Thursday, August 27, 2015

Black Holes & the Stock Market (excerpt)

According to an 8/25 Newsmax article titled “Stephen Hawking: Black Holes May Have Exits After All,” the famed physicist now believes that black holes may not be the no-exit-ever spaces they’re thought to be. In his latest mind-bending theory, Hawking postulates that unfortunate space travelers could escape from black holes after all, but they won’t be able to go home to their own universe. That’s a bummer. On the other hand, Hawking reassuringly concluded: “If you feel you are in a black hole, don’t give up. There’s a way out.” He presented his views in a lecture on Monday at Stockholm University.

Stock investors are fretting that they fell into a black hole starting last Thursday, with the S&P 500 plunging 10.2% in an almost vertical line through Tuesday’s close. Looking at the chart on Monday, I concluded that the market should find support at 1862.49, which was the low on October 15, 2014, the day before the “Bullard Bounce” commenced. On Tuesday, the market closed on the day’s low at 1867.80. Yesterday, it rebounded 3.9% to close at 1940.51. This could be the beginning of the “Bullard Bungee Rebound.”

Falling below the October 15, 2014 low would be bad, but not as bad as entering a black hole. So far, the market’s selloff looks more like a wicked correction. Yesterday, I attributed it to algorithms and unfair trading tactics used by high-frequency trading (HFT) firms rather than to panic selling by individual and institution investors. Today, I would add that ETFs contributed to the recent debacle. There were mini flash crashes in many ETFs because liquidity dried up as market makers and broker-dealers had no idea what a fund’s holdings were really worth.

The current correction won’t turn into a potential black hole unless the S&P 500 drops to 1704.66, which would mark a 20% bear-market decline from the record high of 2130.82 on May 21 this year. That would be the lowest level since October 15, 2013. That might feel like a black hole, but the S&P 500 would still be up 151.0% since the start of the bull market on March 9, 2009. It would still exceed its previous cyclical high on October 9, 2007 by 8.5%.

That would be cold comfort for most investors who would feel lost in space, believing that Mission Control at the Fed and at the other major central banks can no longer revive the bull market. The 8/26 BloombergBusiness included an article titled “Investors’ Central Banking Saviors Caught Naked as Stocks Slide.” The key point was: “Where have all the heroes gone? The central bankers who saved the global economy in 2008 and kept its anemic recovery from stalling now increasingly lack the tools to respond if the worldwide slump in equities gets much worse.”

Maybe so. But there’s more to the global economy than meddlesome central bankers. There’s also the underlying resilience provided by aspirational consumers, hard-working employees, and innovative entrepreneurs around the world. They’ve done remarkably well for themselves in recent years, with lots of benefits accruing to our economies, despite the meddling of all the central bankers and central planners. Maybe the market bottomed on Tuesday.

Today's Morning Briefing: Black Hole Theories. (1) Stephen Hawking says there’s a way out of black holes. (2) Bullard Bungee Rebound. (3) We blame HFTs and ETFs for exacerbating the recent unpleasantness in the US stock market. (4) Can stock prices move higher if the central banks have lost their magic powers? (5) Dow Theory and Death Crosses. (6) Our mantra: “USA, USA, USA.” (7) Gasoline windfall literally driving the economy. (8) Dudley and his chums are in a black hole without an exit. (9) Fed’s space-age jargon full of “escape velocity” and “lift off.” (10) Reality is probably distorted in black holes. (11) Focus on market-weight-rated S&P 500 Energy industries. (More for subscribers.)

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