HI Financial Services
When markets fall right now and
fear overwhelms so many, opportunity abounds – Brian Wesbury
What has been happening
so far this week?
Look at the bounce off of…umm…uh..15,375 on the DJIA and
1740 on the SPX? Not really support
levels. Not really anything in all
honesty. There could be a small,
meaningless argument that the DJIA bounced off the 200-SMA. There was a 7% pullback and that was enough
for a correction on our market. People
ask me all the time if this was warranted and if this is the bottom. Let me go over both those questions.
Yes the pullback was warranted. Think about the fact a “healthy market”
usually has a correction once a year. Think that our last correction was almost
three years ago. We are long overdue for
a 10% correction to give others an opportunity to buy in at a cheaper price
than before the correction. I’m not
quite sure I understand how it is “healthy” but logically it makes sense. Yes, a pullback is warranted and a correction
should occur sometime in the future.
Is this the bottom?
Technically NO! But the market
makes up its mind on inflows and outflows.
Money is flowing into the buying but we do have low volume for the most
part. I could see the market heading
right back down to test 1740ish on the SPX.
At the same time I could and would expect from past history to see the
market head up to the highs like it has every other pull back in the last three
Where will our market
end this week?
Look for a day that the market cashes in the gains but Yellen set
the rebound. It would have been better
to see the Market hold 16,000 on the DJIA but it did move above 1800 on
SPX. We should see some people cash in
profits and then you should see big money buy in. We have a bit to go to hit the highs made at
the end of last year. If we hit those
highs then off to the races again. I
would look for the market to finish higher than where it finished today.
DJIA – We had a good
bounce off of 15,375. Not a round number
and not a support level either. I guess
sentiment is important in trading. There
could be an argument that we bounced off the 200 SMA as well
SPX – We also got a
bounce from the 1740 level. Again not
support but the bounce above the 1800 is big.
1800 should act as support now.
COMP – Bounce off of
4000 or a “round number” as I like to call it.
Round number hold physiological support for retail traders. Technically speaking the Nasdaq held the 50
SMA and also held support.
Where Will the SPX end February
Looking for the
bounce. We didn’t quite test down to the
1710 level and we still might but right now we look to be in recovery
I NEED to have an
expectation to set up my trade. Bearish
market and February is the second worst month in the market historically. I am not looking for an exact number but I
would expect a drop to test 1710 and maybe a finish at or slightly above
1750ish. The “ish” means around give or
take an many numbers as I need to add or subtract to be close.
1800 or higher –
would expect 10 points plus or minus from this level
1700 or lower
What is on tap for the
rest of the week?=
CVS, FOSL, MOS
AMAT, CSCO, DE, DPS, FEYE,
WFM, Z, NTES, MET, NVDA
A, ABX, CAB, DBD, IM, JAH, KRFT,
TAD, PEP, SKYW
Tues: Jolts Job
Openings, Wholesale Inventory
Wed: MBA, Treasury
Thur: Initial Claims,
Continuing Claims, Retail Sales, Retail Ex-Auto, Business Inventories
Import, Export, Industrial Production, Capacity
Utilization, Michigan Sentiment
Tues – JP: Machine
Orders, Teritary Index
Wed – EMU:
Industrial Production, JP: CGPI
Thurs – CN: Consumer Price
Index, Producer Price Index
Friday – EMU: Merchandise
How I am looking to
Taking money from long
puts or protective puts and rolling short calls up. We are still stuck in no-man’s land for the
DOW but be repaired some technical damage to the SPX and COMP. With technical levels restored and technical
crossovers on stocks I took profits on Long Puts.
I am keeping the short calls to act as a short term buffer
if the market can’t hold the current levels of support. Also I can always adjust the shorts if I do
not want to get called out.
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Brian S. Wesbury – Chief Economist
Bob Stein, CFA – Deputy Chief Economist
What happened to stock markets over the past few weeks is nothing
new. It’s been happening off and on for the past four years and eleven months.
Ever since mark-to-market accounting was fixed in March/April
2009, the stock market has been rising along with profits and the economy. But
very few investors understand why things turned around so abruptly in 2009.
As a result, every time the stock market declines, economic data
hits a soft patch, or fear is stirred by dour reporting on one issue or
another, the “sky is falling” mentality takes hold very rapidly again. All of
this happens because conventional wisdom is that the only reason the economy is
recovering and stocks are up is because the Federal Reserve has done
Quantitative Easing (QE).
But, as we have written before, the entire narrative of what
happened back in 2008/09 is mistaken.
First of all, the entire subprime crisis was about $400 or $500
billion dollars of bad loans. Yes, those are large numbers, but in an economy
that was producing $15 trillion of GDP each year, it’s just not enough to cause
Rather, it was an accounting rule – mark-to-market accounting –
that created losses for financial institutions well in excess of the true
problems in the housing market. This rule forced financial firms to sell
mortgage-related assets into a fire sale, markets became illiquid and prices
fell to levels well below fundamental value. Without mark-to-market accounting,
the crisis would have remained contained.
We’re not saying firms should never mark assets to market. The rule makes
sense when firms are always ready to sell an asset. But the rule
makes no sense at all when markets seize up and no sane owner would sell an
asset but for the erosion in capital caused by the accounting rule itself. If
in the absence of the rule asset owners would just wait out the storm, then the
only justification for marking an asset down in value is if it is truly credit
impaired, which wasn’t the case when the homeowners backing the assets were
still paying their mortgages.
But instead of focusing on fixing this rule, the US government
invented policies – TARP and QE were the big ones – to fill the hole in bank
capital caused by mark-to-market losses. Both TARP and QE started in October
2008 and in the five months following the start of these policies, the stock
market fell an additional 40%, with financial stocks down significantly more.
It was not until the Barney Frank and the House Banking Committee
leaned on the Financial Accounting Standards Board to fix the excessively rigid
rule that things turned around. The hearing was announced on March 9, 2009, the
exact day the market hit bottom. The rule wasn’t officially changed until early
April 2009, but by then markets had already anticipated a new rule. It was the
change in this rule that stopped the crisis, not TARP and QE.
Our main point is that the crisis was never actually as bad as
many thought, and the recovery has not been just a “sugar high” based on QE. As
a result, “tapering” is not as dangerous and the odds of a return of the crisis
The economy, profits and stock prices are rising because of “real”
economic developments – fracking, new computer software, communication
technologies and the impact on energy production and productivity are driving
growth. Yes, the economy could be doing even better, but we shouldn’t ignore
real improvements either.
The bottom line is that while so many people view the recovery as
fragile and fake, they are missing the important narrative outlined above.
Instead, the economy and markets are much more robust than the conventional
wisdom believes. When markets fall right now and fear overwhelms so many,
This information contains
forward-looking statements about various economic trends and strategies. You
are cautioned that such forward-looking statements are subject to significant
business, economic and competitive uncertainties and actual results could be
materially different. There are no guarantees associated with any forecast and
the opinions stated here are subject to change at any time and are the opinion
of the individual strategist. Data comes from the following sources: Census
Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal
Reserve Board, and Haver Analytics. Data is taken from sources generally
believed to be reliable but no guarantee is given to its accuracy.
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Why the US economy may be in a semi-permanent