Advisor Login Contact Us

For Those Who Wanted Volatility, I Will Caution All be Careful in What One Wishes For. It May Come True.

Wow!  Yesterday the S & P 500 had the biggest point reversal since October 2008.   The S & P 500 was up 2.9% in early morning trading only to end about 1.30% lower with massive selling in the final hour of trading.  In my view technology based trading, trading that does not play by the same rules as most other market participants, is to be blamed for the late afternoon rout.

If we needed to be reminded August is shaping up to be the worst month since November 2008 or February 2009, the height of the financial crisis. Most of the decline has occurred in the past five days.

The volatility is incredible!

Wow!  What a change.   As little as three weeks ago the S & P 500 was trading in the narrowest range since at least 1995 albeit there was intense volatility beneath the surface.  Bloomberg reported just 12 days ago the S & P 500 had crossed it 50 day moving average line 35 times in 2015, exceeding any full calendar year in history.

Is the S & P 500, an index that is now overly influenced by five mega capitalized names, just playing catch up?

The last time the S & P 500 was this far below its 200-day moving average was during the two week period from September 21 and October 7, 2011 according to Bloomberg.

I have commented many times that today is similar to 2000 where only a handful of stocks pushed the averages higher ending with these issues being decimated during the next 12 month as the typical stock advanced because of economic activity.

Will history repeat itself?   The accepted reason for the rout is China but I will argue the negative economic narrative does not fit the data.

Yesterday there was a strong rebound in the Conference Board measure of consumer confidence rising to the second highest level since the financial crisis.  The rise was broad based and the component reporting jobs were hard to get fell to the lowest level since 2008.  This augurs well for further job gains.  Such data is also consistent with greater consumption growth.

And then there is housing, a traditional driver of economic recoveries.  The sharp upturn in both new and existing home sales argues for higher home prices given the dearth of inventories, the lowest in a decade.

I can envision a period of time where home sales disappoint given the lack of inventories but prices rise given the demand, demand partially supported by rising consumer confidence and jobs.

And then there is bank lending rising by 7.7% in July from 7.6% in June.  For the year bank loans are up an average of 7.8% according to Fed data. .  The average increase from 1960-2014 was 5.5%. From 2005-2014, bank loans rose by 4.9% per annum according to the Federal Reserve.

And then there is the decline in Treasury prices.  Most would expect there would be a flight to quality during the past several days but there was instead a drop in prices. What are Treasuries suggesting?  Greater growth?

Wishful thinking?  We are told many times history in not indicative of future performance but the above is the historical path of past economic recoveries, utilizing benchmarks and precedents to form conclusions.

I think we will all agree the emotionalism in the markets is intense.

Last night the foreign markets were down.  London was down 0.45%, Paris down 0.34% and Frankfurt down 0.39%.  Japan was up 3.20% and Hang Sang down 1.52%.

The Dow should open significantly higher but can these gains be maintained?  Is today’s opening a reversal of yesterday’s close?  CNBC reported that up to yesterday 49% of volume is the result of high frequency trading.  Did HTF cause yesterday’s late afternoon reversal?  I think yes given there was a lack of a catalyst.  Moreover there are ample studies to suggest that ETF and HTF trading spikes occur at the end of the day.

The 10-year is off 7/32 to yield 2.10%.

Return To Index Page
Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.