Where the Rhythm Lies

For the umpteenth time in the 10-year old bull market from 2009, the S&P opened higher on a gap this morning, and then promptly traded broadly sideways for the balance of the day.

Understanding this rhythm may be key to understanding when the current bull market may end.

You see, as detailed in a New York Times February 2018 article “The Stock Market Works by Day, But It Loves the Night” (which in turn cited research by the Bespoke Investment Group), if one measures all of the net overnight advances in the S&P 500, these gains account for more than 100% of the market’s total gains since 1993.

In other words, by the time New York local markets open, nothing tends to happen. Imagine tons of human eyeballs and quant algorithmic trading engines in New York and other U.S. locales now staring at intraday market-hours price action that largely do nothing. Instead, mean reversion trading takes over. This is an important subtle shift from the markets of the 1970’s and 1980’s where the world typically waited with baited breath for U.S. markets to open on a daily basis.

Arguably, the rhythm of the trading day – its very tone -- is now being set abroad. This tone generally starts in China, continues through Europe, and by the time U.S. markets open, we are effectively now the “night trading” session (without most people in New York knowing or admitting such) within the global market day. The U.S. is the time zone where markets are more naturally resting, more than trending.

To me, this is indicative of a world driven by foreign capital flows into what has largely been deemed by some as the “dynamic and innovative U.S. economy,” and by others as the world’s “least dirty white shirt” as bigger problems in Europe and Asia have abounded. This is perhaps not the greatest reason to have thrown a U.S. party: the center has been holding and attracting capital as a safe haven while the periphery has splintered, until someday the center may give way as well.

Most recently, volumes in U.S. markets – after being notably high during the Q4 2018 market decline -- have been increasingly anemic as we now re-approach all-time market highs. This is hardly a confidence builder.

So why did markets turn so ebullient in Q1 2019? Sure, Chairman Powell changed his tune on U.S. rate hikes back in January, but was the fact that Chinse banking authorities blinked and started to rekindle its shadow banking system’s expansion with aggressive bank lending practices (yet again) arguably even more important?

So here is the takeaway: When the day comes when U.S. markets finally make an entropic turn lower in price, look for the spark for such a turn to come from abroad, not from any domestic news. Look for an environment where the U.S. retail investor – focused only on daylight U.S. trading – may get caught or trapped by gapping overnight moves. After all, might one not expect that what has gone up the manner that it has, might also go down in a similar fashion?

Published By: Barclay Leib, Senior Advisor, Cooper Family Office

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