07 Feb

7 Feb 2018 – Cashin’s Comments

On this day in 1904, smoke began to pour out of a fabric warehouse in downtown Baltimore. It didn’t look like a big problem and the fire squad arrived promptly. Unfortunately, so did a 50 mph windstorm. The wind, the fire and the fire cart decided to try for the same parking space.

The wind and fire won the race. The firemen and their cart regrouped down the block….but not for long. The raging wind swept the now raging fire from the six story warehouse to every other building on the block….and the next block and the next. The fire fighters and the city fathers regrouped. The police were called in to control the crowd of 30,000 displaced or curious. The mayor ordered that buildings in the path of the fire be dynamited to set a firebreak. But the windswept fire just burned across the rubble to its next target.

Area fire squads came in to help out….but hose fittings and hydrant taps were all different and the Samaritans turned spectators….so did everyone else. The wind and the fire died out after two days. The damage was over 2,000 buildings destroyed leaving over 140 acres of downtown Baltimore as rubble. The economic cost made it the second worst urban fire in American history – behind the great Chicago fire. So why isn’t the fire more famous? The answer may be that despite the thousands displaced, the buildings destroyed, and the millions of dollars it cost – the fatality rate was rather low – only one person died.

Traders could empathize with those Baltimore authorities as markets continued to whip around, seemingly out of control.

Bottom Forming Process Incomplete Suggesting Further Volatility – Tuesday’s market had many aspects of a bottom forming session but refused to give traders an outright “all done” signal. Stocks gapped down on the opening but well short of the heavy losses that the overnight futures had indicated. Accidentally, but conveniently, the limited gap in the Dow made it open right at Monday’s intra-day lows. That inspired buyers that quickly took the averages into plus territory. Traders then sat back and awaited a classic “rollover and retest” of the
mornings lows.

They got their rollover, rather quickly but the market refused to retest the morning lows.

Frustrated that the market refused to follow the “classic” retest pattern, traders switched to Plan B. An alternate pattern in a bottoming process would be a series of higher highs and higher lows.

The market again refused to match the pattern that traders were hoping for. Instead, it oscillated between the midmorning pullback levels and the post-opening spike.

In early afternoon, I sent an email to some friends summarizing the action so far:

The zigging and zagging is typical in attempting to form a bottoming process after a high volatility selloff. Watch to see if they attempt to retest the gap opening lows.

Around 2:30, word began to spread of a possible compromise on a potential spending bill in Congress. That seemed to inspire some buying and the Dow rallied to its post-opening high.

This time it didn’t stall and when it punched through, the buying accelerated. The buying slowed a bit but prices floated higher despite indications of nearly $2 billion to sell on the closing bell.

The on close sellers did not relent but the late momentum rally continued and basically gobbled up all of those sellers with barely a twitch. The late buying was rather broad with 9 of the 11 S&P sectors closing higher. Advances beat declines by about 5 to 2. The whipsaw action helped swell the volume to 1.4 billion shares.

May you live in interesting times!

Just A Coincidence, We Hope – UBS’s inimitable economist, Paul Donovan notes that the new Fed Chair, Jay Powell is a lawyer by training and not an economist. Paul further notes that the leader of the German Reichsbank in 1923 was also a lawyer rather than an economist.

That didn’t work out well, did it?

Overnight And Overseas – In Asia, markets are mixed with basically small changes. Tokyo saw a fractional gain – with modest losses in India and Hong Kong. Shanghai fell more significantly in partial “catch-up” to the others. In Europe, markets are bouncing modestly in lighter volume.
In other assets, Bitcoin is back above $8,000. Gold is virtually unchanged and remains within its resistance band. Crude is slightly lower with WTI trying to hold the $63 level. The euro is a touch weaker against the dollar and yields are down a tick or two.

Consensus – As suggested, it looks like the bottoming process is still in motion. Lots of unacknowledged damaged caused in the last few days. Adding to vulnerability has been the fact that virtually all corporate buybacks have been put on hold for earnings season.

Stay wary, alert and very, very nimble.


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