Today, I’m reminded of the old Wall Street adage: Buy The Rumor, Sell The News. On average, capital markets are a forward looking mechanism and tend to discount future events. So they tend to rally into a major event then sell off when the event actually occurs. We have seen tremendous moves in global markets in the wake of the European Central Bank’s (ECB) latest meeting.
Draghi’s Bazooka Fires A Blank:
Before Thursday’s open, the European Central Bank (ECB) fired another shot from their easy money bazooka. The ECB cut their benchmark interest rate to 0% from 0.05%. They also expanded QE (money printing) to 80 billion euros a month, up from 60B. The bank also cut their bank deposit rate further into negative territory taking it down to -0.4%, from -0.3%.The ECB also extended their QE program to March 2017, which is longer than the initial target of September 2016.
Market’s Reaction: Huge Reversals In Stocks, Commodities and Currencies:
Over the past four weeks (since the Mid-Feb low), we have seen huge moves in global capital markets (Buy The Rumor). For example, the benchmark S&P 500 index soared +11% in 3.5 weeks and crude oil vaulted nearly 50% during that time. In normal non-easy money days, a 10% rally for the entire year in the S&P 500 was considered healthy. So 11% in three weeks is a HUGE move by any normal measure. Crude oil surging nearly 50% in 3 weeks is also a huge move. These are major global markets, not some thinly traded no-name penny stock.
That brings us into today. Initially, stocks rallied hard on the news and the euro plunged. That move was short-lived because during Mr. Draghi’s press conference, he said he’s done with easy money (for now), and that triggered a huge reversal in global markets (Sell The News).
The German DAX was up over 2% after the ECB announcement but plunged and closed down -2.3%. That’s a HUGE intra-day swing from high to low. Separately, the euro currency traded all over the map. After an initial (and huge) sell-off, the euro soared from 1.0853 to 1.1226.
Again this is a major global currency, not a small penny stock that no-one know’s about. Exaggerated moves (both up and down) occur during bear markets, not bull markets.
A Near Term Top
We believe today’s huge reversal marks a near term top for the risk-on trade (stocks, commods, etc) and a near term low for the risk-off trade. Stocks and oil are negatively reversing from deeply overbought levels (and below important areas of resistance) and are now a mirror image of what we saw on the Feb 11th near term low (when markets soared from deeply oversold levels).
