The Zigmont Report (Daily Market Recap for 12/6/18)

Mike Zigmont

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.

Frazzled.  Tuesday’s large drop in US equities spooked markets globally.  With the resumption of trading in the US, markets were nervous and looking to the US for clues and indications as to how things would proceed.  Yesterday, US futures suggested a modest bounce was coming.  That didn’t happen.

It turns out that the US asked Canada to arrest the CFO of a Chinese tech company for extradition and Canada did this on Dec 1.  The news broke late yesterday/last night.  The charges are unknown but violating trade sanctions with Iran has been reported as a reason.  Who knows.

This event, which is unusual, would probably have been ignored by broader markets in past years.

That’s not the case right now.  US and China are in a dicey trade negotiation where whispers and partial quotes move the tape a couple percent.  Now that a Chinese executive is arrested, all kinds of speculations emerge.

  • Maybe China will retaliate
  • Maybe this is purely political
  • Maybe [insert something crazy here]

The reality is not known and considering that investors were already on-edge, this just cranked up their paranoia a few notches.

Overseas markets fell 2-4% and our market was looking like it would drop about 1.5% on the open.  After Tuesday, that’s no Bueno.

So we started trading down and downside momentum grew from there.  Panic didn’t materialize but the bear was roaring.  The S&P bottomed when European trading closed.  The S&P was off almost 80 handles at that time (down almost 3%).

No Bueno.

Dip-buyers did their thing and the tape repaired a lot of the damage.  We still had a down day but it wasn’t a runaway train.

Let me reiterate something we’ve covered frequently lately.

*This is a manic environment.*

*We are moving a lot on very little information.*

This means that investors are going to exaggerate momentum intraday and they are going to change seemingly at random.

This is a blender market.  You cannot trust the closes and you cannot extrapolate the latest move/trend.

I believe this is our environment until we exit the news-vacuum.  We need data points to shape a consensus economic view and we need policy information to shepherd forward rate expectations.

That may be an impossible ask for a while though.

We’re in a transition phase emotionally.  Bullish optimism in more growth is over.  Now we are collectively worried about a coming change.  This is all perception currently.  If the data begins to show transition, we are going to struggle with pricing in how much change is coming and how fast.  We also will have trouble pricing in how the Fed will change its behavior in response.

So my points here are these:

  • Change exacerbates uncertainty
  • The data hasn’t really started to change yet so this current uncertainty is based on unguided expectations only
  • When the data starts to change, investors will become hyper-attentive to the data
    • That will be the moment where data and news drives the tape more than emotional fickleness
    • That will be the moment when expectations converge on reality

How long it takes us to get there is unknown so we may be stuck in the blender for months.

Nonfarm payrolls data (198k est vs 250k prior) releases tomorrow but if it doesn’t show a transition (high probability), it’s not going to matter.

See you tomorrow,