The major stock indices were decidedly weaker today and the usual attempts to “buy the dip” for once fell flat. About an hour into the day the S&P had lost about 0.75%, the Dow was down 0.5% while the Nasdaq led the charge lower with a loss of 1.25%. But unlike so many other days, the indices fell further and closed on their lows with the S&P losing 1.45%, Dow down 0.91% and the Nasdaq down 2.13%.
Lots of people are blaming rising tensions with North Korea for the decline. I don’t agree although it’s a handy excuse. I think we may finally be seeing exhaustion. The case for exhaustion is not made by a couple of bad days in the market. Exhaustion is a process that takes months and may have started back on June 9th when the FAANG stocks, the market leaders, had a very ugly down day after a huge run up the day before. These reversals can be very informative about a change of trend although the markets made new highs since then but on very unimpressive volume.
Recently, the indices have stalled out and volume has continued lighter while the bulls are euphoric. At market openings, we have been seeing these little gaps higher from the previous day’s close, especially after new highs, often indicating that people who feel they are missing out are panicking to get in. To me, these are all signs of exhaustion.
People have asked me many times how the market can go down when the central banks are prepared to flood the world with more liquidity. The answer is that markets can do whatever they want, as they proved in 2001 and 2008 when the Fed threw the kitchen sink and the dishes at the markets and they crashed anyway. Does anyone have a memory anymore?
Can we just have a little correction and bring the markets back to their senses? Not in my opinion. The valuations are too high. The leverage is too high. The shorts are too few. The cash reserves are too small. In my opinion, any decline that gets serious is going to bring in the margin clerks and culminate in a crash.
This is a time to be very careful, dear reader. The next few days should tell us a lot. Maybe the good ship Lollypop rights itself again but the action is looking very toppy to me and more than a little dangerous.