Carty Capital Management
Carty Capital Management



Not Surprising

So why?  The simple answer is we went up a good deal - for a lengthy time.  A rest is normal.  What is not normal - but at the same time inescapable - is the emotional reaction of the crowd. 

Good Morning,


What a 24 hours.  You can hear hundreds of reasons as to why the market is falling back a bit.  Sadly, I am a bit upset with myself in that some of your recent notes have already come to fruition.  In recent comments, I had suggested that we need to get accustom to larger numbers.  I hinted that a 4-digit daily move was sooner rather than later. 


As stated at the time, I suggested it was not being stated to cause concern.  Instead it was simply to recognize that numbers are getting larger - but percentages are not. 


So why?  The simple answer is we went up a good deal - for a lengthy time.  A rest is normal.  What is not normal - but at the same time inescapable - is the emotional reaction of the crowd. 


Consider it was only recently (week three of December) that we broke a 3-year record of not seeing a majority reading (above 50%) in the AAII bullish sentiment data.  Three years running folks - where the crowd just could not get bullish even as markets basically rose.  Yet, here we are - the moment something goes red in a significant way - and the crowd looks to exit very, very quickly. 


Driven by?


Somewhere in all that mess is this mental sensation:  "Gosh, I waited for years to feel safe again and the markets were going up and that made me feel better.  Finally, I decide to step back in and within a month of 'getting back', the markets are in turmoil again!  Get me out for good this time...."


Now, I am poking fun a little bit but the underlying theme is not too far off from what a whole bunch of latecomers are likely feeling today.  How do we know they were latecomers?  Well, it is highly likely the final break to a majority of bullish sentiment and the break of interest rates to the upside - along with a heavier flow (not seen in years) into equity funds - was not all an accident.  They felt good again.


The grim reaper is the humiliation factor the market carries with it at anytime on a short-term basis.  It will twist and turn you and make you imagine the worst possible outcomes.  I have stated this for months and months.  We have been suggesting we pray for it to come. 


Why?  Because bull markets last longer when they are intermittently interrupted by emotional misperceptions of reality.  Ghosts are embedded in every bull.  They serve a purpose, they create doubt, they rebuild walls of worry. 


As Warren has stated for decades, "In the short-term, the market is a voting machine.  In the long-term, it is a weighing machine."


We are witnessing the emotional voting machine at work.  Make no mistake.  For those of us old enough to tell you about portfolio insurance in 1987, the VIX, ETN, ETF influences today smell, sound and quack almost alike.  The commonalities are very real.  


Speaking of real - some of the VIX ETN "tools" are already blowing up.  The rocket scientists who created some of this garbage will always come and go.  It has merely exacerbated the speed of movement - which has lit the fuse to the new bubble of fear. 


How do we know that?  Let's note the data flooding in as the talking heads race to explain why this happened:



The first chart above is the CNN Sentiment Index again - updated after yesterday's actions.  Note the second chart is more important for perspective.  I have marked the last few lows in red.  All of them were many, many market points lower than we stand now. 


The green dot is marking last evening's reading.  It is soon to become yet another low on this multi-year snapshot.  As the emotional surge of fear works through the system, it's impact will burn off as well.  


Keep in mind, nearly 1,000 points down in a DOW in a matter of less than an hour is not related to a fundamental issue with an economy.  Besides, when the news trucks arrive at the front door of the NYSE down on Wall Street as they have this morning, the end is near.  


I stand  by this idea:  This is all early in the game.  Recent days have proven out what we stand by as it relates to all the chatter about "the overly bullish crowd".  That emotion has been so burned - even a little red ink will push the bulls back - quickly.  


One More Note on Emotion


The VIX ETN's have caught too many newcomers off guard.  What is the VIX telling us now?


So think about this logically for a moment if you will.  Check the VIX chart above.  Going all the way back to 1990 in this data, there is now only one reading of the VIX (fear index) which is higher:    you guessed it - 2008-2009.


Do we really, really, really think that is now?


Patience not invested yet has the opportunity to become very valuable over these next couple of weeks.  Patience and discipline...


and the barbell economy. 


The Good News?


