21 Sep AN UGLY DAY
The S & P 500 has violated its 50-day and 100-day moving average for the first time in about a year. Every time since October 2020 when the S & P 500 touches these pivotal moving average lines, it has rebounded. In fact, a headline read “The markets will never beat you if you buy the dips.”
As noted many times, the financial system is flooded with liquidity but that does not suggest the markets are liquid. Study after study indicates liquidity is poor in both the equity and fixed income markets, defined as how much prices move with a major buy or sell order.
According to the SEC, the median spread for the largest 3,000 USA stocks by market value was $0.04/share at the end of September 2019. Today it is $0.07/share. For “smaller stocks” it has gapped to about $0.12/share. The illiquidity in the bond market is worse with spreads outside the “largest corporate issuances and sovereign debt” has increased to almost 1 ½ points.
Bloomberg writes the biggest sell program since May hit the markets at the open. The issue at hand is that these large programs are not singular. A Nomura quant analyst warns of $40 billion of forced selling by volatility funds if prices don’t rebound.
The illiquidity of the markets could amplify any selling or buying, a liquidity issue that has increased considerably during the past 2 years as per the above data from the SEC.
As inferred above, the S & P 500 violated key moving average lines yesterday, the result of continued regulatory crackdown in China as one of its largest real estate borrowers is facing considerable uncertainty amplified by domestic inflation and tapering concerns.
Some are suggesting the NASDAQ 100 could repeat September’s 2020 three week drop of 13%.
Today is the start of a two-day FOMC meeting. No change in monetary policy is expected but consensus is split evenly between November and December as too when the Fed may commence tapering.
As written many times, the Fed has been buying about 60% of net Treasury issuances for many years. What happens when this support is no longer there even as $1.5 trillion deficits are forecasted for several years to come?
Returning back to yesterday’s market activity, the 10-year Treasury rallied about a ½ point on the Chinese news and the NASDAQ fell about 2.2% and the Dow about 1.7%. Both indices rebounded off their lowest levels of the day as some bought on the dip. Treasuries also reversed about half of their gains.
According to Bloomberg all but 11 members of the S & P 500 fell in price yesterday.
What will happen today?
Last night the foreign markets were up. London was up 1.14%, Paris up 1.38% and Frankfurt up 1.46%. China was closed for a holiday, Japan down 2.16% and Hang Seng up 0.51%.
The Dow should open moderately higher on a reassessment of the risks associated with China’s crackdown its real estate sector and optimism about the commencement of the two-day FOMC meeting. The 10-year is off 4/32 to yield 1.33%.