Potential "Ring The Bell" Moment

As an economist who has been highlighting the divergence between the fundamentals and stocks for some time, that one day drop yesterday on Wall Street is noteworthy. However, it could simply be a short term speculative position squaring hiccup.

Traders were long stocks looking for an easy break higher on the last Fed hike of the cycle, but they did not get clear upside. Then, another piece of bullish market news in that Q2 GDP was stronger than expected. Something I was not expecting. I was way wrong at 1.6%. Apology.

US GDP

Back to the trading of the day point. It could simply be the case that the market, on a short term basis, was already well long stocks. That this is a classic mini-version of ‘buy the rumour sell the fact’.

This move lower on the day certainly had power. Now some hesitation.

It is always challenging to make too much of a single day’s move. In truth, with the historically obscene concentration of wealth management in the top 3-7 firms globally, a single day’s price activity can on occasion be determined by just one of those funds making even a minor decision. Making trading for others more difficult than ever before. Such developments can feel like random events out of nowhere.

Perhaps, yesterday’s power down day was a combination of both, sell the fact and a large institution thinking it might be time to take some profits.

This move is really interesting because it is either a short term trader shake out, or something much bigger.

The argument for a tipping point in market direction is that that is all the good news we are going to see for US stocks for the time being. Certainly of the magnitude of the Fed’s historic last hike or Q2 GDP surprising to the upside.

If the follow up price action to these events, remember we highlighted how important this week is to the medium term outlook, is one of even mild weakness, this should give many a large fund manager and small investor alike, pause for thought.

Quite simply, if the market cannot make new highs after such huge catalysts, then it is exhausted. I always like to remind people that whenever everyone who wants to buy a market already has, then that market can only go down even if there are further bullish news developments. The broad suave of stock buyers often so easily forget that once they have all bought, they are nothing but a sea of potential sellers?

I really do think today’s Friday trading in New York could be telling. Perhaps the final result delayed until after Monday’s closing bell, but a further sustained decline below Thursday’s low, across equity markets, could well ‘ring the bell’ for a substantial bear market period.

If the markets break momentarily lower intra-day then recovers, then the bulls will feel some reassurance.

My view though, is that any further weakness should be lit up with a major spotlight within traders and investors minds.

The risk that this is something more, than the albeit more probable momentary position squaring, is far too high to ignore.

The exciting times are really only just about to begin. Markets immediately recover, or they hit a major bear market period under the weight of all those global leveraged long positions?

Clifford BennettACY Securities Chief Economist

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