Bull and Baird Blog - January 13, 2016

Equities start the day higher as depression begins to spread its wings. I don’t know whether it’s a January effect or a cold thing or the fact that the entire world is now bearish but the start of this year feels particularly grim. I can’t recall any of the past few years starting off with so many people writing eulogies for the market.   The latest one comes from Goldman and while it’s not necessarily a “the top is in” call it does have a very “this whole thing is winding down” feel to it. I have to give them credit though, that piece is really good and you should go read it right now (they tweeted out the link this morning). Here’s the thing, over the past say 4-5 years we’ve seen all kinds of people scream “top” and “bubble” and “sham” and “centrally planned” and “fake” and “what a joke this all is” primarily because 1) they are perma bears and 2) they just flat out missed it. Now those people are easy to ignore because they always scream the same thing (my news highlights last night showed how Marc Faber sings the same tune over and over). This time is different though, 2016 has brought out some VERY smart people who are noticing twilight settling over the valley. Is this particular stretch of bull market over? Probably, a lot would have to go right to continue this epic run and those pieces just aren’t falling into place. Is the economy late cycle? For sure, I doubt anyone would argue against that. Should we sell and go all cash and cheer for the market to punish everyone left in it? No, of course not. Markets go up and down, you get good times and bad, it happens, that’s why the equity risk premium exists. Maybe a smaller allocation to equities makes sense going forward, maybe it doesn’t, no one will know until the dust settles. One thing we can say for certain is that the tone of macro commentary has changed significantly, you would be hard pressed to find optimism about the next 12-24 months both in the Global Economy and in the market. The contrarian in my adores that fact but the rest of me can’t help but notice a LOT of non perma-bears turning out the lights. Sigh. 

After the open we saw ANOTHER session where early morning highs gave way to afternoon pain. Now if you’ve read along with me all these years you know I’m a big fan of “price action”. Now price action is a nebulous term, it has no real agreed up on definition and major decisions aren’t usually made on how the market “feels”.   But it does provide us a glimpse at psychology and psychology is a big part of what moves the market. We started the day higher for the same reason as yesterday, because we are oversold. In a bull market once the tape gets horribly oversold dip buyers rush in and save the day….we’ve seen it for years.  Lately we are seeing the exact opposite, any rally is being used as a chance to lighten up and that tells me a lot. Crude was green most of the morning: didn’t matter. Over the past month Crude and stocks have moved in tandem (credit @ukarlewitz) so we should’ve seen a rally and we didn’t.  Bad…bad....bad. Price action has turned horrendously bad my friends. CSX reported last night and yes, they beat EPS and missed revs, get used to hearing that. What troubled me the most about their conference call? This statement:  CSX Corp. executives said on Wednesday that current pressures on rail cargo volumes are at levels not seen outside a recession.  Ugh, just kill me now. Our fantastic analyst Ben Hartford has this chart in his 2016 outlook.  To quote Scooby Doo:  ruh roh.   Remember those comments from FAST last quarter?   Starting to look VERY prescient.   No one wants to hear both FAST and CSX say “yep, haven’t seen this outside a recession peeps.”   But now they basically have…so yea.    Wanna know what the big winner was today?  CHIPOTLE! Yea, take that e-coli. 6% like it was nothing. Other winners MET, SWN, ED, and SRE. Losers were WMB, CHK, BWA, and TSO. Did you know WMB was a $40B market cap company…. IN JUNE OF 2015.  Now? $10B. I mean does this not remind everyone of banks in 2007-2009? I used to sit at my desk and marvel at the fact that C and BAC could go down every single day and then go down some more.  Never thought I’d see it again so soon.     

The rest of the day was abject misery covered in vomit. Down and to the right for every agonizing tick until we finally closed the day at 1,890, down 2.2%. So the past few days I’ve talked a lot about sentiment because it’s important. Sentiment can move a market more than anything I’ve ever seen and that includes random headlines and horrible earnings. Let’s finish tonight with this thought: fear is back. Fear has become the de facto stance right now and not the fear of missing it. The past few years have seen vicious rallies because dip buyers feared missing the bottom. That is no longer the case, “fear of losses” has taken over. There is no one around to prop this thing up, it will not rip back to 2,100. Dip buyers are gone..poof. The tone has changed and we could be in for a lot of very choppy price action. “The easy money has been made” is a terrible statement, stupid, almost insulting, but I can’t think of a better way to describe the big picture. Remember how the market used to feel bulletproof? That someone would always ride to the rescue when things seemed bleak? Those days are over, done, finished. 2013 feels like a myth right now. A stock market rose 28% in a 12 month period?  Come on.

Final Score:  Dow -221bps, S&P500 -250bps, Nasdaq -341bps, Rus2k -330bps. 

News Highlights: 

To miserable for news highlights today so we’ll have to end on a Fail video.  Basically sums this whole thing up anyway (that rock jump at 4:46 is insane).

https://www.youtube.com/watch?v=WImgnGXwpjU 

 

Have a good night.