Are Stocks Having An Efficient Markets Moment?

#CKStrong

The efficient market hypothesis (EMH), alternatively known as the efficient market theory, is a hypothesis that states that share prices reflect all information and consistent alpha generation is impossible.  – Investopedia

Carol K., who is slowly emerging from a coma, has taught me many things.  One major lesson is that investing is not about predicting the future but a process.  And if you get it wrong, don’t get angry but adapt to the new market conditions, get on your horse and get back to even and beyond.  

The last two days really feel like stocks are having an efficient markets moment. That is a more hawkish Fed is being priced and markets are now concerned about their lofty valuations. 

We have resurrected GMM’s S&P Key Levels table, which illustrate what we believe are the most signifcant short-term levels to monitor. 

Note the S&P500 bounced off its 50-day at 4672 today, now a big support level.  A key fibo at 4622, and 4495 (-4.28 percent), the December low, is the one level we are watching closely.  To the upside is 4818 and 4796.56, the all-time high and closing high, set just two trading sessions ago 

A Wiley E. Coyote Moment?

Will the current sell-off morph into a Wiley E. Coyote moment and drive stocks over a cliff allowing them to fall to fair value, which, for most, is much lower?  We seriously doubt it until the Fed begins to remove lots of the stimulus and tighten monetary conditions.  Remember ”three steps and a stumble?” 

We will qualify our postion with an “unless a Black Swan event emerges.”  Given all the hype, a crypto crash may not qualify as a Black Swan but certainly a Grey Rhino, which could do some major damage.   

We suspect it will take much more than three steps for the Fed to shatter glass.  

We have no idea where the market is headed tomorrow but shorts should beware.  There is just too much liquidity and wealth in the global economy.  Earnings for Q4 are going to come in very hot. Moreover, stocks seem the place to be with the new inflation regime and extremely low and negative real interest rates.   

It’s extremely difficult to submerge a beach ball and hold it underwater for any significant time.

To go lower on sustained basis, we suspect the Fed will have to drain a lot of liquidity and destroy mucho wealth before they are done. 

Asset Inflation And Price Inflation Are “Cousins”

Volcker recognized that when he was fighting inflation, he was actually fighting two kinds: asset inflation and price inflation. He called them “cousins,” and acknowledged that they had been created by the Fed. – Politico

The following illustrates the model I believe represents the current (and many years past) market environment.  Love that simplicity and parsamony.

As always, we reserve the right to be wrong. 

Stay frosty, folks. 

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2 Responses to Are Stocks Having An Efficient Markets Moment?

  1. Joe Rourke says:

    That is some lovely artwork there Gregor. Economists should do more art and less equations to explain things, I think!

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