Re-calibrating expectations for profitability; for monetary policy; and of course for 'corporate earnings', has dominated the ongoing rationalizations or interpretations, of what's going on; what's happened; or what it means.

 (We all know what led up to the market break; the selling in FANG as well as others that's gone on for weeks and in some cases months; the tighter monetary policy and the ridiculous assertion by President Trump tonight, that the Fed is 'crazy'; as well as way a strong Dow and S&P masked lots of underlying distribution for months. Nevertheless, aside forecasting this, with the 'Crash Alert Conditions Prevail' warning just a week ago, and not from hubris, let's review known prospects; as well as unknown risks.) 

Today's 'wall-to-wall' financial media reflections are certainly a good effort at explaining what 'is' going on (as if they had no idea before?); generally focused on the Fed; focused on most recent (or current) defensive action; and less so on several other factors, that we believe dominate the topic of 'what's really afoot'.  

Those realities that are often ignored include: a) the Federal Reserve very clearly shifting monetary policy to 'snugging-up' rates and offloading their Balance Sheet, without comparable quantifiable replacement (tightening reduces liquidity regardless of rates especially as paper matures); b) the recent spike by rates that was (on a short-term basis) more than they had expected even from the last Fed Funds rate hike (hence debate about the concern regarding China simply holding but not being a participant in the 10-year Auction); c) the 'trade & tariff' issues, which to a degree override some other concerns, and d) the soft-pedaling of the upcoming Midterms, which risk shifting virtually everything with respect to projections regarding another growth leg-up.  

But there's more: the Auction wasn't great (sort of a C+ or B-), but 'paper' was absorbed in Wed.'s 3 and 10 year Auctions. Growth is running above forecasts (by normal measures); justifying the 'normalization' by the Fed. If (as we contend) Housing, Autos and more are actually sluggish; well that's why we've called for a reflection on whether an 'inventory build' because of 'supply chain' concerns is also driving a perception of business activity at a higher level than reality says it is (to wit: pre-holiday hoarding of inventory without reliance on 'just in time' deliveries due to China tariffs and a desire to maximize profits on what they can through the holiday season.  

Liquidation

No, not just the 'smart money selling' that I contended is a factor on rallies all year (starting from our late January parabolic blow-off of course; but as persisted with more selling on ensuing 'Rinse & Repeat' thrusts, to give an illusion of strength (masking distribution) as facts showed occurred.  

It goes beyond that. We contended that 'buybacks' would dry-up with rates firming (because most such programs were based on bond offerings), and we believed as history bore-out that historic relative 'insider-selling' was in fact occurring into strength (as executives took advantage of the buybacks they engineered for additional indirect executive compensation). I pointed out Facebook, Apple, or particularly Google and Amazon as such risky stocks; while warning particularly that Netflix was vulnerable to a decline and to the newly re-imagined AT&T (which incidentally will introduce a new radically differentiated HBO service next year) licking at their heels. 

But there's another kind of liquidation which contributes to not just a buyer exiting; but that same buyer reversing direction and selling. That's China. With China's serious Debt concerns; many Chinese investors urgently did move capital 'out' of China; and bought American equities (not Treasuries only as some tend to think). They likely were liquidating those holdings so as to meet home-front obligations. Likely contributed to Yuan buying too.  

Finally, the market did not respond favorably after the 10-year absorption; and that (as I contended on in a midday report) would support a view that there is more at play here than merely Fed and rate worries. For sure. 

In sum: the basic props under this extended market were giving way since January; and that's how we'd forewarned building personal cash and being ready for a more visible correction by Senior Averages. Rotational selling of course took many small caps and later momentum favorites (FANG+) to lower levels progressively; while the rotation into conventional industrial types was (as projected) insufficient to offset the selling in mo-mo stocks.

Fiscal drag from tax cuts; trade war (or the opposite); or Blue Wave. These are all concerns I'll expand on more; and have already. I really don't see a need to do much here, as investors are well-prepared for this decline; or a possible little 'flush', preceding a snap-back that won't be sustainable. My work suggests that if rates 'do' firm much more it will start to eat into 'cash flow' for many companies next year; so don't think of 'pie in the sky' ideas or serious buybacks anything like the frosting on the cake that preceded.  

Arguments are a bit crazed, regarding whether this is the 'start of something bigger'. It's 'continuation', with a catch-down by everything that masked the long distribution. So sure it can rebound; the unknowns remain about China (though this may push a deal sooner than later); and Midterms (can impact that too); as well as put the kibosh on the idea that we had giddy steaming growth. We picked up a bit on that long ago; the IMF did the other day; and exactly a week ago we issued the 'Crash Alert'? conditions remark; seeing underlying selling that was getting nasty, concurrent with new Dow and S&P highs. You won't be seeing those levels for awhile, even with snap-backs.  

Futures are crashing overnight; overseas and the DJIA as well as S&P; another phase. It might flush and set-up a bounce; but the risk is an algo-computer-driven flat-out Crash, you know. In a sense too much discussion in the media about buying bargains or nibbling; did they forget the backdrop of this market? It's not been structured like a normal market; hence more risk.