Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $12B AUM, offering volatility management solutions to its investor base worldwide. Mike has been publishing his daily newsletter (Monday-Friday) privately for the firm’s investors and his personal contacts in the investment business since 2008, sending it daily shortly after the market close.
The opinions expressed below are my own and do not necessarily represent those of Harvest Volatility Management, LLC.
Close but no cigar. The dip-buyers made their move. Asian markets fell a lot and Europe was off a couple percent… that was more of a reaction to our yesterday than new events… anyway our premarket futures were off 30-ish handles in the wee hours of our morning. Dip buyers went to work on the futures and pushed them up to about unchanged by the time the market opened. CPI data (2.3% vs 2.4% est & 2.7% prior) came in a bit soft and that helped the bulls push both US and European equities higher early. The S&P was positive on the day around 10 AM. The bounce that everyone was looking/hoping for was beginning.
It could stick around though. The tape faded again and there was a back-and-forth during most of the session. Bears finally won the day as the tape broke lower around 2:30 PM. Technical levels failed again and it looks like investors rushed towards the exits as we approached the close. The tape climbed in the final hour and some hope blossomed for tomorrow.
So here we are, down 6 sessions in a row and the bulletproof nature of the market is disproven. If the bull market is going to continue, it’s going to take more time than past bounces. This isn’t going to be a 1-2 week hiccup.
We’re about 7% off the highs of 2-3 weeks ago. That’s not a big drop but a lot of people are still spooked. Longs have had so much smooth sailing that they haven’t yet reset their frames of reference.
The Fed is normalizing interest rates. For the first time since the financial crisis, short term rates are equal to/greater than inflation.
If we’re going back to a normal interest rate environment, we should not be surprised if markets (especially equity markets) go back to a normal volatility level. We should *expect* higher levels of realized volatility going forward.
One can make directional inferences from that conclusion of course but let’s just focus on the stock market environment and the sentimental shift that is occurring *and is unlikely to reverse* as long as the Fed continues to normalize.
The perception of the stock market as a no risk, excess return engine is ending (as it should). There are going to be pockets of true-believers but the consensus opinion cannot remain in the permabull, buy-every-dip camp.
We don’t *have* to have a bear market to effect this change (we might but I don’t think it’s necessary).
We cannot resume the bull market until the perception change is complete.
The leveraged longs and the true-believers are going to get washed out in the process.
If I’m right, we’re looking at choppy markets for a while, with some hum-dinger, short-term rallies along the way. I speculate that the net journey will be south.
Once normal levels of risk have been repriced by the market and re-accepted psychologically, then we can trend.
This is a transition phase for markets. No sense in attempting to jump into it. Watch it play out if you can, take risk-off actions if you can’t.
When 1-2% gyrations stop being newsworthy and are considered par for course… and stocks are widely perceived as risky again, that’ll be the time to make your asset allocation and your stock-picking decisions.
See you tomorrow,