What happens when market players are undecided but slowly but surely throw in the towel each day? We have corrections, and they are slow like molasses. Further, we had just become used to those swift, painful drops on high volume and rising volatility. I suppose if you’re going to be in pain, would you like your fingernails ripped out slowly, one at a time or quickly and all at once? For most it would probably the former not the latter.
Why do corrections happen so slowly? Hope is a big reason. Many in markets see brief corrections and want to ‘catch the bottom’, or they see strength is sectors and they jump in these names. Lately, energy, gold and silver have been where much of that money has been placed as we have seen an exodus from many high beta groups like biotechs, technology and retail.
Now, it is not uncommon to see money flow from one group to another – the search for return and yield in a very tough environment never ends. Alternatives like bonds (with yields as low at 1.7% on the 10 yr. bond) and cash (yielding around zero) are just not attractive. The SPX 500 slipped into negative territory again last week, and we are nearly halfway through 2016. News last week that hedge funds are on the ropes is spreading, while recent data show fund managers have been shedding stocks – not to mention issuing dire warnings in the business media.
We don’t need to hear this, rather if we pay attention the market action — detail such as higher put/call ratios, weakening breadth, lower reading on the bullish percent index, slumping poll numbers by the bulls and increased distribution days – that is enough to tell us the market is in correction and is taking its sweet time. The slowness may be an anticipated response (kneejerk) that the Fed will be more accommodative – after all, those who doubt the Fed runs the show often get run over. This time? I’m not so sure.
