Market Brief – Wednesday 10/24/18

Stock prices are a function of liquidity, or how much money is sloshing around the financial system, and not earnings. Even though earnings are positive, stock prices are falling due to a lack of liquidity. Even with the lack of liquidity, stock prices are trading well above where they should be based on their earnings. Earnings don’t matter until they do.

New home sales plunged -5.5% MoM or even worse, -13.2% YoY. To make matters worse, mortgage applications tanked -16% from a week ago! With residential lending being the largest consumer money-generator in our economy, this is a huge signal of an economic contraction. It also indicates the resumption of the deceleration in the money supply is going to continue.

Today’s 5-year Treasury auction saw indirect, or foreign bidders, snap up a reasonable 59% of the auction. What is unexpected is that direct, or domestic bidders, were nearly non-existent. One view is direct bidders want a higher coupon for their money. The other view is that liquidity is at a premium and domestic investors are all tied up in stocks. The remainder of the auction when to the dealers, who will look to sell to their clients. Based on the reaction from the stock market, it appears liquidity is shrinking.

All major stock indices were down hard today as liquidity drained from the market and stocks gave back their gains for the year. Treasury yields were down a bit, but not as much as one might expect from a risk-off position. The speculators who are betting against Treasuries are extremely convicted about their position. When they are flushed out, and the will be, stock prices will fall even faster as they are forced to buy Treasuries to cover their short positions.

Physical gold finally made it over its 100-day moving average, but the gold miners got stuck in the equity downdraft. Nothing is signaling a move in just yet.

Agricultural commodities jumped in early trading but ran into a wall of sellers at a previously defined area where the sellers are at. Trading volumes have been relatively light, indicating the sellers are nearly tapped out. If the bulls can break through the remaining sellers, prices will quickly move higher.

Based on the information I have on the CTAs, which is probably a bit out of date as I believe they adjust their parameters daily, they should deleverage tomorrow by selling more S&P 500 futures. I suspect they will do the same with the Nasdaq-100, DJIA and Russell 2000.

Risk happens fast.