Wednesday, February 21, 2018

Uncertainty Is A Certainty

Just a couple quick thoughts to help you put today's action -- the Dow first rallying 300, then declining 460 presumably in response to the release of the Fed's January meeting minutes -- into perspective.

1. Recall that we've been suggesting herein that if we've indeed seen a near-term bottom, recent volatility would go down as one of the weakest corrections in market history, and, therefore, to not hold your breath. I.e., finding a lower low from here would be totally consistent with the preponderance of past bull market corrections.

2. A quote from Gabriel Burstein's insightful Macro Trading and Investment Strategies where he touches on the interest rate inspired 1994 rough patch (at a time when the macro setup was constructive, as it is today) during (midway through) the longest bull market in history. This should be instructive for the myopic investor/trader who's perhaps a bit bewildered by recent market action: (emphasis mine)...
If the markets are nontrending due to, for example, the surprise and uncertainty created by the U.S. Federal Reserve (the Fed) raising rates in 1994 or due to the unpredictability of the unfolding of the Asian crisis in 1997 and 1998, it becomes very difficult to implement directional strategies because, even if the macroeconomic trend is correctly assessed, the lack of immediate technical trend (market direction), the lack of any pattern, and the broken normal relations between assets lead to large swings...."
Bottom line: Periodic uncertainty (the lack of any short or intermediate-term pattern, with large price swings) is forever a certainty in the stock market.

I'll have more for you on the historical relationship between stocks and bonds when I return next week...

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