So much for summer doldrums.
Yes, that was the opening line of yesterday's post.
It's
that kind of market, one that can turn on a dime, or a tweet, or, maybe even a look, a glance, a suggestion.
This is not for market neophytes, who will get skewered royally if they attempt to play and are not prepared to suffer small losses should positions prove unfavorable. Because small losses, left unaddressed, usually lead to larger losses, it's important to monitor all trades closely. Similarly, profits may be fleeting and momentary. It may be better to take short term gains under these conditions, than wait out months of bumps and grinds in expectation of sustained profits.
Current market conditions are strung out like an addict needing a fix. Any twitch can set it off, as evidenced on Wednesday, as short term euphoria faded into tight panic overnight.
Call it Trump-enomics, trade sabre-rattling, currency collapse, kind dollar, or whatever you like, what is underway is nothing less than a massive reordering of priorities. From individual well-being to international survival, nothing is off the table.
While stocks continue to zig-zag - the Dow fell once again into negative territory for the year - bonds seemingly know only one direction, toward the middle, as yield spreads on treasuries keep tightening.
Since the Fed has raised rates six times since December 2015, the yield on longer-dated maturities has not moved in tandem. In a growing, vibrant economy, yields on 10-year and 30-year bonds would be spiking higher in reaction to higher short-term rates, but presently, they are resistant. Thus, short-term rates are rising faster than longer-term, making it difficult for financial institutions to make money since they depend on the spread, i.e., borrowing short-term to lend long-term.
Simply put, it's tough to make much profit on a one percent (or less) margin.
This dynamic has and will continue to scare equity market participants, whose fear is that their investments will rise only very gradually, if at all. The longer-dated treasuries serve as a hedge against the inherent risk in stocks. Even though they may not keep pace with inflation, the risk of losing money is nearly nil.
There are, of course, many more forces at play, including devastated markets in Japan and Europe, which recently (and presently) toyed with negative interest rates, forcing all yields lower. Thus, the US yields look generous by comparison with limited risk exposure.
For a more detailed analysis of interest rates and the dangers of an inverted yield curve, Investopedia offers a reasonable explanation,
here.
A simplified approach may be developing as a new norm: minimize risk, accept lower returns, preserve capital rather than seeking bold - and thus, risky - profits.
The bond market, which is much larger than the equity market, often serves as a lid on runaway speculation in stocks. Currently, the lid is being lowered, slowly, but steadily.
Dow Jones Industrial Average July Scorecard:
| Date |
Close |
Gain/Loss |
Cum. G/L |
| 7/2/18 |
24,307.18 |
+35.77 |
+35.77 |
| 7/3/18 |
24,174.82 |
-132.36 |
-96.59 |
| 7/5/18 |
24,345.44 |
+181.92 |
+85.33 |
| 7/6/18 |
24,456.48 |
+99.74 |
+185.07 |
| 7/9/18 |
24,776.59 |
+320.11 |
+505.18 |
| 7/10/18 |
24,919.66 |
+143.07 |
+648.25 |
| 7/11/18 |
24,700.45 |
-219.21 |
+429.04 |
At the Close, Wednesday, July 11, 2018:
Dow Jones Industrial Average: 24,700.45, -219.21 (-0.88%)
NASDAQ: 7,716.61, -42.59 (-0.55%)
S&P 500: 2,774.02, -19.82 (-0.71%)
NYSE Composite: 12,681.59, -133.05 (-1.04%)
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