“Markets Only Do This When Conditions Are Getting Worse”

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Is the rally the real deal? Watch the credit markets.

By Christine Hughes, Chief Investment Strategist, OtterWood Capital:

Since last Thursday’s intra-day low, the S&P rallied +6.6% in four days with the former laggards and most heavily shorted stocks leading the charge. This action is very typical of a bear market rally and should be viewed with skepticism. A great example of a laggard leading is Freeport McMoRan (FCX) which rallied +63% in four days before giving some back. Even with that huge surge, this stock is still down -66% the past year.

Given what was becoming a large short position in the market (see bottom of chart below), there has been what we call a “squaring of positions” the past week, driving global markets higher. Shorts have begun to cover which forces buyers into the market when they would really rather not be buyers.


If you want to know if a rally is the real deal, you must watch credit markets as credit leads equities – always. By looking at investment grade spreads below, credit has actually deteriorated during this rally, the opposite of what you’d want to see. When spreads widen out (line on chart goes up) this means the market is demanding a higher rate of interest for riskier corporate bonds vs governments. Markets only do this when conditions are getting worse/tighter. This line is going in the wrong direction.


Taken together, this tells me that although this ‘bounce’ in equities may have a bit more to go, we’re only talking days here, not weeks or months. It is my sense that March will not be a pretty month for risk assets. There is still a great deal of bad energy debt hanging over the global markets, a potential currency devaluation in China, and a crisis brewing in European financials. We remain cautious in our portfolios. By Christine Hughes, OtterWood Capital,

Desperate Measures for Desperate Times. Read…  China’s Massive Debt Cram-Down

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  17 comments for ““Markets Only Do This When Conditions Are Getting Worse”

  1. OutLookingIn
    February 20, 2016 at 2:04 pm

    Christine Hughes is one smart cookie.

    Well worth your time to watch some of her past vids on utube.

    I fully concur with the article. This market is nothing but “froth” with no substantive foundation. Next weekends G-20 meeting could very well result in a “Shanghai Accord” where a Yuan devaluation is rumored to occur.

  2. merlin
    February 20, 2016 at 3:02 pm

    absolutely agree. sitting in my paid-off home on my little pile of cash for a long time to come. and looking at dividend stocks with lust in me eye for a strong balance sheet. Yarrrr! There’s booty to be had if your are not greedy and have patience.

    • Si
      February 21, 2016 at 2:20 am

      @ Merlin
      Same here. Been sitting in cash so long my arse has got an imprint. There have been so many times when I have said “at last, the market is returning to its senses” only to find it goes up… and up…. and up……
      I wonder what will happen this time?

  3. Shawn
    February 20, 2016 at 4:43 pm

    What about 4th quarter GDP of 0.7%. A lot of bad economic data. She only mentions energy, Chinese devaluation and European banks. Perhaps in our crazy economy bad numbers no longer affect equities.

  4. alan einstein
    February 20, 2016 at 6:06 pm

    Wolf Street is really a great site and only serious investors seems to communicate but why is it always that they communicate the end of the world? How about that we simply will flail in this never ending world of mediocrity at best for the next twenty years similar to Japan after it had its huge bubble in the 1980’s to which it is still recovering. Not every bad and slowing economy leads to another Cuba, Venezuela or Russia. Just think about it and tell me why I am wrong. Respect the opinions written here, just don’t believe its the end of the world. Just a long time frame of no prosperity.

    • February 20, 2016 at 6:32 pm

      Alan, I’m with you. I don’t see an “end of the world.” I do see a terrible investment environment for a quite a while, and a recession in the near future. These things happen. But they’re not the end of the world.

      • Toddy
        February 20, 2016 at 7:31 pm

        Except for those who over-leveraged themselves in credit derivatives of course.

        I’m terribly curious how Wells Fargo will do in the coming down cycle.

