1. Moving the markets

One market technician called yesterday’s massive rebound a sucker’s rally and for most of today, with the major indexes trading way down, his view seemed to be correct except, it was not over yet.

A powerful reversal during the last hour appeared to be a continuation of the quarter ending re-balancing by pensions plans (and a giant short squeeze) I mentioned yesterday. It pulled equities out of the doldrums, which ended in the green for the second day in a row, as the Dow staged a nearly 900-point turnaround.

The early plunge did not come as a surprise after economic confidence figures got smashed and the US jobs outlook crashed the most on record. December’s number dropped from 136.4 to 128.1 vs. expectations of 133.7 and slipped to its lowest level since July.

I expect this type of see-saw action to continue throughout the final trading days of this year, but I am pondering the question “what bullish forces might be left after the pension funds are done with their adjustments?”

We’ll have to wait and see but, right now, no matter how much lipstick you put on December, it is still a pig as this chart (courtesy of ZH) shows.

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1. Moving the markets

Equities finally managed to stage a long-overdue rebound from extremely oversold conditions but still leaving the major indexes far short of returning to bullish territory.

Getting things started were comments by President Trump yesterday attempting to calm the investing crowd after the pre-Christmas disaster. Words like “buy the dip,” “I have great confidence in our companies, they’re the greatest in the world and are doing well,” got an early rebound going, but that was not the main driver behind today’s surge.

The real firepower came from the U.S. Defined Benefit Pensions fund that needed to implement a “giant rebalancing out of bonds into stocks,” assumed to be the largest in history. Wells Fargo estimated about $64 billion in equity purchases were necessary during the last trading days of the quarter and year to accomplish that mission.

Here are some details:

For those who missed our Friday post on the topic, Wells explained where this massive rebalancing comes from: the huge, end-of-quarter buy order was precipitated by the jarring divergence between equity and bond performances both in Q4 and the month of December. The stocks in the bank’s pro forma pension asset blend had suffered a 14% loss this quarter, including about an 8.5% drop in December. Contrast this with a roughly +1.6% quarterly total return for the domestic aggregate bond index.

As a result of this need for massive quarter-end rebalancing, corporate pensions would need to boost their equity portfolios by as much as $64 billion into year-end.

With a lot of CTAs (Commodity Trading Advisors) and hedge funds having turned short, this was not a good day for them, as the short squeeze turned out to be the biggest since the Brexit. Ouch!

My view has always been that a bear market will allow for short positions, but only once it has been established. Right now, we are in the beginning stages, where increased volatility in both directions can wreak havoc with even the most thought out plans.

That’s why portfolio safety is rule number one. Being out of equities and in money market is the safest and most sensible place to be at this time.

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1. Moving the markets

Even a Holiday shortened session wasn’t enough to give the bullish crowd some hope, as the major indexes plunged again with the S&P 500 finally dropping into bear market territory, a level defined as a 20% drop from recent highs.

Starting this mess was Treasury Secretary Mnuchin who, while on vacation, decided to call the heads of the six largest US banks on Sunday to assure them that there was plenty of liquidity in the system. He then proceeded set up a meeting with Plunge Protection Team (PPT) – on Christmas eve! Unfortunately, he also decided to tweet about it, which was akin to someone yelling “FIRE” in a crowed theater.

The fallout was immediate with the markets retreating, when a sudden rebound (PPT?) pushed the Nasdaq back above the unchanged line, before heavy selling set in, which sent the Dow down some 650 points. Good thing we had an abbreviated session, or the consequences could have been a lot worse.

As I pointed out before, this is now the worst December for the S&P 500 since the Great Depression (1931), and there are still 4 trading days left, which might create some problems for those who have not moved to the sidelines yet, as exit doors are getting increasingly crowded. You could consider this session to be a bloodbath, since volume was just about double of the recent average.

ZH noted that even the traditional safe-haven stocks were pummeled with the S&P 500 utilities index dropping as much as 4.6% intra-day, the most since August 2011, because of the continued threat of higher interest rates. That’s why cash on the sidelines never looked so good.

No one saw this market disaster coming except for our Domestic Trend Tracking Index (TTI), which generated a “Sell” effective 11/15/18. Since that moment in time, the S&P 500 has now lost -14.16% allowing all clients in my advisor practice to sidestep this financial tragedy, while the Buy-and-Hold crowd seems to end up with the short end of the stick again—for the third time this century.

Although I expect some sort of rebound make its presence felt, it will most likely only be a bounce in an ongoing bear market, which I believe has a long way to go.

I wish you a Merry Christmas!

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