Are the Markets Becoming too Complacent?

Lately it seems that each time we turn around the markets are hitting higher highs.  We look at the headlines and what do we see?  Six Reasons why stocks are still setting records.  It seems as though there isn’t too much fear in the markets these days and that does not bode well for the normal cycle of ups and downs.  It doesn’t really matter much if you trade stocks, bonds, futures or Forex.

So what’s happening and why?  I have my own theory as to why this is occurring.  Last summer we witnessed the situation whereby each time the markets reported good news, it was punished.  When it reported bad news, it was rewarded.  Last summer the big concern was one of tapering off Quantitative Easing and until it became clear that tapering was going to happen; the markets rewarded good news with a drop in value.  The same situation is occurring this summer only now the fear is interest rate hikes.  The mindset appears to be “the Fed won’t increase interest rates if the news is bad, so if the news is bad we’ll go long.”  The opposite seems to be the case if the news is positive.  After all that shows strength and growth which means the Fed will hike rates sooner as opposed to later.

This past week we heard Charles Plosser, an FOMC Member mention that the Fed should raise rates next quarter yet GDP dropped to a negative (yes, negative) 2.9 percent.  Of course as soon as the news came out the pundits and analysts all claimed that this was weather related due to the extreme cold conditions from last winter.  Yet Durable Goods and Core Durable Goods also fell and did not meet expectation.  The question how long is the US going to claim bad weather as a factor?  If we have an extreme hurricane season this year, will that be a factor as well?

The problem that I see with the scenario and situation that we have is the Fed has already mentioned that the FFR (Federal Funds Rate) will remain subdued for an extended period of time.  Most analysts agree that the earliest we’ll see a rate hike is June, 2015 which means that we’ll be in this type of market for an extended period of time.  Another factor that we have to contend with is given that we’re in the summer season and the experienced traders are out on holiday, who’s running the ship?  The answer is the interns.  We see this phenomenon occur each summer season whereby volume is reduced and the most ridiculous and insane market moves occur.  Interns do not use judgment to make trades, they follow the rules verbatim.  They do not use judgment as they don’t the experience and know how to use judgment.

In my own newsletter Market Tea Leaves, I strive to provide traders with insight and market direction on a daily basis.  The cornerstone of what we do is based on Market Correlation.  When we started Market Tea Leaves in 2012 we could immediately see a correlated versus an uncorrelated market.  This is becoming harder and harder to do as the Institutionals aka Smart Money are making it more and more difficult to dissect the markets in a meaningful way to benefit the retail trader.  Want proof?  Take a look at what happened on Thursday, June 26^th.  The markets had positive news in terms of reduced unemployment claims and the Dow dropped by over 100 points for no apparent reason whatsoever.  If this isn’t market manipulation at its worst, then I don’t know what is.

This diagram shows the Dow on Thursday, June 26^th.  Initially the Dow opened higher but by 10 AM EST dropped by over 100 points with no economic news in sight.  All the economic news was reported by 8:30 AM EST.  So we’re in a phase whereby the market retreats on good news and advances on negative news.  The question is will we see a return to normal behavior after Labor Day?  Only time will tell…