This commentary below was written yesterday by Mike O'Rourke of JonesTrading.
If ever a day provided indication that the market’s pricing mechanism is broken, it was today.
It is remarkable that a trading day can start with nuclear sabre rattling and the S&P 500 - that has been appreciating at a 99% annualized rate in 2019 - does not even blink. The Indian airstrikes on terrorist camps in Pakistan inflamed the relationship between the two contentious neighbors, who each have nuclear capabilities.
The NY Times reported:
“In a sign of escalating tensions, Mr. Khan summoned the National Command Authority — the body that oversees the deployment and management of Pakistan’s nuclear arms — for a special session on Wednesday. The prime minister also called for Parliament to meet on Wednesday to discuss a response.”
Clearly, there is no quantitative input for such a qualitative event, therefore, in the eyes of the model driven mechanical US equity market, the event may well have never happened.
Instead, this tape creates an overzealous move when a share price crosses the 50 day moving average. Historically, this was a weak technical signal, but when the trading models follow the same technical signal, it becomes powerful. For decades, fundamental stock pickers mocked technical analysis. Today, trading is dominated by computer models using similar signals on a larger scale.
India-Pakistan was just the most obvious example of a market that relies more on technical action than qualitative developments. Given the environment, it probably should not be surprising that the worst Housing Starts number since mid-2016 was a nonevent. Then, on the other hand, the outsized expectations beat for February Consumer Confidence created an upward spike in the S&P 500. The models responding to the size of the expectations beat missed the circularity of their behavior. Consumer Confidence is often reflective of stock market behavior.
Did we mention that the S&P 500 is advancing at a 99% annualized rate this year?
Another story today that would have gained traction in the past but fell on deaf microprocessors today was the FTC’s formation of a technology task force to monitor anti-competitive behavior by large tech companies. The mission of the task force is clear:
“The Federal Trade Commission’s Bureau of Competition announced the creation of a task force dedicated to monitoring competition in U.S. technology markets, investigating any potential anticompetitive conduct in those markets, and taking enforcement actions when warranted.”
Note, this task form is being formed under an Administration that touts itself as the most de-regulatory Administration in the history of the United States.
Ever accommodative monetary policy greases the gears of the financial markets so well that they don’t grip when they should. When Chairman Powell testified today, he failed to mention that financial conditions have returned to test record easy levels. Regardless, at the end of the Q&A, he made sure to take a second opportunity to reiterate that the FOMC is on pause for the foreseeable future and it won’t be moving until the economy clearly resolves itself in one direction or the other.
EDITOR'S NOTE
This is a Hedgeye Guest Contributor research note written by Mike O'Rourke, Chief Market Strategist of JonesTrading, where he advises institutional investors on market developments. He publishes "The Closing Print" on a daily basis in which his primary focus is identifying short term catalysts that drive daily trading activity while addressing how they fit into the “big picture.” This piece does not necessarily reflect the opinion of Hedgeye.
