The Anatomy of a Stock Market Meltdown

OVERVIEW
US equities have collapsed this week and there is a fear and panic in markets as investors run for the exit doors. But many out there know this fear and panic all too well and view it as nothing more than a super compelling opportunity to buy the dip for that next run to a fresh record high. This strategy has paid off handsomely for a decade, so should things be different this time? YES! We believe there is good reason to believe things should be different this time. Here's why...

BACK STORY
The record run in stocks that began a decade ago off the 2009 financial markets crisis low, was a run architected by the Federal Reserve, in an effort to resuscitate a terribly damaged economy, in desperate need of being saved. This meant implementing a strategy of lowering the cost of borrowing to nothing, to draw investors off the sidelines and into stocks. Free money! And yes…..it’s kind of like dangling free drugs in front of a banged up addict, who's desperately trying to give it up, and then pumping that addict with free drugs for a prolonged period of time. Reckless? Absolutely! Did the Fed have a choice? Maybe not…but that's not a conversation for now. For the record, we definitely know the story of one such person(s), who on October 31, 2008, introduced an alternative form of currency born out of a rejection of the system.

PRESENT DAY
After ten years of the most incredible record run in stocks, the market is waking up to the fact that money is no longer free, with interest rates rising back to levels where there is once again sensitivity in the nerves. Central bank policy is normalizing and what this means is the game is up and models can no longer justify equity market valuations. These investors also see where yields look to be headed and will be wanting to take advantage, through the rotation and reallocation into assets that stand to benefit from the end of hibernation and the return of the bear.

WHERE TO FROM HERE?
Here’s a look at the S&P 500 move from the 2009 post crisis low to the recent record high. This move has been decidedly one way and very unforgiving to any contrarians that have tried to stand in its way. But corrections will always come and markets will always look for mean reversion. If we consider some standard retracement percentages frequently tested in corrections, it still looks like we could have some ways to go before the stock market is ready to consider another bull market.

FIBONACCI
The 23.6% Fibonacci retracement of the 2009 to 2018 move comes in at 2400, while the more commonly watched 38.2% Fibonacci retracement comes in at 2070. While 38.2% may seem like a lot, it is commonly tested in the healthiest of uptrends….and when we talk healthy and uptrend, this one takes the cake (ok…maybe bitcoin too…and just look what happened there….a whole lot more than 38.2%). And remember, if the market collapses all the way back to the 38.2% fib retrace, it will only be a massive collapse that still has the market trading at record high levels from 2015 – not all that far back and 7 years post 2008 crisis!

THE STRENGTH OF FLUFF
What was going on in back in 2015? It was preparation for the start to Fed normalization and a move back to taking rates higher again, a move that signaled the beginning of the end. So just maybe, the move from 2016 to present has been nothing more than that final last gasp effort - not driven on any fundamentals, but driven off a desire to pile into a magical trade that would never have existed had the powers that be not wanted it to.

TAKEAWAY
Where does this leave us? Perhaps with a whole lot of fluff in that run from 2015. Last checked, fluff isn’t usually a reliable support. So maybe a 38.2% pullback doesn’t sound so unrealistic after all.
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