Michael Santoli notes that the mechanics of certain institutional investment strategies will force the unwinding of positions, likely exacerbating Friday's selloff early in the week. Which of course has nothing to do with the macro setup for the economy and the market (discussed in the video) going forward. He also stresses that Markets rarely bottom on a Friday, and points out the very normal nature (historically speaking) of last Friday's dip:
Last week we posted two reminders that we've been preparing you readers for a marked pickup in volatility going forward (here and here in case you missed them). And here again is from a post last week where I shared notes from my 1/31 market journal entry:
- Friday's 665 drop in the Dow was a 2.5 percent pullback. There have been 599 one-day drops of that size in the Dow's history.
- This is how a pullback feels — the sudden urgency of sellers pressuring the indexes through levels that were taken with ease on the way up.
- Markets rarely bottom on a Friday, so expect at least another selling wave.
- Watch for mechanical or forced selling by institutions trapped in bets on continued low volatility or assuming negative correlation between stock and bond prices.
Basically, the stock market is going to have to come to terms with higher interest rates; a factor that will call present valuation levels into serious question. However, given where we appear to be in the economic cycle, where the Fed appears to be in the tightening cycle, as well as the results of our ongoing technical and fundamental analyses, history suggests (no guarantees mind you) that the present bull market in stocks has a ways to run. If so, it’ll be the “climbing a wall of worry” scenario, it’ll just be that the worry will be the market’s valuation level, which – despite the attention it gets – is historically the absolute worst market-timing indicator. Regardless, I have no doubt that it’ll be a rocky climb…
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