"The rout of February,. 2018


The market sells off hard

Marc's notes,

The market gyrates and then grinds down. Positive news from the BLS brings talk of an interest rate increase by the Fed. As if we did not know that one would eventually happen right? More like the rally just went too far, too fast. Friday the Dow had a 700+ point swing. Wow. It ended positive which can be a good sign. For my thoughts on it read below:



Despite the recent brutal sell off in equity markets last week, the term “melt up” has appeared in many a financial commentary. Indeed the term appeared years ago by some prognosticators who predicted the trillions of dollars created by global central bankers to facilitate the myriad of bailouts required (arguably) to stabilize the world markets after the 2008/9 crisis would eventually find its way into the stock market, driving prices to previously unheard of levels.

With the widely followed Dow Jones Industrial Average (DJIA) soaring from the mid 6,000’s where it stood during the 08’ banking crisis to over 26,600 at its recent high, an argument could be made this close to quadrupling of the DJIA could be nothing else but the proverbial “melt-up”.

From Investorwords.com, the melt up is defined as:

“A dramatic upturn of certain stocks occurring when investors unexpectedly purchase these stocks and drive their price up without any specific reason, logic or improvement in economic conditions. A melt up reflects a mass mentality where it appears that investors do not want to miss out on making a possible profit. This is usually followed by a meltdown”.

Obviously the melt up portion of the equation is quite an enjoyable ride experience by most investors as they see portfolio values rising almost daily. What could be simpler right?

Such increases in stock valuations and their subsequent effect on investor perception of their new worth could also lead to the often touted “wealth effect”. This wealth effect is based on the belief that with rising stock portfolios come rising optimism on behalf of investors and they will subsequently spend more, boosting asset prices even farther as companies reap the rewards of such spending. And around and around we go, upwards and onwards to the carefree life resembling the “Roaring 20’s”, a period in U.S. history that is said to be one of lavish spending brought on by the relentless rise in their markets between 1920 and 1929. During that time the nation’s wealth reportedly more than doubled, only to fall victim to the great stock market crash of 1929.

Of course, the wealth effect is thought to kick in reverse when the opposite happens, mainly the stock market melts down. Such a thing happened in 1929 and has happened at various other times in history, not the least of which being our own crisis in 2008/09, when consumer spending fell off the proverbial cliff, to put it mildly.

This is not to say, as Investorwords.com puts it that “this is usually followed by a meltdown” is cause for concern but last week’s hammering certainly gives one pause to think.

The bottom line is no one, no matter who it is, can predict market direction, no way, no how.

Obviously markets rise and fall as a matter of fact and historically speaking, but who’s to say this market can’t quadruple again before correcting, if it corrects at all, or if we see a continuing erosion in the indexes causing many an investor to hit the sell button.

Most analysts and investor alike would likely concur market falls are an expected event but when and by how much they fall is an unknown fact to all. Corrections are viewed by some as a healthy and normal pattern of markets in general.

The fact remains although manias, boom and bust cycles and “irrational exuberance” as Fed Chief Alan Greenspan once quipped in response to the dot com run up, may appear as excessive to some, markets don’t follow scrips nor give a hoot about what anybody thinks might happen.

I have always said markets will reflect reality eventually but their day to day movements are only the perception of all the millions of investors in it on any given day. That said, the term melt up is only a term made up by some to describe what they perceive as an irrational movement over a given time period.

As in all debates however, there are others on the opposite side of the analytic spectrum that might say the drastic movements in the markets are only a sign of a healthy and booming economy. Although the rise in the market over the past 14 months has indeed remarkable, there is no absolute law of markets that say it can’t continue up or that it must continue to fall.

As in all things however and as the Boy Scouts say, hope for the best but prepare for the worst. That way, no matter what happens, at least you have a chance at not becoming another in a long line of investors who just hoped for the best, and did nothing else. If you have questions feel free to give me a call at the number below or email me.

(530) 559-1214. 

And then one more for your reading enjoyment: 


Truth sometimes is stranger than fiction. A week back or so I penned an article called the “Melt Up’ which detailed the great run up in stocks and how rare it was to see such a sustained rally. Also detailed in that article was the caveat that “this is usually followed by a meltdown”.  No sooner did the article hit the wires did the market start to crater and in a big way. From the high of 26,616 on the Dow January 26th of this year, last week saw wild gyrations almost daily. It culminated with a handle gripping 1,175 drop on February 5th. It has been down 1579 mid-day so I guess it could have been worse.

We can make an educated guess as to why the “downalanche” (a coined phrase of mine) started but the cause touted by some was that the Federal Reserve would raise interest rates after an economic positive unemployment number came out from the Bureau of Labor Statistics.

Why good economic news causes a stock market selloff seems to be the new norm in the last decade or so is the perplexing question. Not so perplexing however say many analysts.

With the Federal Reserve coming to the rescue after the 08/09 crisis and repeating program after program to stave off periodic sell-offs, investors apparently learned a Pavlovian type of response, knee jerking the market up or down in response to not what the economic fundamentals are telling them but more as to what the Fed will do in response to it.

It all revolves around the elixir the Fed administers when it comes to monetary stimulus, which is to say how they respond to stock market falls or economic news. Historically the Feds drop interest rates to goose an economy (or rescue one) and increase rates to cool off an economy that’s running too hot.

With interest rates near zero for 8 years running, some believe the markets quadrupling since 2009 is solely due to these almost zero rates. That being the theory, raise rates and the logical conclusion would be the markets will fall and investors are acting preemptively to this belief.

It’s indeed counterintuitive to think good economic statistics would trigger sell offs but the proof is in the proverbial pudding. A good unemployment number hit the wires the day the selloff began and when another bit of good news hit February 8th (jobless claims at a four year low) the market started down hard again.

In my opinion, this type of “sell the good news, buy the bad” where market direction is now more influenced by Fed monetary policy then economic fundamentals sets a dangerous precedent and a confusing picture to the average investor. The question now becomes: do you buy stocks when the economy shows signs of weakness because you believe Fed will rescue it or do you buy stocks when the economy shows signs of improvement which seems more logical?

According to the most recent market action, the former seems to hold true. But considering the logic of all of it and how we arrived at this point, who’s to say one day the market’s  reaction to economic news will once again revert back to a saner evaluation of economic fundamentals?

Which is to say: wouldn’t it make more sense to buy stocks when the economy is improving and remove the Fed from the picture all together? That would mean the Fed would have to back off trying to alter market direction and let the free market reign once again. Doesn’t that seem to make more sense?

This analyst thinks so.


Have questions? Wish to discuss your portfolio? Perhaps have a friend who is worried? Call me.

All the best,