While it may seem ridiculous to bring this up during the panicky feeling the crowd is reeling with - but here is the reality:


a)  Sometimes there is no "reason" people get nutty and emotions skew way off course for a few weeks.


b)   Nothing which has been going on in the voting machine atmosphere of the last 8 days has caused dire consequence for the more important long-term weighing machine factors in place for years to come.  


Earnings, Orders and GDP


In the midst of the frantic calls, economic news continued to be very positive.


The tax reform package seems to be lifting consumer spirits, since the future expectations component rose to 105.5 in January, up from 100.8 in December. 


How healthy the U.S. manufacturing sector is at the present time?  For NOV data, U.S. crude oil production rose above 10 million barrels per day (to 10.038 million barrels) for the first time in nearly 50 years.


Jobs are solid and above consensus estimates.  The big news is that average hourly wages rose 0.34% (9 cents) to $26.74 per hour, the strongest monthly wage growth in more than eight years.


Unemployment remains at a 17-year low of 4.1%.


Finally, while I am sure it will be revised somewhat as the quarter proceeds, the Atlanta Fed upped its forecast of first-quarter 2018 GDP to +5.4%.


Remember, after big annual surges, it is not abnormal to go for months and months without making a lot of headway.  As much as it might not feel good watching it, I would not be at all surprised if we find ourselves in a neutral-zone for a bit.


But here is what Bespoke shows us in a nice little piece from historical numbers after market panics:


And this data above tells us what?


When the sell-off began last week, it put an end to the S&P 500's longest-ever streak without a 3% decline from a closing high.  This latest streak ended at mind-bending 448 calendar days on January 26, 2018, eclipsing the previous record of 370 days, ending December 13, 1995.


The news?  There have been only eight times in market history in which the index went over 200 days without a 3%+ pullback. In six of those eight times, the market was significantly higher a month, a quarter, six months, and a year later....the numbers tell you above.


In Closing


Thank your lucky stars - and be grateful if we can get more of a corrective wave to drive away all the good feelings again. 


The VIX tells us that the wall of worry is solidly in place...and that is good.  


Pauses and chop are good things along the way - even when they stink up the joint a little. 


It is never a good feeling to write about bad near-term news and suggest to the reader that it is a good thing.  But alas, we must.  Readers of these morning notes recognize this is that ugly feeling we suggested we would need to embrace. 


As stated, "it will cause one to doubt all they knew before..."  The thing is, history proves to us a fairly consistent reality:  corrective waves ultimately transfer stock holdings from the hands of short-term traders to long-term investors.


There is a very long way to go on this pathway.  A significant number of companies don't even yet have a good sense of just how much their cash flows, investment capacity and earnings will increase from the tax and repatriation changes.  Stack that along with the economic forces aligning around the globe as powerfully as they are coming together now - and you get positives. 


It is just what we have defined in the globally-leading, powerful and steady Barbell Economy effect embedded in the US economy for the next 30+ years. 


Be patient and disciplined friends.  These forces are real and they give a solid foundation for steady and continued long-term upside in global stock markets.


So yes - a correction in this type of environment is a gift.


The long-term horizon trends remain productive, strong and steady.  Even better for long-term investors able to remain patient and disciplined during the storms?


They are still being grandly and profoundly misunderstood.


Alas, that makes better markets for the long-term investor. 


Strap in folks....the best part of the ride is still years ahead of us. 


Of course, there will be lots of stops, rests and short-term setbacks along the way - all the way up this mountain - many of which will feel like the world is ending.


But Just Remember.....


Patience and discipline are your very best friends.  It's a week or two folks - it might even be several more - and could lead to a trade range that will be awfully boring given the last few years of upswing.


This is what markets do to weed out those participants not focused on the proper horizon.  


Besides, I prefer that we focus on what happens after every single panic attack....


Long-term thinking always wins out over short-term trading.  Worrying about the next setback leads too many to think it can be outwitted.  History proves this to be untrue.  Patience works better.  


Forget economics - think demographics.


It's the bigger picture - the latter drives the former. 


It's the current under the emotionally-driven, short-term waves.


Demogronomics keeps us on the leading edge of that long-term direction - but it also demands a much larger, far more patient view of the economic elements at work....including this upcoming earnings season.


Until we see you again - may your journey be grand and your legacy significant.


InvestingMike Williams