5 Things To Ponder: "Buy" or "Run"

This past week investors to a blow from a sharp selloff in the financial markets. I have spilled quite a bit of ink in recent months discussing the probabilities of such as corrective event as the Federal Reserve’s current liquidity operation came to a conclusion this month.

Now that the correction has occurred, at least to some degree, the question that must be answered is simply: “Is it over?”

That is the basis of this weekend’s reading list which is a compilation of reads that debate this point. The bulls remain wildly bullish, believing that this is simply a “dip” in the ongoing “bull market.” The more pessimistic crowd sees the opposite.

As I have stated previously, it is inherently important to consider both arguments to reduce the cognitive biases that lead to emotionally poor investment decisions.

Is the correction over? Maybe. Or this could be a “sucker’s rally” before a deeper decline. A big concern at the moment, as stated above, is the conclusion of the Federal Reserve’s ongoing liquidity intervention program. The liquidity pushed into the markets by the Fed has been the driver behind the markets unbridled advance since its inception in 2012. The same thing occurred in 2011, which led to a topping process as QE2 was coming to an end. 


From yesterday:

"While no two periods are ever the same what is important is the current defense of 1850 level on the S&P 500 so far.  A rally from this level, which fails to attain a new high, suggests that the market will complete an important topping process in the months ahead."

I don’t have the answer, but this is what I will be “pondering” over the weekend.

1) 5 Reasons Why Stocks Are Falling by Steve Forbes via Forbes

  • The U.S. Senate
  • Misbehavior By The Fed
  • Profit Picture Is Getting Blurry
  • World Economies Are A Mess
  • World Security Is Worsening
  • The Yield Curve May Not Invert Prior to a Recession
  • Stock Prices Appear to Be Issuing Economic Warnings
  • The Signal of the Bond Markets Might Be a Precursor to Slowing Growth
  • The Signal of the Oil Markets Is Negative
  • Expanding Geopolitical Risks Raise Risks 
  • Growing Health Concerns Could Dent Economic Growth
  • The Growing Dominance of the  U.S. Could Have a Negative Twist    

He concludes with a bullish view:

“At any rate, trying to time the market is a fool’s game. Ride the storm. After 2016, the U.S. will experience a Reaganesque revival. Markets will go up before then in anticipation of a better era ahead.”

Also Read:  Could The Liquidity Crisis Be Back by Izabella Kaminska via FT

2) Does Wall Street Know Something We Don’t by Neil Irwin via NYT

“Things are looking better, that is, unless you turn your eye to Wall Street. There, the stock market’s main gauge, the Standard & Poor’s 500-stock index, fell 0.8 percent on Wednesday after a wild ride during the day. It is off 7.4 percent since mid-September.

Moreover, longer-term interest rates are down sharply, which normally signals pessimism in the bond market about the nation’s economic future. A measure of expected volatility hit its highest level since 2011 on Wednesday, signaling that more manic days could lie ahead.

This apparent contradiction — and how it is resolved — points to the basic question for the United States economy and for Federal Reserve policy makers right now. How powerful is that underlying economic strength?  And will the recent market volatility prove ultimately inconsequential, or does it presage harder times ahead for a nation still trying to muddle its way out of a downturn that technically ended more than five years ago?”

Also Read: It’s Beginning To Look A Lot Like 2011 via GaveKal Capital Blog

3) If The Bull Market Has A Savior, This Is It by Christopher Hyzy via MarketWatch

“Five years into an often uneven recovery, and with stocks more volatile, are the American economy and financial markets running low on gas?

No. In fact, the U.S. is in the early stages of an extended business cycle and a secular bull market for stocks that could last another two decades.

Compared with previous cycles, this new phase could be longer and more favorable to equities, the U.S. in general, and specific investment themes. Why? Because this is the beginning of a global recycling of growth. The gigantic scale of this transition should lead to a far longer business cycle than is typical, one centered on and driven by changes in the U.S. — including a manufacturing renaissance, coupled with greater energy independence and enhanced technological independence.”

Also Read:  Bulls May Be Losing Control Of The Market by Anthony Mirhaydari via CBS MoneyWatch

4) 7 Reasons A Recession Is More Likely Than You Think by Doug Kass via TheStreet.com

“I would argue that it is different this time and the risks of recession have increased.”

  • The Yield Curve May Not Invert Prior to a Recession
  • Stock Prices Appear to Be Issuing Economic Warnings
  • The Signal of the Bond Markets Might Be a Precursor to Slowing Growth
  • The Signal of the Oil Markets Is Negative
  • Expanding Geopolitical Risks Raise Risks
  • Growing Health Concerns Could Dent Economic Growth
  • The Growing Dominance of the U.S. Could Have a Negative Twist

Also Read:  The Easy Money Stock Market Is Over by Barry Ritholtz via Bloomberg

5) The Potential For 10-years Of Negative Returns by Shawn Langlois via MarketWatch

“At the same time, the number of hedging measures is mounting in the option pits. The CBOE put/call ratio just hit the fourth-highest level of all time at 1.53. Higher than it was during the Lehman Bros. implosion. Meaning, money is pouring into bearish equity bets. The temptation is to read that as a buy-the-fear signal. Think again.

Ryan Detrick, who always comes up with the goods, numbers-wise, found that average returns when that ratio tops 1.5, as it has this week, are rather dismal. Six months following the signal, the S&P has dropped 2.4%. That’s not the meltdown some doomsdayers are talking about — heck, stocks are down 6% since last month — but it’s still noteworthy.”

Also Read: Don’t Buy Into A Rebound Rally  by David Weidner via MarketWatch

Also Read: 10 Signs The Selling Is Over by Jeff Cox via CNBC

Also Read: What A Correction Feel’s Like by Jared Dillian via ZeroHedge

“Everyone has a plan until they get punched in the  face.” – Mike Tyson

Have a great weekend.

Lance Roberts

Lance Roberts is the General Partner and Chief Portfolio Strategist for STA Wealth Management. He is also the host of “The Lance Roberts Show,��?Chief editor of the X-Factor Investment Newsletter and the Streettalklive daily blog.

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