In an early morning comment, Citigroup was painfully honest about how traders enter today's session: "how the market moves today is really anyone’s guess. As the end of 2018 approaches, price action is becoming ever more bewildering."
Those two sentences perfectly encapsulate trader confusion this morning following 3 weeks of violent, historic moves that have left analysts, portfolio managers, strategists and ordinary mom and pop traders dazed, confused and stunned, with feeling as if they are "watching Pulp Fiction."
It’s “completely bizarre,” says Stephen Innes, head of trading for Asia Pacific at Oanda Corp. “It’s incredible just how harmful markets veer when sentiment slides."
While December was shaping up as the worst month for markets since the Great Depression until this Wednesday, the late arrival of the biggest ever pension fund rebalancing out of bonds and into stocks, sent markets screaming higher, stopping out countless limit orders and sending momentum-chasers reeling yet again, just as CTAs and other trend followers had turned "max short" every single major market...
... ramming their shorts and forcing yet another panic scramble.
Yet while nobody can agree on whether the action of the past few weeks is a signal to buy the dip, or a bear market rally, there’s one idea traders and investors can agree on according to Bloomberg: these are not usual times, especially for this time of year.
Commenting on the market insanity observed in past week, Stephen Innes, head of trading for Asia Pacific at Oanda said "it’s "completely bizarre," adding that "it’s incredible just how harmful markets veer when sentiment slides."
He is right: as we noted yesterday, the furious rally of the past two days may have done more harm than good as the "inexplicable" ramp has further hurt the most important commodity in the market: confidence, not confidence that stocks eventually go higher, but confidence in the integrity of capital allocation decisions.
Understandably, Innes has been taking profit on winning investments while snapping up blue-chip stocks whose valuations have dropped in the December sell-off, but for the most part he’s keeping his money on the sidelines. And, like many other traders in Asia, he’s been watching events play out in the U.S. from a distance, amazed at what he sees.
"I’m on the golf course," Innes says about how he’s responding. "As I have been most of the week."
Others also focused on just how different the end of year trading has been in 2018: Mark Matthews, head of Asia research at Bank Julius Baer in Singapore, said two “golden rules” have been broken. First, since 1945, December has produced the highest average gains of any month but this month is set to be the worst of the year. Second, since the 1970s, the S&P 500 has never slumped when earnings growth was more than 10 percent, according to him. But as a long-only investor, Matthews is planning to ride it out.
Still, despite the unprecedented moves, he remains confident that markets will emerge unscathed on the other side, and resume their levitation: “I remain invested through good times and bad,” he says. “Not being invested, over the long term, is like betting against the house in a casino.”
"It’s certainly unusual for this time of year," said Sean Fenton, portfolio manager at Tribeca Investment Partners, commenting on the market moves. “You see people take holidays and sort of shutting up shop, not surges in volatility.”
Fenton, like Matthews, is also hunkering down, betting that the U.S. economy is robust and the sell-off will bottom out. For this time of year, he’s “probably a little more focused on the market,” he says, but that doesn’t mean he’s got reasons for the moves. “Trying to explain short-term movements in the markets is an exercise in futility because generally it’s pretty random,” he says.
While most are waiting on the sidelines until the volatility tempest that has sent the 10-day vol on the S&P to the highest level since 2015...
... passes, others are bravely jumping into the maelstrom and waving it in:
“The magnitude of the increase in volatility over the past week was not expected,” said William Davies, head of global equities at Columbia Threadneedle. “I don’t believe it’s easy to predict market movements over the short term but if we see attractive companies’ value decline as a result of the market sell-off, it makes sense to take advantage and add at the lower prices.”
That said, most traders increasingly refuse to participate in an algo-dominated, illiquid market which nobody has any idea how to trade:
“We have never seen the U.S. market dropping at this magnitude and speed for the past eight to nine years,” says Margaret Yang, a market analyst at CMC Markets in Singapore. Yang’s solution is to go overweight cash for the time being. She expects the volatility to continue until year-end, until investors get a clearer picture from the holiday earnings season.
The real question, however, is what happens after this week - and year - are over: is this just year-end jitters including fund rebalancing and tax-loss selling, or is this a more ominous, if simple, bear market rally?
Longer-term, she doesn’t know if this will prove a “healthy correction” as investors find the S&P 500’s low valuations attractive and earnings come in above expectations, or if it will mark the end of the 10-year bull run. Either way, one thing’s for certain: “The recent movement is definitely unusual,” she says.
Lee Dong-jun, global investment team at DB Asset Management in Seoul, agrees. He, too, has also been staying as clear of the market as possible this week.
"This isn’t normal," Lee said of the market turbulence. “Investor sentiment is very bad.” And while “we don’t think this kind of huge volatility will persist,” he says, “our thinking is that it’s not a good idea to actively trade stocks in a market like this."