Explaining the last “Mambo” of the Markets


We left the week behind with some other significant scare in the markets, especially last Wednesday and Thursday, with the Dow Jones leaving in the last 5 days -4%, the S & P500 -3.8%, the Nasdaq one – 3.2% or the Russel 2000 -5.1%. Before the staff enters panic it is worth remembering that we are facing a 4% drop in what is the longest bull market in history and that began in March 2009. That is to say, we have more than 3,500 days of markets upward.

Signs that things can go wrong we have them everywhere, but we have also had them in the last 9 years and the markets have continued to mark maximum after maximums even though we are in an overvalued, over-bought and extremely bullish market.

In October, there has already been signs of weakness in US equities with some punishment for small caps and with the hikes losing depth, a sign that strong hands were selling the most illiquid positions. Before the fall of this week in October the S & P1500 was down -1.38%, but the average of the 1,500 shares fell -2.75% with 106 shares falling more than 10% and only 15 shares rising more of 10%.

The market downtrend alert index developed by Goldman Sachs has been at record highs since 1969.

The spread between the yield of the 10-year bond and the 2-year bond began in September to approach zero, a signal that could be beginning to anticipate a recession a year ahead in the US or simply expressing that the yield of the 10 years was abnormally low.

And perhaps the explanation that allows us to better understand this whole scenario, is the rise in profitability of the US 10-year bond. In a world accustomed to having free dollars, the increase in the price of debt in the US began affecting the weakest part of the market, the currencies of emerging countries and it is logical that sooner or later it will have to move to the calculation of the premium of risk with which variable income is valued.

USA 10-year bond yield:

To vary the current moment “catch” the retail investor “invested” in equities and little invested in “cash”

By the way, what has happened this week we have already seen recently, especially last February. Curiously, both the declines of these days and those of February coincided with the “blackout” period prior to the publication of results in which companies can not repurchase shares. Logical that the market falters when one of the main buyers disappears for a few weeks.

We will see in the coming weeks whether everything is a temporary issue of buybacks of shares by the companies (buybacks) or if the weakness continues in the month of December.