Another market head fake

In the world of real bull riding, as opposed to nominal bull riding, or investing, the cowboy (investor) must anticipate the spins and leaps of the bull. Riders often study video of bulls engaged in previous games of cowboy tossing. A wrong guess sends the cowboy flying then landing awkwardly absent a score and without money.

So what can we make of the January plunge and recent recovery of the bull market? I am betting that the bull’s real intention is to plunge into a bear and that the latest rise in stocks is a head fake to trick the cowboys to overcompensate in anticipation of a continued ascent. Instead, the bull will reverse direction and slingshot the cowboy (investor).

Some of us are mystified by the recent rise in stock prices, but as the great Austrian economist Ludwig Lachmann wrote, moving the deeply anchored expectations of investors out of their comfort range for prices on the market requires extraordinary events. Some of us have seen indicators as early as two years ago, such as the hedge fund manager Mark Spritznagel, author of The Dao of Capital: Austrian Investing in a Distorted World.

Things to worry about:

Profits have fallen for three quarters. When they start falling, they usually don’t stop until after a recession.

Volume is thin compared to January: 

On Jan. 20, trading on major U.S. exchanges topped 12.4 billion shares, making it the highest-volume day of the year as the Dow Jones Industrial Average fell nearly 250 points.

So far this month, an average of 8.1 billion shares changed hands each day, up from recent years but below the average of the first two months of 2016.

Keep in mind that market prices are set at the margin, in other words by the people trading on a given day, even if only two people are trading. Many investors are waiting on the sidelines watching the action. Who are the prolific buyers? Corporations taking advantage of low interest rates to borrow, to buy back shares and boost per share earnings.

Standard & Poor’s 500 Index constituents are poised to repurchase as much as $165 billion of stock this quarter, approaching a record reached in 2007. The buying contrasts with rampant selling by clients of mutual and exchange-traded funds, who after pulling $40 billion since January are on pace for one of the biggest quarterly withdrawals ever.

"Corporate buybacks are the sole demand for corporate equities in this market,” David Kostin, the chief U.S. equity strategist at Goldman Sachs Group Inc., said.

The world economy has not improved. The threats that existed in January are still there today. Only the price of oil has risen, in spite of inventories at 85-year highs and only rumors of potential deals to limit increases in production.

The stock market is stuck in the same trading range it has suffered for the past year. It will require major news to overcome market inertia that breaks the psychology of the market and transforms it into another indicator of the looming recession by its collapse.