Saturday, January 9, 2016

The Great Reset! Has It Begun?

In 2014 Markets Made Historic Highs
With every market pullback as of late, we are forced to wonder if this is the beginning of the end. Have we entered the period that may someday be referred to as "The Great Reset"? This is the period where after decades of modern monetary theory the world reverts back to the tried and true. Over the years the valuations of many stocks and commodities have gotten out of hand driven higher by financial forces unleashed by monetary policy that has expanded both credit and debt to a level that a decade ago many economists would never have imagined. I want to make it clear this has become a worldwide problem. With all the distortions from things like computer driven trading, dishonest economic data, and stock buybacks it is only logical that at some point in time reality would re-enter the picture and set things right.

Selloffs Take Many Forms And Shapes
This reset can develop in several ways and it will be interesting to watch how this unfolds and the market unravels. What will ultimately be declared the driving force behind its demise will be equally fascinating. During the bull market of the last seven years, it seemed that even bad news was good news in that markets would rally and rise indiscriminately. It often appeared that any indication things were not well was interpreted as proof the Fed and central banks across the world would soon step in to add a little fuel and give the economy a badly needed kick. When it comes to a falling market, however, the market can fall like a stone or in the case of a "realizing market" slowly grind its way downward. The slowly downward and bone grinding action of a realizing market tends to go on forever and a day with no respite.

Have We Ventured Into Bubbleville?
 Most investors have divided into two distinct camps over the last few years with the bears thinking the bulls are delusional and the bulls thinking those constantly heralding the coming gloom and doom should pack it up and head home. Of course, each camp has fringe factions that vary in the degree of their convictions. Mega bulls continually point to the upside and how those not in the market will miss great opportunities, while mega bears preach caution, advise risk aversion, and warn of the coming financial Armageddon. It is easy to rationalize why those in power cannot afford to let financial markets to collapse, however, preventing such things is easier said than done. History is filled with examples where greed has guided investors down the path to Bubbleville and always they are encouraged to follow because they are told: "this time it is different." Sadly, again time will show that it's not different at all.

Often investor psychology and the behavior they display is based on recent trading patterns. In this case, many investors will react and "buy the dip". For years this reaction to each pullback has worked and garnered huge profits for many investors, but this trading strategy has the potential to cause them a fair amount of pain. Bulls trying to buy pullbacks and pick market bottoms time after time may soon find that more downside action exists. Ironically more than once I have heard a person talk about how they plan to short this market when it tops, but the fact is they won't. It is very hard to pick a market top, but if anything they will probably assume the role of buying into a falling market and getting sucked into the vortex well before the fall has stopped.

The term "capitulation" which in market terms means to surrender or give up is often used to mark a top or bottom in markets. It is often important to ask not only who is capitulating, but why. Over the last several years it has been the bears and those who saw every morning a market ready to collapse under its own weight that have ended their day in tears. It is also these same bears with their tightly placed stop-loss orders that have paved much of the path this market has made to higher and higher levels. It will be interesting to see just how many of these beaten up souls still have enough fight inside to ride the markets lower when their time to shine does occur.

If you are bullish and see higher markets ahead even though this move is long in the tooth by historical standards it is important to question not only where growth will come from, but also it's quality. Throughout history, the world has witnessed and undergone many resets. The coming adjustment will come and it will most likely be ugly and often volatile. Market crashes  generally are the result of panic and so far what we have seen is more on the level of "minor concern" resulting in a chorus of cries to buy the dip. It is only after the market blows through several key support levels and starts making what some people view as crazy new lows that panic will set in, and by that time it will be too late to escape the carnage.

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