    • Merlin
      February 20, 2016 at 7:36 pm

      Alan – I think many of us express our frustration on this site with current affairs and how seemingly little control we have over The Beltway shenanigans that have placed the country in such financial distress summed in one phrase: no balanced budget. We long for our governments to be as responsible as we have to be!! And I agree with your last statement. I have steered both of my children into healthcare careers as the best chance for continuous employment in any kind of economy.

    • Nick
      February 20, 2016 at 8:20 pm

      I agree completely — I think that the arguments about whether there is going to be a violent correction or not kind of miss the forest for the trees, we should be wondering instead where growth is actually going to come from. Whether the lack of growth is accompanied by a violent correction or a long malaise is kind of immaterial — though the latter is probably more frustrating, from an investment perspective. Where there any classes of equities or investments that did notably well during Japan’s long trudge?

      • Merlin
        February 20, 2016 at 9:41 pm

        Nick – I would guess food, clothes, housing, utilities would have provided some slogging growth as these are necessities. Maybe a Japan-based reader will comment….

    • Richard
      February 21, 2016 at 12:07 am

      Because, sweetheart, it’s not ‘recovering’!

    • Nick Kelly
      February 21, 2016 at 2:41 am

      No, not the end of the world. The Depression, the Two World Wars didn’t end the world. In fact the last two brought the US first to the front ranks and then in 1945 to the last man left standing with about the same casualties as its Civil War.
      The Soviet Union was a military threat but never a commercial one. Before the war, only Europe, Britain and the US built cars for export. At its end, All US competitors were flattened or broke.
      The two losers have now caught up and this is one reason the US can’t ‘go back to 50’s and 60’s.

      This site like Stockman’s Contra Corner is a niche in the tide of relentless Main Stream Media boosterism. You are asking why this drop of negative sentiment added to a swimming pool of irrational exuberance has to be be so damn concentrated.
      There is also the fact that from the point of view of some denizens, the MSM and the whole stock market seem to have gone…. well, insane.
      In 1929 Poor’s, not yet merged with Standard, spoke of ‘the great common stock delusion’
      Today we have the hype of social media stocks, for some reason referred to as Technology or Tech stocks.
      Twitter with no profit and multi-billions in value, sorry valuation, is a tech stock.
      So supposedly is Amazon essentially a well-run delivery service selling for 600 times earnings. And so on.
      Then you have the European banks, the China crash ( still not grasped by the MSM) etc.

      Before World War II, World War I was known as the Great War (or sadly, the War to end War)
      Our current term for the post 1929 Crash is the Great Depression. The idea that there could be ANOTHER one is something the MSM just can’t contemplate. And therefore can’t help its readers prepare.
      No one wants a crash but the Fasten Seat Belts sign is on.

      But the main reason

      • Ptb
        February 21, 2016 at 10:42 am

        US civil war had about twice the number of casualties as that if WWII.
        approx 600k vs 300k. Check Wikipedia

        • nick kelly
          February 21, 2016 at 1:09 pm

          Ok I’ll take your word for it-and of course casualties includes injuries- and you had a much smaller chance of surviving an injury back then.
          So it reinforces my point that the US compared to say Russia et. al. paid a relatively small price.

          BTW; some of the top US strategists were convinced that at the end of the war they would only face one serious rival for global hegemony- the same one that challenged them before the war: Britain.
          The same Britain that was desperately trying to convince them that the USSR had designs on the entire continent.
          They finally got the message after Churchill’s ‘Iron Curtain’ speech in the US.
          But for what Churchill called the back ribs of Europe it was too late.

    • Bruce Adlam
      February 21, 2016 at 6:14 am

      The 1930s was not the end of the world and no one is saying that

    • robt
      February 24, 2016 at 12:38 pm

      Don’t include Russia with the other two. They are not even remotely associated, and the common propaganda from the West is to try to conflate Russia with the Soviet Union.

  5. John Doyle
    February 20, 2016 at 6:14 pm

    Read this; The “silver age” of central banking for more insights into the mess;


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