There is Little Fear in World Stock Markets Now

There is Little Fear in World Stock Markets Now

There is Little Fear in World Stock Markets Now

$DIA, $SPY, $QQQ, $VXX

The stock markets do not fear NKorea, and they do not fear the extreme left’s attack on US President Donald Trump

Risk assets across the globe, despite high valuations, have recovered nicely from a sell-off triggered by concerns about a NKorean nuclear attack.

By doing that, they highlighted the extent to which participants (traders and investors) are highly confident about the environment they operate in, and have developed necessary stabilizers. And while there is a limit to the effectiveness of these stabilizers over time, disrupting them in the short run would require deeper and more sustained adverse shocks, internal or external.

Over the longer term they cannot obviate the need for the need of more sustainable engines of value creation.

Having been sold off last week in the midst of a spike in the widely followed VIX and lots of talk about a long-anticipated price correction, risk assets have recovered again, as many stock indices resume their march toward another set of records.

The recovery started before NKorean leader Kim Jong-Un’s pullback on firing nuclear weapons toward Guam.

Further, the recovery continues despite the lefts intensification of political Noise in the US that delays any legislative progress towards pro-growth policies.

The recovery in risk assets has a lot to do with a “Buy the Dips” strategy that is now ingrained in markets and that has proven highly profitable.

It is underpinned by related beliefs held by a very wide set of participants and supported by high-frequency data and other recent signals.

Those beliefs are as follows:

  1. A Goldilocks global economy in which prospects for relatively stable nominal GDP have been enhanced by a fall of the threat of material slowdown that has occurred without materially increasing the risk of an inflationary outbreak.
  2. Supportive central banks that continue to show considerable caution when it comes to both raising interest rates, and tapering large-scale balance sheet purchases.
  3. Continued migration to passive vehicles, including ETFs (exchange-traded funds), which dull stock differentiation and provide consistent overall support to markets.
  4. Strong performance of corporate profits, which helps to bolster companies’ cash holdings and expands prospects for dividend payouts, stock buybacks and M&A activities.

Because of the reasons, it will take a big and sustained external shock to shake investors out of what has become a comforting, self-reinforcing “Buy the Dips” mentality.

The same is true when it comes to possible internal disruptions, be they signals of less robust global economy or a policy slippage.

In the longer term

There is is a limit to how far this conditioning can decouple asset prices from fundamentals. But, it is a limit that extends beyond what many traditional valuation approaches and models suggest, especially historically based ones.

The Big Q: Why?

The Big A: It is an extended, enjoyable journey for participants.

But remember, like all journeys there needs to be a sustainable destination. And a Key condition for this is a greater governmental policy effort to promote higher and more inclusive economic growth.

Friday, the US major stock market indexes finished at: DJIA -76.22 at 21674.51, NAS Comp -5.39 at 6216.51, S&P 500 -4.46 at 2425.51

Volume: Trade on the NYSE came in at above the weekly average at 925-M/shares exchanged

  • NAS Comp +15.5% YTD
  • DJIA +9.7% YTD
  • S&P 500 +8.3% YTD
  • Russell 2000 +0.1% YTD
HeffX-LTN Analysis for DIA: Overall Short Intermediate Long
Bullish (0.25) Neutral (0.23) Neutral (0.06) Bullish (0.46)
HeffX-LTN Analysis for SPY: Overall Short Intermediate Long
Neutral (-0.17) Neutral (-0.08) Neutral (-0.21) Neutral (-0.21)
HeffX-LTN Analysis for QQQ: Overall Short Intermediate Long
Bullish (0.26) Neutral (-0.04) Neutral (0.21) Very Bullish (0.62)
HeffX-LTN Analysis for VXX: Overall Short Intermediate Long
Neutral (-0.09) Neutral (0.03) Neutral (0.02) Bearish (-0.33)

Have a terrific weekend

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Paul Ebeling

Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.

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