“We are going to be buyers of things over time. And if you’re going to be buyers of groceries over time, you like grocery prices to go down. If you’re going to be buying cars over time, you like car prices to go down. We buy businesses. We buy pieces of businesses: stocks. And we’re going to be much better off if we can buy those things at an attractive price than if we can’t.”
We have used our version of the above Warren Buffett quote for years and used it on CNBC yesterday afternoon. Our modified version goes like this, “Stocks become riskier when they go up sharply and more valuable when they go down sharply!” And boy did that happen in spades yesterday. I wish I could say I predicted it, but when our short-term model flashed a cautionary signal three weeks ago, I wrote that I thought the pullback would be short and mild. Actually, our colleague Andrew Adams has “nailed” this market on a short-term trading basis. The media’s causa proxima for the decline was a brief inversion of the 2-year to 10-year T’Notes signaling a recession is coming. However, Janet Yellen opined she didn’t think the economy was headed for a recession. Janet might be correct because the global bond market has not been a freely trade market for over a decade. Due to the central bank corner on bonds, why would historic correlations be valid now? And as I have often said the real yield curve is the 90-day T’bill to the 30-year T’bond and that is not inverted. It should also be noted that the 2-to-10s has inverted before and nothing happened to the economy. Moreover, in past inversions stocks have tended to peak 12 months later. So that is the media’s reason for yesterday’s Dow Dive, but you can choose from a plethora of other reasons (Russia blowing up their own weapons, a build-up of Chinese forces on the Hong Kong border, India and Pakistan, Venezuela, Argentina, etc.). Whatever the reason the S&P 500 (SPX/2840.60) closed at the lower end of its 2840 – 2860 support zone and if that level fails, we likely test the August lows (2822). Bear in mind the SPX’s 200-day moving average is at 2795.73, which would be a slight “undercut low” of the August low of 2822.