Most of the real learning during my flying years in the Air Force came during the debriefs. A 2-hour training sortie required a two to six hour debrief going over every detail of the flight and working backwards from the mission objective to mission prep. That missed target could be due to a simple switch position missed during pre-flight checks or some minor detail missed prior to stepping to the jet. I still do debriefs.
Why didn’t the pattern repeat?
We see a pattern of the market moving sideways as it worked off overbought conditions and at least tagging the lower price channel before advancing in a new rally. But this last rally saw the market move higher before either of those conditions were in place. Why?
Sometimes we never find out – the financial news does not really care. If the market moves higher they look around at current news events to pin the tail on some donkey and write or talk about it. If the market had moved down, they would find some other reason.
Does it matter? If you want to learn what really drives the market it does and debriefs take time.
So what caused that bump?
Two unrelated central bank actions pumped liquidity in the markets during this time and appear to be the most likely cause. I do not think the money flowed directly into the stock market, but when the tide comes in all boats rise.
What were those actions? The Fed needed to work the cash off its balance sheet by 16 March due to the debt ceiling issue. They had built up a large cash position and started working it off in February. By using cash instead of issuing more debt during this time, money flowing into the markets did not have new debt issuance from the Fed to invest in and it appears to have flowed to other investments.
The other action that added liquidity to the markets was the ECB Targeted Long Term Refinancing Operations (TLTRO) that occurred on 1 March. It was the last and by far the largest LTRO to date which is basically 0% interest loan to corporations for whatever suits them.
The SP500 peaked on 1 March and has been drifting lower ever since. Since we have seen the market front-run ECB QE programs as well as the Fed monetary interventions in the past, a 1 March peak should not surprise us. The liquidity tide is simply receding after a high tide.
Now contrast this information with what you have been reading on the financial news. The market is up because a A and now the market is down due to B. There are other factors that move the markets, but most of the news is just daily noise. Now that we know more about what caused that bump we do not follow the wrong narrative about the market’s recent action up or down that may affect our decision making.
What matters now
What matters for the rally going forward is whether the broader market indexes stay within their upward price channels. Most of the indexes still have some room for a pullback as the tide recedes. But more importantly we need to watch for a reversal in the trend of investors preferring to hold risk to preferring to shed risk.
We often get early signals from the most risk sensitive investors before our funds make big moves. The markets have been in a RISK-ON mode since the market bottomed on 11 February – the date the Fed made some unscheduled phone calls to the Bank of England and then the European Central Bank. What timing! Funny how that happens.
Today with the Fed concerned about “over valued” markets and in a monetary tightening mode, we are in the opposite situation from the market bottom. The trend remains our friend even if we are moving sideways within the price channel. But my view is the market will revert to RISK-OFF and pullback this summer/fall and I want to miss it.
We are getting ready to follow our seasonal signals and reduce exposure to the markets for the historically unfavorable season for equities (summer/fall). We will be making sure all our switches are in the correct position. In other words, invest and allocated smart for the summer. If we get that reversal to RISK-OFF over the summer our members will know.
You can join us for our seasonal signals and investor alerts for risk-off indications. If you view our levels of service you will see we offer a very low cost option for those who are not interested in all the extras. And don’t forget to view our results page to understand why we adopted the simple strategy that we love.
Most of my writing these days is found on our website under Market Commentary for members and in our Current Situation Reports. I hope you will join us in our ongoing debrief so we can learn together.