Death of a Bull, or Another Buyable Dip?

End of Day Update:

It was a wild ride for the S&P500 as respectable gains evaporated in a late-day selloff. The Fed’s meeting minutes poured cold water on the market when they told us the easy-money party was coming to an end. Many people believe the Fed’s aggressive bond buying program inflated this market and now the Fed is telling us they plan on shrinking their enormous balance sheet later this year. While today’s dramatic reversal on elevated volume was noteworthy in of itself, the bigger question is if this is just another buyable dip like all the others before it, or if this is a true turning point that represents a fundamental change in the market’s outlook.

The market clearly didn’t like today’s news and that’s what lead to the largest intraday reversal in quite some time. But for this to represent a real change, this needs to be a new and unexpected development. Something that caught optimistic owners by surprise and will finally be the catalyst that causes them to give up hope and sell.

Personally I didn’t find this revelation all that surprising. The Fed told us they were going to boost interest rates and that’s what they’ve been doing. So far stocks have brushed off the last three rate-hikes and we continue hovering near all-time highs. Shrinking the balance sheet is the next logical step in the return to normalized monetary policy. It’s been eight-years since the depths of the financial crisis and the economy has proved itself far more resilient than most expected. While equity owners would love to keep the money printing presses running full-tilt, we find ourselves at a point where the risks outweigh the rewards.

If I knew this was coming, was it a surprise to you? If it doesn’t seem like a big deal to either of us, should we really expect this to send a chill through the market? The current crop of owners is stubbornly confident. Every other dip this year bounced because owners refused to sell. Do we think this headline is so shocking and unexpected that it will turn these stubbornly confident owners into fearful sellers? I doubt it. And there’s our answer. Today’s news doesn’t change anything. Stubbornly confident owners will remain stubbornly confident and this dip will bounce like all the other ones before it. No matter what the market “should” do, when people don’t sell, supply stays tight and prices resilient. Something will break this market eventually, but this isn’t it.

As a trade, I would give this reversal a little time to work its way through the system. These things are rarely one-day events, but I would be buying this weakness, not selling it.

Jani

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