If you happen to see the action in the markets this morning you may have some concerns. Understandably it can be quite shocking to a sudden drop in the market but I am going to try to explain what I see happening and continue to remind everyone to take a long term approach.
Historically a 10% (or thereabouts) correction in the market is not unheard of and is quite normal. This market just hasn’t had one since the summer of 2012 so it’s easy to get complacent. This latest run was getting long in the tooth and to say we were overdue for a correction is an understatement. What I think we see happening this morning is capitulation selling. There are a large number of Wall St. firms and hedge funds that are conducting margin calls in which they are required to sell customer positions to raise cash to keep accounts within the margin of risk that is required for margin accounts. This will also cause a mini panic and some individual investors will join the selling today which will add to the correction.
The fast money crowd of hedge funds and swing traders begin selling and then the margin accounts are required to follow suit until all the margin calls have been met. Once this forced selling is done the downside pressure should calm down and we will probably see a slow rise in the indexes again. The intermediate term indicators reflect a very oversold situation and market sentiment readings that are very bearish which historically is contrarian, meaning very soon we should start to see buying again.
In order for this type of selling to continue the slow, big money institutions will need good fundamental reasons to join the selling and right now those do not exist. A recent tongue in cheek article in Fortune magazine highlights some of the positive aspects of our current economy http://fortune.com/2015/08/20/american-economy-worries/. Here are the highlights:
– Falling oil prices means the cost of producing and transporting goods is cheap right now. The price at the pump is getting down to decade lows. While this isn’t great for oil stocks, it helps consumer budgets. This situation may also be temporary once the oil wars come to an end which looks like that could happen this fall.
– US corporations have extremely large cash positions on their balance sheets which they are looking to do something with, i.e. expansion, dividends.
– Wage pressure for skilled workers is going up which will lead to increased consumption (though that may be only reflected in increased spending for health insurance premiums – just kidding, I think).
– The housing market which had been flat since 2013 has grown this year with building permits going up nationwide by 30%.
I know there are some negatives in this economy as well, such as the glut of unskilled workers, but so far, the positives are outweighing the negatives. Even gold buying is not reflecting any major panic in the markets right now. There has been more buying of the shiny metal the last couple of weeks, but overall, gold still remains steeped in a bear market.
As I write this, a quick check of the markets shows that the major indexes have recovered more than half of their opening drop with the first two hours. That doesn’t mean they can’t or won’t drop again in the short term as I expect increased volatility, but keep a long term perspective and don’t join the panic.
Recent Comments