Market Brief – Tuesday 10/23/18

Following a global routing of stocks, U.S. stock indices opened below their 200-day moving averages, which are key technical levels investors watch to determine the strength in a market. When a security continuously trades below its 200-DMA, it is considered a bearish signal.

Buyers stepped into the markets early to take advantage of this drop in stock prices, as most believe strong earnings will propel the equity markets higher. Corporate earnings don’t matter when liquidity is high, but when liquidity is low as it is now, earnings start to matter. The markets will ignore a positive earnings print if the markets sense weaker earnings in the coming quarters due to tighter financial conditions.

With the Fed raising the Federal Funds rate and unwinding their balance sheet, and the Federal government running massive deficits, financial conditions are tightening. The evidence of tighter financial conditions is in the money supply, where the growth rate is about two-thirds its long-term average.

Today’s 2-year Treasury auction was met with decent foreign demand, as foreign investors took 52% of the auction. Domestic investors largely ignored the auction, leaving most of the remainder to the securities dealers. As dealers take on more inventory, liquidity conditions tighten.

Tighter liquidity is bearish for stocks and bullish for bonds.

The equity markets are in a distribution phase, which is where the “Smart Money” exits the last of their positions. The evidence is in the large downward moves, followed by retail investors buying. At some point, retail investors will be tapped out. They keep buying as the big money sells.

The S&P 500 remains below its 200-DMA, while both the Nasdaq-100 and DJIA closed above theirs. Treasury yields were down slightly on the day as short-sellers came in to defend their short positions.

Physical gold and the gold miners started the day over their 100-DMA but closed below it. Agricultural commodities successfully defended their 100-DMA for the second time.