Investor Sentiment Falling Fast

By Lloyd Khaner  APR 09, 2014 11:07 AM

New market direction found! The main question on investors' minds is, what was the cause of the decline?

 


Well, last we spoke, the market was searching hard for its next direction, and my oh my did it find it. Just for the sake of clarity, the direction found was down. While the major averages -- the Dow (INDEXDJX:.DJI), S&P 500 (INDEXSP:.INX), Nasdaq (INDEXNASDAQ:.IXIC) -- only lost a few percentage points, the broad market of stocks has experienced a correction. Is the correction over? If I knew I would tell you, but I don't, and nobody else does either.
 
So the main question on investors' minds is, what was the cause of the decline -- the "trigger"? Again, nobody knows, but let me share a good guess with you. The Japanese yen and Chinese yuan currency carry trades started failing. Carry trades are when you borrow money in one currency with the hope that it weakens, and you invest the borrowed money into another currency or asset which you hope strengthens. (For more, see What Is a Carry Trade?) When it works, you make money with both sides of the trade, but when it doesn't work, you can lose money on both sides of the trade. Add a little bit (read: a lot) of leverage to the trades and you get a lot of gain or a lot of pain. Rhetorical question moment: Can you figure out which way the carry trades went in March and early April?
 
Next is that the carry trades have to be "unwound" enough to lessen the pain, and in some cases, to cover margin calls (pay back borrowed money). That's where the equity markets usually come in. Stocks are generally easy to sell, so are often a good place to raise cash. You may not like the price, but you can usually get a bid. And get a bid stocks did -- at consistently lower and lower prices. The momentum stocks got hit the hardest, with growth stocks right behind them, followed by value stocks getting hit the least. Nevertheless, if you have ever been in a fight, when you get hit, no matter how hard, it still hurts. And that's where we are now -- hurtin' a bit; no knockdown, no knockout, but bruised and bloodied and not likely to forget about it anytime soon.

Here's a quick look at the worries facing stock market investors. Click on the image below for an interactive version of this week's Wall of Worry, or scroll down for the text-only version and an explanation of how the Wall works.




Wall of Worry (Text Only)

QE:
 Out with the old and in with the potentially new, as the US FOMC ramps down its program while the eurozone ECB ponders ramping its up.

UNEMPLOYMENT: Soon the US will have too much employment. Of course, much of it is under-employment. If you don't believe me, just ask the PhD preparing your latte.

INVESTOR SENTIMENT: Confused, and rightly so.

EUROPEAN ECONOMY: All eyes on Russia and its 40,000 troops on the Ukrainian border.

HIGH-FREQUENCY TRADING:

Lloyd: Beginning of the end for equity HFT?
HAL: There's always the currency and bond markets.
Lloyd: You wouldn't.
HAL: They're bigger, global, and more liquid than the equity markets.
Lloyd: But you wouldn't--
HAL: Already there!

CHINA: Don't mess with our currency! You want to play carry trade? Stick with Old Reliable -- the Japanese yen.

RETAIL SPENDING: Is anybody out there?
 
US ECONOMY: Spring has sprung, the grass has ris', I wonder where the economy is?
 
ECB: Deflation? Inflation? Nope, just one heck of a conflation of both.  
 
MOMENTUM STOCKS:
After a multi-year mega run, is it time for mo-mo to go-go?
 
EMERGING MARKETS: Will the Comeback Kids make a comeback?
 
VOLATILITY: Not a whole lot on the surface, but a few feet down below the market averages it's a free-for-all.
 
PMIs: Pretty good lately but no one cares.
 
UKRAINE: Trying not to blink.
 
RUSSIA: Trying to make Ukraine blink.
 
FEDERAL RESERVE: Sticking to the current path. You be the judge as to whether it's the path to prosperity or destruction. 

EARNINGS SEASON: Are expectations low enough? We'll see...


What Is Lloyd's Wall of Worry?
By Lloyd Khaner

Welcome to my at-a-glance guide to the issues facing investors this week -- a unique tool for traders and money managers.

Typically the term "wall of worry" refers to the entire body of concerns influencing stock market
action. When the wall is high, meaning the market is nervous, stocks tend to get cheaper.

This wall of worry is even more specific. Every week I list the exact concerns in the marketplace and use the list to help me make buying and selling decisions. As I like to say, "Buy fear, sell cheer."

In other words, once the the wall rises above 15 blocks, start looking for deals. If the worry count sinks below 10, consider selling; prices have likely peaked.

No positions in stocks mentioned.

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