May 19, 2022
Good morning,
Years ago, I changed the cadence of my Morning Notes from every day (M-F) to every other day (M,W,F), adjusted for holidays (T,Th). During periods of elevated Volatility (euphemism for sell-offs), I reverted back to every-day in an effort to possibly calm some emotional fears that are parabolically related to Volatility. I don’t know how effective my shift to daily MN’s was and believe it may have had the opposite effect. As in: “he’s writing again? – this must be bad!”. Daily notes stopped after the February 2020 Covid related sell-off.
I’m writing you today, after yesterday, and with the Grace of God before tomorrow, because following yesterday’s stunning market performance, many professional and non-professional investors believe the sky is falling. I’m not writing to scare anyone, only to say the sky is not falling. It sure doesn’t feel like the market closed yesterday at the same level that it closed at last Wednesday. As staggering a blow to portfolios as yesterday felt, we were there already just last week. Yesterday’s sell-off just wiped away the mini-rally that started last Friday (after probing even lower levels last Thursday).
On Monday we talked about a series of uninterrupted 10:1 or better volume up days as being a good early indicator of a bottom. We had two qualifying hi-volume Up days Friday and Tuesday. Yesterday was an interruption cancelling the signal – no sign of a bottom yet. It seemed early anyway; we have talked about a tough summer already.
Should we take yesterday’s selloff and assume, with the deeply imbedded recency bias in all of us, that the S&P will be down 40% in the next month if we only extrapolate yesterday’s performance out a few weeks? That’s what our instincts are hinting at behind our consciousness, feeding our fears. Could it happen – yes, anything can happen. Will it – not likely without some unknowable unknown (war, famine, plague) materializing out of nowhere.
There is a very high probability that the supply chain crisis will ease, inflation will peak, China will emerge from its lock-down, the war in Ukraine will clear, our economy will slow, the Fed will back off its tightening posture. The open question is when and in what order will all these changes unfold, and whether they will unfold before the U.S. economy goes into recession. Markets have seen much worse in past cycles – it just doesn’t feel that way now.
See you tomorrow. Oh, btw – please let me know if you find today’s out of cycle note helpful or not.
Be well,
Mike