The Market Has Devolved Into Trench Warfare
Looking at the market of the past few weeks, it reminds me of trench warfare. A lot of boredom, followed by brief outbursts of carnage, and in the end, nothing changes.
Since August 3rd, the S&P has been stuck between 1391 and 1418. In the meantime, volumes have eroded. Since July 31st and the Knight fiasco, S&P mini volumes have dropped significantly and seem set to have one of the slowest full days of the year.
Maybe it is because it is August, but that excuse just doesn’t seem right. We have had busy Augusts in the past. Heck, just last year we had great volatility in the month. So it isn’t just that.
There is no shortage of news. We have had summits in the past, and Fed meetings, but typically we get volatility leading up to them. Markets have moved on every single utterance by any European politician or central banker. Now Merkel could stand up naked on the Parthenon shouting that Greece should go, and the markets might sell off a couple of points. Draghi wheeling around a printer might cause a bigger reaction, but even then, I’m not sure.
That may be an exaggeration, but what has happened?
The Threat of Future Promises to Do What They Want to Do but Can’t Today
The market would run up on expectations and then sell off after the hopes were dashed. Only to build back up on renewed hopes, once again to be scuttled by inaction. Is it possible these momentum chasers have all been whipsawed so much that they are out of business. That they were constantly buying into the rallies too late and getting stopped for a loss, and having the same at the bottom?
Or is it simply that the central bankers have learned that they can promise future action, and keep the markets happy, so long as they continue to promise future actions?
Maybe it is some combination of the two, but relying on promises of future actions is dangerous.
Delays do Matter
In the short term, the markets can be propped up by talk of potential action. The problem is that does nothing for the real economy. The Spanish stock market can remain buoyant, apparently indefinitely on hopes of plans, yet the economy deteriorates. At some point, that money is necessary. It is crucial to fix banks in particular. While the banking sector remains a mess, it will be difficult for the economies to turn around. While people may buy stocks on anticipation of some future plan, businesspeople do NOT commit to new plans based on some politician’s vague statements.
I am growing concerned that both Europe and to a lesser extent, the US, will rely on jawboning for too long. The jawboning may be appreciated by the stock market, but that is a poor measure of success. The stock market has less and less to do with the real economy, it just happens to be easy to see and to react quickly. Politicians, and market analysts who look at the stock market and get comfortable that policies are working because stock prices are up, are being mislead. They need to look at the underlying economy, and until money is actually delivered, until banks are dealt with – some killed off and some fixed up enough to provide new loans – all the talk of austerity and bond purchases is largely useless.
Real people who run businesses must make decisions to grow. Real people need to buy real things. That only comes as the economy mends. Stocks can be bought for other reasons in the short term, but over time the two converge.
So I’m looking for real implementation, and think the game of just being able to drive markets higher on promises of future help is over.
My positioning hasn’t really changed from yesterday. I remain small net short, being long or flat assets I like, and flat or short assets I don’t. I am looking to add small amounts of risk, as I do think Europe is finally getting ready to act, but I will be cautious.
I will come out with our Jackson Hole preview tomorrow. In the meantime it looks like we are set for another day of trench warfare, and people starting to react to 3 point moves in the S&P 500 as though it is a meaningful trend, and not just an actual order in a system with awful liquidity.