Find out how. Let's Talk

How the Market Works

Market Crash:  More Bull-Oney

Posted by kdadmin on September 17th, 2015.

Market Crash:  More Bull-Oney

Nine days ago, in my first Market Bull-Oney post, I talked about what mean regression (two steps forward, one step back) meant and how it was useful in volatile markets. As if to give me a gold star, and underscore that point, the stock market has EXACTLY settled at the top of the 50% mean regression range we calculated in that post.

This is good and bad …

It’s good because it means that I can do math. Which is kind of important in my job.

It’s bad because it doesn’t really tell us anything about market sentiment. It’s a “Meh” vote from the broader market. Which forces us to look at ancillary data points in our quest to defend our portfolios while still preying on the sick and the weak … The most curious of which are:

  1. The options skew index (a measurement of option traders perceivedrisk of a major decline) is at 140 (on a scale from 100 to 150). It’s only been there about 14 times in history since 1990. This means that option traders are much more bearish than the market as a whole. The current sharply declining call option prices on flat stock prices would bear this out.
  2. Lower than hoped inflation was touted as a “good thing” for stocks a couple of days ago; with the rationalization that the Fed therefore wouldn’t raise rates today. Low inflation, and DEFLATION, is NOT a good thing. It crippled Japan’s economy and markets for over 15 years.
  3. The SPY’sPE ratio is still near record highs. What do the bulls think is going to happen? If the Fed doesn’t raise rates, WHY, exactly, would stocks go up substantially? The Fed is almost certainly going to raise rates this year (within three months) if they don’t do it today. The recent high marked a PE of 27. That puts the yield on stocks squarely within the reach of the yields on bonds. Now, why would you take the risk of loss in stocks when you could get a similar return in a much safer bond?

The only reason any of this matters to you is because it frames our entry point. It informs our decision about when to get back in the market, and how. We can’t sit in cash forever, because (low) inflation will get us, and there ARE opportunities to be had.

In other words, in three hours, at 2:00pm Eastern time, we’ll have our answer about the Federal Funds Rate announcement. Shortly after that we’ll see what sort of carnage it, and Janet Yellen’s press conference, have wreaked on the market. Only then will our next move become obvious.

In other other words, Excellent

Meet

Minneapolis, MN | St. Croix, USVI
(763) 577-1900