The Zigmont Report (Daily Market Recap for 10/19/17)

Mike Zigmont

Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $10B 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

6 hour dip.  Around 4 AM eastern time, the People’s Bank of China Governor Zhou Xiaochuan warned about risks of excessive market optimism.  He mentioned the possibility of a “Minsky moment” which is a sudden market selloff driven by a buildup of excessive leverage.  His comments referenced Chinese assets specifically.  The Hang Seng index sold off almost 2% and S&P futures sold off 15 handles (60 bps).

The market opened down about 10 handles (40 bps) and printed an intraday low at 10 AM ET.  The S&P was off 13 handles (50 bps).  The tape climbed slowly and surely from there.  Capital flow was 101% for the overall session but the pace was around 120% in early trading.  Investors were much more active this morning than they have been recently.

During the early morning selloff, the catalyst for the equity selloff was barely mentioned across the street and it was forgotten & buried by midday.

There are a couple things to mention here.

  1. Investors are *strongly* conditioned to buy any and all dips
  2. News isn’t what it used to be

The second point merits a little explanation.

In the olden days, when a central bank governor delivered a warning, the market listened (at least at first).  When Alan Greenspan delivered his “irrational exuberance” comments it was December of 1996…. This was just the beginning of the dot-com bubble.  The Japanese stock market sold off 3% immediately.  European equities sold off 2.7%.  The US market sold off 60 bps.

The market dismissed Greenspan’s warning shortly thereafter and the dot-com bubble continued for four more years.  Ultimately who was right and who was wrong isn’t terribly important (to me).  The point I’m making is that the market heeded the warning *for at least a day.*  The words of the Fed Chair *mattered* to the markets.

Of course, today was not the same as back then.  The PBOC Governor is not the same as the Fed Chair.  Irrational exuberance is not the same as Minsky moment.  But…..

The intraday rejection of the Governor’s comments by our market is new.

In recap emails, I often like to ask and answer the question “did the investment landscape change today?”

Well did it today?  US equities said no.  If you ask me, I say yes.  I don’t think it’s a tectonic shift but when the head of the central bank of China publicly communicates an overvaluation concern, that’s a change in the landscape in my book.

Current equity markets are in bullish group-think mode.  I don’t know what to do with that fact.

The simple answer is that you go long and enjoy the ride.

I can’t do it though.  Musical chairs made me nervous as a kid and it makes me nervous as an adult.

Last thing:

Today is the 30th anniversary of the Black Monday Crash of ’87.  Here’s a brief (6 min) explanation of it by Michael Lewis.  Even today, there’s no definitive explanation of/answer for the crash but Lewis’ take is good in my opinion.

See you tomorrow,