It is hard driving forwards looking through the rear-view mirror but we are being forced to do this in a market that has severely changed in 2018.
Something cracked in February and now we are dealing in the market equivalent of wild waters.
These charts say it all.
I think we can agree that charts at least tell you about the past, so this snap shot of the DOW clearly tells us that the calm days have ended and new times are in effect:
Here is the tech powerhouse Nasdaq chart:
Then there is the somewhat amazing UK FTSE index chart:
These are all 1 year charts. It great times for short term traders but a frightening development for long bull investors.
So my conjecture is that the Federal Reserves reverse-QE kicking in, is the driving force behind this change in the market. QE means market up and reverse QE should mean market down.
So what we are seeing is the effect of reverse-QE.
This is an updated chart of Reverse-QE versus the DOW.
This is weekly from 15/11/17 to 17/5/18
The interesting thing is that according to these numbers in rough terms the last 4 weeks of net reverse-QE equals no net move in the DOW. That nett number is $25 billion of reverse QE. That is suggesting that if the Fed reverse QE’s at this rate, $25 billion, every month, the DOW is going sideways. More than that it will go down, less reverse-QE it will go up. In 20 weeks the Fed has reverse out $85 billion from its balance sheet for a net loss in the DOW of 183 points.
That’s pretty good.
So if what we are seeing is the effects of reverse-QE we can imply the following.
The Fed is closely managing the process
$20-$30 billion a month of reverse-QE is all the market can handle
So the scenarios are:
The Fed manages the reverse-QE and holds the market at a level, as in the post dotcom crash moderating the pace to suit asset values.
The Fed ramps reverse-QE to $80 a month by autumn and crashes the market
The Fed gives up on reverse-QE and higher interest rates and lets the market rip.
So what to do?
In scenario
the way to go is to buy the dips and sell the tops in a risk off manner.
If you believe the Fed is going to stick to its plan and ramp to $80bn a month, the you should be as much in cash as you can bear
If you think the Fed will fold on rising interest rates, you should seek a psychiatrist. Of course it’s a mad world and this is a mad market, so you could be on to something.
It is my opinion that this is now a very technical market, changing gear on the basis of central bank policy. This makes it extremely dangerous because it pivots on actions of a small number of fallible people rather than on the sum of outcomes of a huge cohort of participants creating a bell curve of market forces.
This is why the charts have gone into spasm. These wild swings are a measure of risk and risk is very high indeed.
The market is walking a tightrope and it is wobbling.