Look Out Below, Halloween Edition
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As seen above, U.S. index-futures are off ~1%. The October rally is a blistering 13.7%, fueling traders’ hopes for a continuation into the end of Q4.
But Halloween looks to have begun early across the pond, as markets there have been frightened, , now that the euphoria over the Euro-Zone deal has worn off. Stocks dropped 2-3% in advance of a European meeting this week to explain just how the European Financial Stability Facility (EFSF) will fund an expanded bailout facility. It is noteworthy that Italian yields have spiked higher, as Credit Markets have not found the same reasons to celebrate that equity markets did last week. The Greeks remain angry at the Germans, whose High Court expressed doubts of a quick green-light for the euro bailout program. The countries of Europe are locked in a bad marriage. Bottom line: The Greek orderly default is now behind us, and now the hard part, finding the money to recapitalize banks across the EU, has ahead of us.
Beyond the EU zone, there are a few factors worth noting:
• Fund manager catch-up: The S&P500 is up a mere 2% YTD, and plenty of funds managers are still down for the year. Merrill Lynch notes that “Only 31% of active large cap mutual funds have beat the Russell 1000 so far this year, and equity long-short funds are down 17% year to date. There is some evidence that during years in which performance is subpar heading into the fourth quarter, an end of year “catch-up” beta rally is more likely.” (“Hail Marys” are more likely when trading OPM rather than your own).
• Valuation Attractive?: The key to valuation depends upon the probability of a recession driven earnings collapse. Thursday’s GDP report gave comfort to the bulls that a recession is less likely, and therefore stocks are cheap. (I suspect this calculus was what drove US stocks Thursday, and not Europe).
• Seasonality: October 2011 is the 10th best month for market performance since 1929. Following the prior top 10 rallies, momentum continued, with median 3-month returns about 6.3% (that is double the average 3-month return).
• VIX Collapse: CBOE Volatility Index futures for Q2 2012 plunged 8.7% since last Wednesday. That is the biggest drop on record, according to Bloomberg. During Thursday’s rally, VIX futures of all maturities fell below 30 yesterday, the first time that’s happened since Aug. 17, the data show. This suggests some complacency when it comes to tail risk of major outlier events, such as an EU bank crisis or sovereign collapse.
• Sentiment still depressed: The other side of the VIX story is Merrill’s Sell Side Indicator, a gauge of Wall Street sentiment. It is still underweight equities and is therefor constructive for stocks.
Some consolidation is in order following last week’s huge move. The above bullet points suggest that following some consolidation, the year end rally can continue. How high is anyone’s guess; mine is that we are about halfway though the move upwards.
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October 31st, 2011 at 7:43 am
Europeans are looking for “dumb money” to leverage the EFSF; Germany, ECB, private investors and BRICs have all declined to contribute significant backing, so who’s left…..wait for it…..US Fed.
October 31st, 2011 at 7:46 am
Recapitalize?
Not a problem……
Remember, Greece only needed 200 billion. Absolute mouse nutz.
October 31st, 2011 at 7:47 am
End of many mutual fund fiscal years today. “Abandoned Baby” set-up for a top is perfect for a slide today 0r tomorrow morning.
Beware Tuesday 11/1/11.
October 31st, 2011 at 8:08 am
“The Greek orderly default is now behind us”
Is that really true? The austerity being imposed across Europe is making all of the sovereign debt problems worse, Greece included. It is likely that the Greek bond haircut will soon be found to have been insufficient while other countries will demand similar forbearance (and the voters of Greece or one of the other peripherals will eventually tire of suffering for the primary purpose of bailing out French and German banks).
Unless you believe in the magic of expansionary austerity…
~~~
BR: No, you misunderstand. The DEFAULT is behind us — the repercussions are ahead of us.
My apologies for any ambiguity
October 31st, 2011 at 8:10 am
BR mused:
How high is anyone’s guess; mine is that we are about halfway though the move upwards.
reply:
———
Close enough for horseshoes. I agree. Otherwise I wouldn’t have bellied up to the bar and started in. I plan another couple of buys within the next couple of weeks or so unless the sky falls (unlikely). But I don’t think buy and hold is for me at this time, so I will cash out when the S&P looks toppy and has passed or is close to certain levels I have in mind. Then I will buy the next big dip most likely … and so on in 2012. Once operation twist ends, I will probably use my former long term bond fund as a parking place whenever I cash out of equities.
As I stated before, nobody cares about European problems; they only care about the possibility of default and the world ending events that are likely to accompany default. That’s off the table. Europe and China will publicly talk trash, but privately, China will be cherry picking assets at discount prices.
October 31st, 2011 at 8:20 am
PeterR Says:
October 31st, 2011 at 7:47 am
End of many mutual fund fiscal years today. “Abandoned Baby” set-up for a top is perfect for a slide today 0r tomorrow morning.
reply:
———–
Actually, today would be a better day to take advantage of tax selling. This will minimize taxable distribution amounts later this year. If I were managing a fund, I would be thinking today is a good day to sell the dogs.
October 31st, 2011 at 8:23 am
BR observed:
No surprise there, right? Look for the “immediate future” to play itself out over the next ten days or so, as a short-term buying opportunity.
October 31st, 2011 at 8:26 am
BR said: “How high is anyone’s guess; mine is that we are about halfway though the move upwards.”
What starting point for the rally are you using, the Oct. 1 close of 1100? SPX closed at 1285 on Friday; so are you are looking for another 185 point move from here, yielding 1470?
Please advise/thanks
October 31st, 2011 at 8:53 am
This is a pivotal period for the stock market. IMHO the critical question is whether the 1074.77 S&P500 low of October 4 was a “lasting bottom.” The majority seems to think it was a “bottom.”
However, for many reasons I believe the 1074.77 was not a “lasting bottom.” As well, I continue to see a building level of “risk” in many areas, some of which I listed at my blog post here:
http://economicgreenfield.blogspot.com/2011/10/danger-signs-in-stock-market-financial.html
October 31st, 2011 at 9:35 am
If the Europeans, or Americans, see China as “Dumb Money” they are badly mistaken. Logically, and they are VERY logical, if the Europeans themselves won’t put money into EFSF, then why should China? If China ultimately does put money into Europe, other than via the purchase of undervalued assets and/or resources, it will be entirely for political/mercantilist reasons. Underestimate the Chinese at your peril.
October 31st, 2011 at 9:49 am
philipat Says:
“Underestimate the Chinese at your peril.”
That’s bumber sticker material, I tend to agree 100%.
October 31st, 2011 at 10:06 am
Just another kick in the ass for the working stiff.
October 31st, 2011 at 11:12 am
[...] The market is trying to consolidate its recent gains. (Big Picture) [...]
October 31st, 2011 at 12:02 pm
Krugman blogged earlier today: “So we’re deep into self-fulfilling pessimism territory here. Either the ECB moves in with big purchases, or the euro is crostini.”
November 1st, 2011 at 7:10 am
[...] 2 days in a row: Futures are showing 24 points down on S&P, 154 points off on the Dow. Yesterday, futures were down only 100 to start the day, and we ended up getting shellacked for a 2- 2.5% [...]