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Game Time?


The stock index futures were weaker overnight, and despite an attempt to "buy the dip" early on (that didn't take), 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%.

"Fire and Fury," Signifying Nothing As I noted yesterday, people are blaming escalating tensions with North Korea for the recent decline. However, in my opinion, that is not why the stock market is declining. I think a decent case can be made that we are seeing exhaustion. Keep in mind, exhaustion is a process, which may have started on June 9 with the FAANG reversal, and even though the market has made new highs since then, there have also been signs of deterioration.

Meanwhile, the indices have stalled out, volume has been lighter, while sentiment, euphoria, end-zone dancing on the part of the bulls, and massive self-flagellation on the part of folks who aren't involved lead me to conclude that the chance we have seen exhaustion is quite high.

People have asked many times how the market could ever go down with the central banks unleashing unprecedented amounts of QE. The answer, of course, is that markets can do whatever they want, and no one is bigger than them once they change their mind about something.

The Thin Line Between Invincible and Infamous I have also made the point that when you are in a bubble or a mania, nothing matters until the action has exhausted itself, at which point anything can take the market down. In this case the catalyst could be the heightened tensions with North Korea, and folks will certainly blame that for the decline, which will cause them not to act because they will assume it is transitory (although it may not be; things could escalate from here). In any case, there is no shortage of problems, and given the fact that QE hasn't solved any of them, but has created massive imbalances, we will have to keep a close eye on how things play out.

As I have stated many times, I believe it is no longer possible to have any sort of orderly decline, meaning that any decline that gets serious is going to culminate in a crash. To be clear, that is just a thesis of mine, although I believe it as strongly as I believe anything. That said, I don't want to get too far ahead of myself just yet, but I do think it behooves everyone to start thinking critically about the positions they have and what they might do if things get very ugly very quickly. (I added more puts today, as well as a few shorts, just in case it is finally "game time.")

With all of that out of the way, turning back to the action, after the initial early selloff the market tried to bounce but couldn't, then slid some more, such that by midday the Nasdaq had lost 1.5%. From there another rally was attempted, which also failed, and the Nasdaq was 2% lower with about 30 minutes to go. While I'm sure many expected a rally to save the day that was not to be, and the market leaked a bit more into the close, finishing with the losses you see in the box scores.

A Silver of Hope Away from stocks, green paper was mixed, stronger against most currencies but weaker versus the yen, oil lost 2%, and fixed income was slightly higher, although not as strong as one might have expected given the decline in the stock market. As for the metals, they were strong, again led by silver, which gained 1% and finally broke through $17, which is a potentially important signal for folks who live and die on chart action. Meanwhile, gold rallied 0.75%. Turning to the miners, they did a little better today (selectively), Pan American in particular, which was once again successful at the stupid game of beat-the-number and rallied 10% on huge volume (a strong positive).

I think a lot of people are afraid to get involved with the metals and miners because they think the only reason gold is up is because of North Korea. It would be perfectly perverse if gold took off and folks were unable to buy it because it was going up for the "wrong" reason.

Positions in stocks mentioned: long PAAS.