Thursday are Macys, Walmart, and JC Penney.   In late August they can all move the indices.  So ahead we have another day to talk Turkey and psychoanalyze Elon Musk but today we hopefully start off with some of our fears behind us.  Please call me if you have any questions.

daily chartbook 2018-08-14