The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Strange.
Capital flow was 78% today. That’s incredibly light activity. That’s less than a *slow* summer trading session. It’s bizarre because the S&P 500 opened down 1% and fell steadily further, down 3.4% at the intraday lows. Low volume and big selling don’t usually go hand in hand. Throw in the fact that yields in Treasuries climbed significantly on the back end *and* the expected Fed Funds rate for year-end dropped 8 bips, a very large change…. And you have a weird day in the market.
One of the catalysts for today’s equity pain were the comments by President Trump on Fed Chairman Powell. The childish nature of the comments were one negative facet, another was the overt pressuring of the Fed by the President. The independent nature of the central bank of the United States is now not assured. Markets understand the danger of this path and while they aren’t panicking, this is certainly a canary-in-the-coal-mine moment.
If the President forces the Fed Chair out and/or forces the Fed to cut rates, the market will reframe its view of the Fed. This will certainly lead to increases in inflation expectations and lower GDP expectations. A central bank that acts at the behest of the President, instead of in the interest of their mandates, will be a net negative. There are ample examples of other countries where central banks are not independent, and their inflation and growth numbers are worse than the parts of the world where central bank independence is preserved.
Other matters certainly factored into today’s down move, but let’s just say that Fed influence is added to the bearish mix.
Let’s get to the really strange part, the low capital flow. Why was capital so inactive today? A 2% down day is a big move for the S&P 500 and for it to happen on extremely low volume is anomalous. I think we can speculate about it a little and then call it a day.
What can we conclude from the low volume?
In the bull market of 2023 and 2024, dips like we’ve seen were ravenously consumed. The typical investor had been conditioned to buy dips first and think later. That behavior is missing today. Undoubtedly, most of the conditioned dip-buyers have already acted. We are left to wonder whether they are out of capital or whether they are being patient for the next attractive moment.
We are not yet in a bear market. It official becomes a bear with an S&P close below 4918. That’s about 4% below where we are. That’s not too far away. Buyers-in-waiting, are probably looking for the bear to be official before they go to work. Are sellers-in-waiting looking for a bounce? Probably. Would they also act at lower prices, when emotions get heightened? Probably. Will the designation of an official bear market tip some of them into acting? Probably.
A fundamental catalyst can change everything of course but it looks like both the buyers and sellers were on strike today. It seems like the sellers will likely act first. That bodes poorly for the market in the near term.
What really matters will be whether the buyers-in-waiting get overwhelmed or not.
See you tomorrow.
-Mike
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