IT WAS NOT A PRETTY DAY!

As widely reported, at one time yesterday the market was experiencing its worst first day of trading since 1932. After a late afternoon partial recovery, markets had it worst first day of trading in 15 years, its sixth poorest start of new year trading since 1932 according to Bloomberg.
I am certain there will be a crescendo of reports stating how the first day of trading goes, so does the year. Personally I disregard these generalities under the similar premise reading in poor light will hurt your eyes.
The reasons for the selloff…China and the Middle East, albeit most of verbiage focused upon the former.
I ask will the Middle East replace China as the primary market narrative in similar manner that China replaced Greece six months ago?
If so, how will the markets respond? As widely reported there is a record short interest in crude and there is the greatest amount of “put options” purchased on oil. For contrarians, such is very bullish.
Many times I have commented about 2015’s intense bifurcation where the only strategy that worked was momentum, aka HFTs. Bloomberg writes momentum issues returned 32% for 2015 while traditional values stocks fell about 22%. Wow! [Note: I do not know their metrics for this analysis]
Did momentum issues also benefit from the greatest number—in both the absolute amount and dollar value—of ETFs? ETFs are quasi index funds whose composition is simply based upon capitalization size, a size that may be amplified via leverage.
If the dominant narrative changes from China to the Middle East, and if momentum remains the primary strategy, will oil and oil companies have the proverbial market melt up, a melt up the partially the result of the covering of massive short positions? If so, will any momentum firms or ETFs suffer great distress given leverage, leverage that few know or understand?
Early yesterday oil was up about $1.25 on Saudi/Iranian tension, only to close about $0.15 lower on the belief that tensions between two of three primary OPEC members will not impact production. [Note: Iraq is the third primary OPEC member]
What will happen today?
Last night the foreign markets weredown.. London was up 0.07%, Paris down 0.55% and Frankfurt down 0.63%. China was down 0.26%,Japan down 0.42% and Hang Sang down 0.65%.
The Dow should open moderately lower on global nervousness. The 10-year is up 3/32 to yield 2.23%.

 

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.