What to make of the US indices worst weekly loss in 2 years?

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What happened?

Dow down more than 600 points in a day, and most weekly loss since early 2016.

  • Equity indices down significantly for the week
  • US bond yield up significantly for the week
  • USD finally strengthened significantly on friday after taking a beating for last year.
  • Gold and Oil dropped in friday, but uptrend still intact.
  • Vix spiked to 17, resulting in backwardation (near term volatility higher than long term)

Why did it happen?

  • Janet Yellen was kind enough not to raise Fed Funds rate, but the Fed knows that the economy is cooking along and it will lead to several rate hikes this year. The fears of higher inflation and interest rates causes the US bond yields to rise.
  • The addition of more than expected 200,000 jobs in January sparked more fears of impending interest rates hikes.
  • Deutsche Bank reported losses for 3rd straight year, causing DAX to drop 3.85% in a week.

Is the market crashing?

We are in the exciting last phase bull market in which earnings, inflation, and interest rates are rising. The bull market will end when if inflation and interest rates keep going up, and when market perceives that corporate earnings are falling.

The good news is that earnings are rising very nicely now, so the bull market should prevail for a while.

The charts of major stock indices have turned parabolic,  meaning the uptrend is unsustainable in the short term. A retracement is healthy for the bull market.

How long will the retracement last?

Some traders believe the market will bounce back up on Monday. See https://www.cnbc.com/2018/02/02/the-dow-is-plunging-more-than-500-points-what-happens-next.html

Others think that the market will fall for some time. See https://www.bloomberg.com/news/articles/2018-02-02/stocks-in-rate-wringer-with-rout-raising-existential-questions

No one really knows. Found an nice article here (https://www.bloomberg.com/news/articles/2018-02-03/how-worried-should-you-be-traders-confront-inflation-s-reality), where a strategist commented: “‘‘I’ll bet you a bag of donuts that by Wednesday or Thursday of next week the equity market starts finding its footing against the backdrop of more stable bond yields. And then, like any bottoming process, the market tests it and tests it again and then all of a sudden, boom, new buyers come in.”

Coincidentally, my time frame is similar. My plan is to wait about 2 weeks before doing some discounted shopping. My reasons borders on speculation, but it helps me to prepare my mind to take action.

  1. There is no real crisis at this point, so likely not to last for months
  2. Retracement after parabolic rise likely will not be a short 1 day fall.
  3. I have a trading calendar by China company HomilyCharts that predicts turning point of STI. The next 2 turning points are 5th Feb and 19 Feb 2018. Please take this with a large dose of salt.

The other thing to be careful about is that based on past experience, when bad news come, they usually come together at the same time. Lets see if there are more negative news to come lol.

Conclusion

There are no signal that tells me to panic sell on coming Monday. The market will be in risk-off mode in the next few days. I expect stocks to sell off the next few days as flight to safe haven begins.

I am comfortable with my dividend portfolio. I will wait for my indicators to tell me when to take further action.

  • I'm a remisier with Maybank Securities, and as a bonds and REITs investor myself, I guide my clients to build resilient bonds and REITs portfolios. If you like to be guided, please open a trading account to become my client; It's free!