Something Broke In Markets On Thursday

Authored by Mark Cudmore via Bloomberg,

This Friday is going to be a session for active short-term traders, and it will likely be unpleasant for investors.

Something broke in markets on Thursday. There are a few things that worry me about the latest bout of risk aversion. This is in context that I’ve been an unrelenting stocks bull since the December Fed meeting…

But now I’m uneasy…

The Thursday selloff confused people.

Initially, many blamed the comments from Fed’s Kashkari about there potentially being no US rate cuts this year.

However, a quick look at a few charts shows that (a) yields fell rather than climbed, so his hawkish lines did not impact, and (b) equities started selling off before his headlines.

It’s never a good sign when people struggle to identify why stocks have a relatively large swoon.

If an asset is weak without an obvious catalyst, it suggests that it can really get destroyed if a genuine risk materializes.

For good order, the weakness in E-minis coincided with the oil price rise that in turn followed the Netanyahu headlines.

We have key US data this morning at a time of vulnerability for the market in terms of the Fed narrative.

We’ve run a long way on the idea of the Fed being dovish despite a strong US economy.

We’re getting closer to the point where we must acknowledge that either the Fed won’t be easing soon, OR the economy is in more trouble than we thought.

It means that we’re in the unusual-in-recent-times setup where a big surprise in either direction could hurt stocks today.

(For clarity and consistency, I would only see this as a multi-week consolidation/retrenchment and not some long-term bearish turning point).

Middle East tensions have escalated substantially just before the weekend, further supporting the idea of taking some risk off the table.

And, let’s face it, the 5-month E-minis chart below just looks horribly negative. If you’ve ridden the rally until here, this chart is your siren call to take some profits.

And if you’ve been desperate to fight these bubblicious markets, you have now been given the green light.

I remain structurally bullish for the year ahead and yet if I was back in a trading seat, I’d probably want to be tactically underweight into the weekend.

It’s that kind of contradiction that will make this Friday an unpleasant markets session for all but the most nimble of traders.

Good luck.