Markets Now Await Fed Decision
Is the Fed’s interest rate increase pegged for next Wednesday already in stock prices? Or are investors worried that something else is afoot given recent equity sector weakness?
Stocks Thursday rallied modestly and unevenly which relieved some short-term oversold conditions.
Leading the way higher were beaten down energy shares (despite decline energy prices), healthcare and biotech names.
Experienced pundit John Mauldin recently wrote “The Apex of Stupidity” which is published below:
“In the last week, we have reached what is surely the apex of this stupidity. A bunch of algo traders programmed their computers expecting “Derivative Draghi” to be extremely dovish, as any proper Italian central banker should be. I am not sure I understand why, but some traders obviously decided that he had not been dovish enough. European stock markets plunged by -4%, while the euro went up by roughly the same amount in the space of a few minutes. What that means is simple: value in the financial markets is no longer a function of the discounted cash flow of future income, but instead is determined by the amount of money the central bank is printing, and especially by how much it intends to print in the coming months. So we are in a world where I can postulate the following economic and financial law: variations in the value of assets are a function of the expected changes in the quantity of money printed by the central bank. To put it in a format that today’s economists understand:
? (VA) = x *? (M),
where VA is the value of assets and M is the monetary increase.
What we are seeing is in fact in one of the stupidest possible applications of the Cantillon effect, whereby those who are closest to the money-printing, i.e. the financial markets, are the biggest beneficiaries of that printing. This is exactly what happened in 1720 in France during the Mississippi Bubble inflated by John Law. The end results were not pretty.
What I find most hilarious is that some serious commentators have been pontificating at considerable length about what the market’s participants think. These days, some 70% of market orders are generated by computers, and many of the rest by indexers. And computers do not think. They simply calculate at light speed, which allows them to react to short term movements in market prices as they were programmed to do. And since they are all programmed the same way, the result is some big short term market moves. In essence, these computers act as machines that allow market participants to stop thinking. As a result, I cannot remember a time when less thinking has ever been done in the financial markets, which is why I find today’s financial markets infinitely boring.
We are swimming in an ocean of ignorance, just like France in 1720. It seems all the painful economics lessons learned over the last 300 years have been forgotten. I suppose that means we will just have to wait for another Adam Smith to appear. La vie est un éternel recommencement…”
You can take issue with his thinking but you’d be doing so at your peril.
I think we may be in a slow trading environment until Wednesday’s Fed Meeting.
If so, I’ll be posting much less until then.
Market sectors moving higher included: Dow (DIA), Biotech (IBB), Healthcare (XLV), Energy (XLE), Oil & Gas Exploration (XOP), Retail (XRT), Homebuilders (ITB), Transports (IYT), Metals & Mining (XME), Japan (EWJ), India (EPI), Dollar (UUP) and not much else.
Market sectors moving lower included: REITs (IYR), Utilities (XLU), Materials (XLB), Energy MLPs (AMJ), Gold Stocks (GDX), High Yield Bonds (HYG), Europe (IEV), Spain (EWP), China (FXI), Brazil (EWZ), Emerging Markets (EEM), South America (ILF), Crude Oil (USO), Euro (FXE), Natural Gas (UNG) and many more.
The top ETF daily market movers by percentage change in volume whether rising or falling is available daily.
Volume moderated substantially from Wednesday’s sell-off and breadth per the WSJ was mixed overall.
We’ll have significant data from Retail Sales, Business Inventories, Consumer Sentiment, Baker-Hughes Rig Count and PPI Friday.
These could be market movers causing me to make another commentary.
Let’s see what happens.
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