The Sinister Forces of Market Relativism

Up through roughly 4:45am ET Thursday morning, markets were clearly oversensitive yet unruffled – and, it appeared financial and commodity markets were obliged to bury themselves behind the bulwark after Wednesday’s earth-shattering barrage.

In the early going, European stock markets mustered a valiant attempt to stay flattish – encouraged by the late Wednesday U.S. equity surge – however, news of Sovereign bonds, precariousness of the Greek government, mixed with another bout of fatalism has spilled over to the periphery causing shock waves reminiscent of “pre-bumblebee” days. Subsequently, most European major indices went into free fall mode registering 2%+ losses. And, in the time it takes to make a pot of coffee, S&P 500 December e-mini futures followed suit, shedding 20 points to a low of 1816.50.

The Multi-bow Derecho Market

A long dark economic cloud cover has been forming for a while and is thick and stationary. Economic data out of Europe has proven dull and dreary for weeks, Japan’s economy is once again facing contractionary forces as its recent consumption tax takes a toll on domestic demand, and China struggles to grow from its very lofty base. Above the thick layer of daily data, we are regularly reminded of disinflationary fears, the alleged commodity collapse, US dollar strength, and Fed tapering turned to tightening just around the turnpike. To top things off, markets recently have been prompted to agonize over the many geopolitical obstacles surrounding us.

Is this a Market of Hypochondriacs or Simpletons?

One of the primary financial market trademarks in 2013 was equities rallied fast and furiously well before the data said so. Contrary to popular belief, consensus largely missed the 2013 rally as buying seemed a bald-faced act of audacity mingled with unmitigated gall. This year was different in that any trader or portfolio manager judged by a calendar (99% of them) could simply not afford to underperform the benchmarks two years in a row. Add on top of that supportive economic data and, what you have is the start of what has been coined, “the most hated market rally ever.”

Consensus was markedly weak and conviction-less throughout 2014 – chasing every major post-dip run up –  noticeably so in early February, mid-April, and early August.  The new found trick of “begrudgingly buying every dip,” was promptly and repeatedly rewarded as the S&P 500 rallied from 1848.00 to 2020.00. However, as these things go, market forces had enough and finally paid back - in full - all the casual risk-takers and gamers by creating a few seemingly benign twists and turns followed by a tremendous multi-day market collapse.

Market Momentum Meets Weak Hands

There’s no denying that the risks in the current market narrative are real. What I’m proposing is they’ve been exacerbated or intensified by pure old-fashioned momentum; a force – like wind – that cannot be seen or well predicted but its force is powerful, undeniable, and its effects can only be seen in aftermath. Momentum causes excruciating market gyrations and extreme volatility – turning cowboys into cowards. It obliterates financial asset prices far worse and much farther than even the most pessimistic could ever imagine.  Momentum takes old news and recycles it back to bold-print, front page headlines. It turns lukewarm news into bad news; it turns bad news into the gravest. It makes good news disappear altogether.

Momentum aside: Lower prices + solid fundamentals = buying opportunity.