The selloff continues with futures down around 0.5% at the time of this writing. The market has launched into a correction of some magnitude. Will this time be different or will a shallow floor be found as has happened so many times before? The current correction is motivated by higher interest rates due to the anticipation of meaningfully reduced levels of QE around the globe while the U.S. switched from quantitative easing to quantitative tightening last October. It started to reduce its $4.5 trillion balance sheet by just $10 billion per month. While not a meaningful amount, markets are forward looking so the recent correction is motivated by concerns central banks will eventually have to taper by a material amount which could undo this QE-catalyzed bull market which began in 2009. Another sign that 'this time is different' is the 20-year bond ETF TLT has broken down after its feeble year long attempt at rallying:
Indeed, the bear market in bonds seems to be underway. Further, major stock indices are now below their 20-day moving averages while the small cap Russell 2000 is just under its 50-day line.
Markets are telegraphing that this is a major headwind, at least with the case of bond markets. Stocks could also start to unravel if the economy does not sustain itself. It would mean the QE experiment failed, and QE flow would have to be increased once again in the face of interest rates that are still near historical lows. There is still little fuel in the interest rate tank.
What could favor a repeat of the past couple of years where the market finds a shallow floor? Central bank favorites such as the FAANG stocks, three of which are on the focus list, have been holding up relatively well. Other strong leaders such as NVDA have also held up well. A number of these names have been on our Focus List. Further, if future QE reductions are not meaningful due to a soft economy, this could result in a continuation of this long bull market as QE flow remains strong and continues to find its way into US stocks.
In the meantime, keep your stops tight especially for those stocks that are about to hit or already hit their 20-day lines which is typically the last point at which we sell any remaining shares.
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