Warning tremor or just another blip?

Thursday, 11th October 2018

Warning tremor or just another blip?

Here at Money Truths we’ve been warning of trouble ahead for stock market investors for some time….

We were at it in March. And again, in September….

We’ve said it. And we’ve kept on saying it. And, so far, we have been wrong – consistently so. Our timing has been out. But sooner or later we know we are going to be proved right….

We will take no credit for it when that day comes. A broken clock tells the time correctly twice a day, as they say….

But the day is coming. Of that you can be certain….

And the signs suggest it is fast approaching.…

  • Global stock slump….

The bull market in stocks has run on for close to a decade. It has been easy for investors to make money. Even the worst and the weakest of the breed have done well. It’s been as easy as throwing darts….

The bull market has been running up a head of steam for so long, we suspect many investors have forgotten that markets can fall too. Often just as swiftly – quicker even – than they rise….

For such investors, the last few days will have come as a jolt. A reminder that what goes up is prone to come back down….

US stocks led the way late last week – falling in value just a few days on from registering new highs and breaking new records. A deepening sell-off of US treasuries provided the catalyst and the impetus….

Yesterday, US stock continued to tumble. The Dow Jones Industrial Average fell 831.83 points – the third largest single-day loss in history….

For perspective, the two days that beat yesterday’s drop came during the 2008 financial crisis and after the 9/11 terrorist attacks in 2001….

Falling stock values have not been confined to the US. Stocks are falling globally….

Earlier this week, the FTSE 100 hit a 6-month low – falling more than 1% in value. The FTSE All Share Index also rides along at its lowest level since April….

German stocks fell. French stocks fell. Italian stocks fell. The losses were Europe-wide. The pan-European STOXX 600 index fell 1.1% to its lowest level in 6-months….

The tremors were felt in Asian markets too – where stock prices also slumped….

  • Another opportunity to buy the dip?

We have been here – or somewhere just like it – before, of course….

Stock prices took a dive back in February – igniting fears that the end of the long-lived bull-run was nigh….

That proved to be a false alarm. Or just a warning tremor. Markets and prices recovered – and went on to set new highs in the summer….

The bulls who held their nerve – and their holdings – were rewarded with fresh gains….

The gung-ho merchants/far-sighted market callers (go with how you see it) who bought the dip went on to hit another jackpot – and sniggered openly at bearish commentators like yours truly who lack their enduring faith….

Stand-by for another round of dip-buyers advising more of the same. This ride ain’t over yet they will tell you. This market has springs attached to its heels. It’s headed back up.

You can rely on bounce-back-ability to produce another round of gains in the weeks and the months ahead….

And they might be right. They have been right before. They’ve been right at every turn and every short-lived correction across the last decade….

But they only need be wrong once. And the gains they have garnered can be blown away in the strong winds – like so much chaff….

  • Strong winds building up….

And potentially there are strong winds ahead. Winds of the gale-force variety. Probably even fiercer. Winds strong enough to blow any boat – and stock portfolio – way off course….

They’re not blowing as hard as they might. Right now, these things are merely gearing up out at sea. The full force is yet to be generated and unleashed. But by the time these winds hit land they could be very destructive – reducing all before them to splinter-wood….

Worries are growing by the day that the Donald-Trump-inspired trade war against the Chinese could have more damaging effects and more far-reaching implications than previously thought….

Billions of dollars-worth of tariffs that the US has slapped on Chinese goods could retard Chinese growth. Chinese indexes are already down 18% on the year. An ongoing trade war could bite markets even harder. And the effect will be felt globally….

Global stock losses over the last few days are a mere foretaste of what might be down the road….

The International Monetary Fund (IMF) warned just yesterday that a continuing trade war could ‘significantly harm global growth’. On Monday, the IMF downgraded world growth forecasts for next year….

Add to this the possibility of a disorderly Brexit that could disrupt money markets and trade….

Add to this Italy’s continuing debt problems that might ultimately lead to Italy abandoning the Euro….

Add to this a high-flying dollar that increases borrowing costs in emerging markets and makes debt-defaults an ever increasing likelihood….

And you just might feel a bit of a chill on that gusting breeze….

  • So where is investor sentiment?

You might recall our old friend, the CBOE Volatility Index or VIX chart. We have referred to it previously….

Some people call it the Fear Index. You might also think of it as the Complacency Index….

You might recall that the Index measures how volatile investors expect the US S&P 500 index to be across the next 30-day-period….

If the VIX measurement is high, that can be taken as a sign that investors are fearful. When the VIX measurement is low, that is a signal that the market is complacent….

Right now, the VIX reading of 22.9 represents a 3-month high. Investors are more fearful this week than they have been at any time this summer….

Not as fearful as they were back in February when the VIX reading hit 37.3. But more fearful than they were….

That’s to be expected, of course. Losses tend to do that to investors. They act like a cold shower and damp-down exuberance and expectation….

But this week’s losses are still fresh in the mind. The nerves are still jangling. There could be some over-reaction to a short-term sting. That must be factored into the current VIX reading….

The interesting thing will be to watch where the VIX reading goes from here as the dust settles (if indeed it does settle!)….

Will investors come to understand this week’s market action as a warning tremor that puts them on guard going forward?

Or will they swiftly come to see it – as they did in February – as just another blip on a journey that only goes one way long-term – up?

The VIX reading will give us at least some indication. It’s worth keeping an eye on….

That’s how it looks from here….

All the best,

Money Truths