Review Of Recent Market Events

Over the last week or so, we've had a tremendous set of events in the market. Instead of looking at the Treasury Market in particular today, I'm going to look at the inter-relationship of the markets and macro events to show what the markets are telling us. The short version is this: the markets are at best signaling slow growth and an increasing possibility of a recession.

First, the markets are being hit by a cross section of events. As I pointed out last week, these can be summed up thusly:

1.) The EU Commission President stated the EU issues were no longer contained to the periphery. There are a lot of issues between the various countries here that are beyond my knowledge, but Spain and Italy are now having problems with their respective bond yield (their yields are blowing out) indicating investors are concerned about those economies.

2.) The US economic news has been growing increasingly negative for the last few months. This started with the US manufacturing sector, which was hit by the supply slowdown that started in Japan. Then we had the last two employment reports, which were far weaker than anticipated. This was followed by a massive downward revision to first quarter GDP and a weak 2 quarter GDP print. We've also seen consumer spending slow. However, as I noted yesterday, the overall economic numbers show a weak US economy at this point, but not a recessionary environment.

3.) Market participants have uniformly panned the debt deal package as counter-productive in the current economic environment. Once the debt deal was signed, the markets started tanking -- and have been ever since.

4.) Several markets were already through important technical levels, which aggravated the market's weak position and accelerated the selling. This led to computerized sales adding further downward pressure.

All of these factors led to the sell-off. In addition, since I wrote the above statement, we have S&P issuing a downgrade of US debt largely based on political factors -- an analysis I agreed with.

Now, let's also assume that during different periods in the ideal economic cycle, various markets behave in certain ways. For example, as it looks like the economy is starting to slow, traders sell equities and commodities (because these are risk based assets whose value is largely derived from economic growth) and buy treasuries (because inflation is low or non-existent and there is no possibility of the Fed raising interest rates).

Let's take a look at some year long charts:


Stocks have sold off massively on huge volume and are now just below year ago levels.


Treasuries have rallied for the exact opposite reason as stocks -- they are considered a safe haven during times of uncertainty, which we definitely have right now.


Oil has dropped like a stone on the assumption that a slower economy will lead to lower oil demand. The good news here is that lower oil prices mean less of a drag on US consumer spending.


The dollar is still consolidating at the bottom of a long, multi-year sell-off.

While copper has dropped with the equity markets, wheat and corn are sill in fair shape.

Let's take a look in more detail at the markets.


From its recent highs of approximately 134.75, the SPYs are now down a little over 17.25%, which is quickly approaching bear market territory. The volume is massive (nearly three times the previous levels) and the downward bars are incredibly strong. Simply put, this is a massive sell situation that has wiped out a major amount of market value.



Conversely, the IEFs have staged a massive rally on volume that is nearly 3-5 times the levels of the previous month. The market has printed some incredibly strong upward bars compared to the previous three months. From their recent level of approximately 97, prices have rallied almost 5%. While this is not a rally in commensurate response to the stock market sell-off, it's a big rally for the stodgy fixed income world.

These two charts show an incredibly clear shift in investing trend from risk acceptance to risk avoidance. Traders are dumping stocks (risk based assets) and plowing the proceeds into US government bonds.

Let me add a few personal observations. This equity sale looks overdone. As I pointed out on Friday, the data is pointing to a slowing economy with both the manufacturing and service sectors still expanding. While the manufacturing sector will probably print negative next month, I don't see an imminent crash, especially with car production and sales picking up post Japanese earthquake recovery. While consumer spending is contracting, it is doing so at an incredibly slow pace; it's really in more of a stall in an upward trend rather than a falling pattern. The LEIs are still slightly positive, the Treasury curve is still very positive, initial unemployment claims -- while still elevated -- are moving in the right direction and the last employment report was fair. While I don't expect markets to act entirely rationally based on the data, these charts simply belies the underlying data as far as I can see.