Andy’s Notes: We continue to be bombarded with questions regarding stock market action over the past few weeks. Is just a long, long overdue correction, is it the start of a bear market, is it 2008 all over again, has the US’ ballooning external debt finally hit a critical limit? Opinions vary greatly on the subject, and we’d like to add one more to the growing pool of observations. Everyone knows that interest rates have been artificially low since 2007 – at a minimum. There is also a recognized trend that when people dump bonds, the money tends to drift towards stocks and vice versa. Blowing up a huge stock bubble is what we believe to be designed to give lots and lots of maneuvering room to drive money into bonds to keep interest rates in check. The fact that the not-so-USFed monetized the Dow, S&P500, NASDAQ, etc is perceived to be much different than monetizing the bond market – or aka monetizing debt. Monetizing debt is perceived as a last-ditch, inflationary move with negative connotations and consequences where monetizing the stock market or some other asset class is viewed in a completely different manner.

So, we believe, the ‘fed’ monetized the US stock markets knowing that deals are being cut almost weekly to exclude the dollar from international transactions. The resulting decreased demand for the dollar would result (and has) in bond sales. Anytime such sales gain momentum, the plunge team can trigger an equity selloff in an attempt to drive the money into bonds, thus keeping interest rates in check. The only probably is that (at least so far) it is taking an awful lot of equity market selloff just to pause the rise in interest rates. Plus the ‘fed’ is tightening at the short end via the FFR. They do this by pulling money out of the system through various means. The move is easily telegraphed – the ‘fed’ is trying to keep the dollar appealing at a time when there is a bridgehead of negative sentiment being built against the greenback. The problem is the USEconomy is hooked on low rates. How high can interest rates go before the ‘fed’ starts breaking the good China. Pun intended. The next 6-24 months should be awfully interesting as the juggling act becomes more and more difficult and therefore the house of cards that juggling supports becomes more and more unstable.

Spooked by fears about peak profits, the slowing Chinese economy, Trump’s tariffs, ongoing political turmoil in the UK and Italy, and ongoing jitters among systematic, vol-targeting funds, on Tuesday the S&P tumbled as much as 2.34% in early trade – a drop which almost wiped out all gains for the year – before paring losses and closing only -0.55% lower. The drop pushed the S&P’s decline from its September highs to 6.5%, two-thirds on the way to a technical correction.

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However, the relative stability at the index level has masked turmoil among individual names where some 1,256 stocks hit 52-week lows, while only 21 establishing new highs.

More concerning, and a testament to the tech-heavy leadership of the market concentrated amid just a handful of stocks, is that while the broader S&P 500 index has yet to enter a correction, more than three-quarters of all S&P stocks – or 353 – have already fallen more than 10% from their highs. Worse, of those, more than half 179 have already fallen by 20% or more from their highs, entering a bear market.

The reason why the broader index has so far avoided a similar fate is because Apple, whose $1 trillion market value makes it by far the most heavily weighted stock within the S&P 500, has fallen only 4.6% from its October 3 record high. That has helped the S&P 500 itself stay out of correction territory.

Broken down by sector, the S&P 500 materials index – the closest proxy of Chinese economic growth – has fared the worst in October, leaving it down 19% from its 52-week highs, with the utilities index is the outperformer, down just 5 percent.

At the individual level, among the bottom 10 S&P 500 performers, are names likes Wynn Resorts and Western Digital, both highly exposed to China. Nektar Therapeutics and Newell Brands are also among the S&P 500’s worst performers

Taking a step back, despite its relative resilience, the S&P 500 is still on track for its worst month since August 2015, while most global equities are down for the year. North America is still the best performing region with 67% of the six countries having benchmark equities trading higher on the year in US dollar terms, according to Deutsche Bank. In EMEA, only 23% of countries are up, and only 6% of countries in the European Union (in USD). In South American (6 countries) and Asia (18), not a single country has a positive return in USD terms this year.

One day later, and despite the widespread call for an imminent market bounce, traders remain completely ambivalent as today’s market cash open action shows:

• Half of S&P 500 stocks rising, half falling
• 5 of 11 S&P 500 groups rising, 6 falling
• 15 DJIA stocks rising, 15 falling

Meanwhile, the Nasdaq has a more negative tone with decliners outpacing advancers. In other words, as Bloomberg’s Andrew Cinko writes, “there’s no follow through on either the upside or the downside after yesterday’s epic rebound. At this moment, he who hesitates isn’t lost, in fact, he’s got a lot of company as stock market pundits engage in verbal duel over where we go from here”.