09 Feb

9th Feb Cashins Comments

On this day in 1825, the United States selected a President. No, not in an election but in the House of Representatives. Thus, ended one of America’s closest and most inconclusive elections.

The original list of candidates was unique. The favorite in the polls was a well-known guy from Tennessee. Breathing down his neck was a guy who was the son of a former president. That brought charges of dynasty. Additionally, there were splinter party candidates who might tip the results. In the fall election no candidate had received a majority of the total of either popular or electoral votes.

Andrew Jackson got 99 electoral votes. John Quincy Adams got 84. Henry Clay got 37, while, a fourth candidate, Wm. H. Crawford got 41. Crawford had been the Secretary of Treasury for eight years and might have been the logical compromise choice. But he suffered a stroke during the campaign and fell behind the others and out of contention.

So, in the House, Clay’s people threw their support, along with as much of Crawford’s as they could muster, behind Adams. So, Jackson, who had the most popular votes and the most electoral votes, was denied the Presidency. Jackson’s people never forgave Adams. They killed nearly every proposal Adams sent to Congress – – whether it was good for the country or not.

Thus, the plan for a national bank died. So did the plan for a national university. And the two opposing sides added so many “spite” riders to the tariff bill that it became a contributing factor to the Civil War.

To celebrate stop by the Constitution Inn. Sip an old fashioned, and nod knowingly as political pundits tell you today’s politicians are far too partisan and have lost touch with how the government used to operate.

Political partisanship played a small part in Thursday’s market smash-down but you almost needed a microscope to find that influence.

Bottoming Process Returns To Ugly – The highly volatile bottom forming process returned to its ugly phase and did so with a vengeance. Violent swings in a bottom forming effort aren’t always triggered by news or events. They can swing sharply on simple shifts in momentum.

I think Thursday’s sharp selloff may have been the result of a stew of influences.

Early on, Mark Carney, of the BOE suggested the Bank may have to step up the tightening process. His comments reinforced the recent worries about central bank tightening.

Then there were comments from bond guru, Jeff Gundlach. He suggested that the 2.84 level on the ten year tended to “kneecap” the stock market. He also said that the new equity turbulence would not be over in just a few days.

My friend, Doug Kass of Seabreeze Partners maintains we are still feeling the fallout from the earlier collapse of the inverse volatility instruments earlier in the week.

The bond action at 1:00 was absolutely awful.

Then, Bill Dudley, President of the New York Fed was asked by Bloomberg whether the market selloff might affect Fed policy. Dudley dismissed the market selloff as “small potatoes”. That seemed to inspire a bit of selling.

Some guessed that selling after 2:00 may have been the result of afternoon margin selling but there was no way to verify that.

Then there were rumors of “on the close” sellers and the selling continued into the closing bell.
A pretty ugly session overall.

Another Pair Of Eyes – We thought we’d quote our good friend and fellow market veteran, Jim Brown, the guru of Option Investor.

Here’s how he opened:

After a year of extremely low volatility, the new normal is extremely high volatility.
Unfortunately, this is normal and we have warned about this multiple times over the last several months. Long periods of very low volatility normally end with periods of extremely high volatility and it is not over in just a week or two.

Typically, after a volatility spike it takes weeks for the volatility to return to its normal range of 14-18 on the VIX. The following example shows the VIX spike to more than 50 in August 2015 when the S&P fell more than 235 points in five days. It took nearly two months for the VIX levels to return to normal. It took seven weeks before the S&P finally consolidated enough to begin a lasting rebound.

The economic fundamentals are much stronger in 2018 than 2015 and earnings are rapidly rising. It should not take seven weeks for the market to find a bottom but it may take several weeks before an actual rebound begins.

Due to format restrictions, we can’t reproduce Jim’s chart – but you get the idea. Jim closed his note with a strong caution on volatile Fridays. Never buy on Friday. You never know what is going to happen over the weekend and market declines on Friday tend to continue at the open on Monday. Experienced traders never buy on Fridays in a volatile market.

Friday’s can turn into flush days. Investors who have been trying to hold out all week could see the margin selling at Friday’s open and decide the market is going lower and the give up on hope as a strategy. They hit the sell button and kick themselves for not getting out earlier.
This is called a capitulation event. If it occurs on Friday, that is an even better sign for dip buyers on Monday. Remember, margin selling usually occurs before 10AM and again at 2PM.

The futures have been all over the place tonight. They were positive for a while, dropped to -10,
rebounded to +10 and are now negative again. This is investor indecision and traders trying to game the overseas markets.

Look for signs of capitulation on Friday as a buy signal for Monday.

Another good friend, the legendary Jeff Saut over at Raymond James often notes that selloffs rarely bottom on a Friday, if ever. I’m not prepared to say never but I will endorse the very, very rarely.

Overnight And Overseas – In Asia, markets were hit hard. Shanghai fell the equivalent of 1000 Dow points and has moved into correction territory. Tokyo, Hong Kong and India sold off heavily but not quite as harshly as Shanghai.

In Europe, where markets sold off sharply yesterday, prices are lower but only modestly so.
Among other assets, Bitcoin is down a bit and is trying to hold over $8000. Gold is a shade lower and remains within its resistance band. The euro is little changed against the dollar while yields are at tick or two higher.

Consensus – In ordinary markets, Fridays have a mild upward bias as shorts tend to reduce exposure in front of two days when they can’t trade but events can happen. Those are not ordinary markets by any means.

Stock with the drill – stay wary, alert and very, very nimble. Have a wonderful weekend!