JP Morgan's Nikolaos Panagirtzoglou:
Markets become more brittle, risky: "The shift towards passive funds has the potential to concentrate investments to a few large products. This concentration potentially increases systemic risk making markets more susceptible to the flows of a few large passive products."
Crashes, when they happen, will be bigger and badder: "the shift towards passive funds tends to intensify following periods of strong market performance as active managers underperform in such periods of strong market performance. In turn, this shift exacerbates the market uptrend creating more protracted periods of low volatility and momentum. When markets eventually reverse, the correction becomes deeper and volatility rises as money flows away from passive funds back towards active managers who tend to outperform in periods of weak market performance."
Markets become less efficient: "if passive investing becomes too big, potentially crowding out skilled active managers also, market efficiency would start declining. In turn, this would present opportunities for active managers to extract arbitrage profits."
JP Morgan's Nikolaos Panagirtzoglou:
John Hussman wrote a great article discussing the current market and the asymmetric risk facing
investors today. The "BOLD" is our emphasis.
John P. Hussman, Ph.D. www.hussmanfunds.com
Originally posted October 17, 2016
|Market conditions are very vulnerable and only need a small catalyst, like a spark needed to idle sitting fuel, to unleash the animal spirits amongst investors. Consider a “Crash Alert” warning to be similar to the “SEVERE” red alert issued by U.S. Homeland Security to warn of a heightened risk level of a terrorist attack. It does not guarantee an attack, nor suggest that conditions could not deescalate to the “ELEVATED” yellow alert in subsequent weeks without incident. It simply means, pay attention, take precautions and avoid high risk areas. That is all we can ask of our readers to do the same with their investment accounts.|
The S&P500 has now rallied 130 points in 15 days and the bulls are frothy like a dog in heat. If the market keeps at this pace, it will be at 1900.00 level by the middle of November, right? That makes sense, doesn’t it? Since the market started at 1400.00 at the start of the year, a rally to 1900.00 would only be 36% higher on the year. That makes perfect sense for the current market conditions, considering that everything in the world is fine (sense the sarcasm).
Gold prices are at an important crossroad. If the bulls can beat the $1325.00-$1350.00 zone above, we could start to gain interest. In the same respect, any deterioration below $1275.00 on gold would show that the sellers are still too dominant for a short term bottom. If the bulls are successful, it may be the first technically positive price action this year as it will be supporting evidence that the $1200.00 bottom was a significant intermediate and potentially long-term bottom. If validated, even just a 50% retracement of the last gold bear market drop would see gold trade back to the $1500.00 level.
I have been asked numerous times if the debt ceiling issue was not going to be the catalyst to spur on a market correction. While the debt ceiling issue in 2011 in fact was the headline catalyst that drove the crash, we are reluctant to believe that lightning will strike twice in the same spot. Market corrections and crashes tend to be driven by investor uncertainty and the fear of the unknown. In this case, investors have now seen this and can quantify its impact, so it has a diminished risk of being the catalyst for the decline.
Holidays are over. The trading desks are going to be fully staffed and will be on high alert for the next market move. The question is- will traders see an oversold market that they trade higher or a weak market that cannot be supported? It is likely that many traders will start the weak off with some range bound chop and that the ECB rate announcement on Thursday and U.S. Jobs numbers on Friday will be the focal point for the next significant move.
CRASH ALERT: When we are in crash alert, it do not guarantee a crash but simply us observing that we are in a market state where all the criteria for a crash is there. The checklist was posted in last week’s blog, click to read.