While volume is melting away, prices keep melting up—the S&P500 crept up 1.4% last week. Your average retail investor continues to refuse to play ball in an equity market now dominated by robotic trading, which, by some estimates, makes up over 70% of total daily trading. Real people are, instead, flocking to bonds and bond funds. This makes the bounce back in equities all the more difficult to accept as a legitimate bull market, which is always characterized by the reverse: retail investors dumping bond funds and rushing into stocks on rising volume.
This is not a normal bull market.
In macro news, retail sales missed expectations. And once the massive spike in fuel costs sinks in, the next several consumer sales reports will probably miss as well. Industrial production also missed badly. Empire State manufacturing beat estimates. Initial jobless claims are settling into the mid-400 thousand range. And the biggest surprise of the week came from the inflation reports. Both core producer and core consumer prices were pointing to annual inflation rates above the 2.0% threshold that the Fed has staked out as its target. Of course, the Fed has officially announced that it will use the core-PCE figure, but last week’s results are related, and they suggest that the Fed has LESS room to launch another round of QE…..at this time. Clearly, should some unforeseen shock hit the economy or financial system, then the Fed will have the political cover to print again. But these results, combined with soaring oil and gas prices, make it far more difficult to do so.
Technically, the S&P is very stretched, in a way that usually makes a pullback very likely. Complacency is high, and so is bullish sentiment. Both of these also set up conditions where a seemingly minor spark could lead to a big wave of selling, even if it’s mostly done by robots these days.
What could cause such a spark?
One example is a blow-up in Greece. In a way that reminds folks of the Lehman collapse, the world is being told by experts in Europe that a formal default by Greece would be “contained”. These experts argue that with two years of preparation and notice, that the European financial system is now strong enough to handle such an event.
And such an event is looking more and more likely.
Today, The Telegraph (UK) ran a story titled “Germany drawing up plans for Greece to leave the euro”. And in it, European sources are quoted saying that the “German finance ministry is actively pushing for Greece to declare itself bankrupt”. The German finance minister “maintains that since Greece is already regarded by the financial world as bankrupt, a formal bankruptcy would have no negative consequences for other euro members.”
We’ll see about that. The US Treasury and other experts said something very similar about letting Lehman go bust in late 2008. It didn’t quite work out as expected.
In the meantime, per The Telegraph, “rumours are already circulating in Wall Street that banks are preparing for a “credit event” – a technical term used by credit agencies to mean default – in the days immediately following March 20, as Greece looks likely to be unable to meet its debts.”
And this is just Greece. Any number of other economic, financial, or geo-political surprises could create the spark that causes a significant correction in US stock markets, which are now certainly overbought and very likely prone to a correction.