This sell-off was long overdue and is likely not the end of the bull market

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For one thing, that we had been living with a market that had grown unbalanced and unwieldy in a couple of ways: The spread between the U.S. market performance and struggling global markets had become very stretched. And the dominance of Big Tech and other mega-cap glamour growth stocks had become extreme, with too many big investors betting blindly on their continued leadership.

So Wednesday’s shakeout – which included the popular iShares Edge Momentum Factor ETF (MTUM) dropping a nasty 5.2 percent – can be viewed as a violent “positioning shock,” when crowded trades were upended in a hurry as the market in general struggles to revalue strong but decelerating earnings at a higher bond-yield level. The bull case for many of these stocks simply came to seem too obvious to too many and the market doesn’t reward the obvious trade indefinitely.

Consider the remarkable example of Amazon. The stock is down more than 16 percent – from $2,050 a share and a $1 trillion market capitalization midday on Sept. 4 to $1,703 and an $830 billion market value now. Nothing much has changed fundamentally. Sure, the company raised its minimum wage for workers to $15 an hour, but that’s not the story here. The Street just fell too hard in love with the supposed eternal dominance of the company – and that kind of blind, unconditional love makes the smitten admirer quite vulnerable.

It’s a noisy environment and will probably remain a nervous, irresolute and mercurial tape for a while. I noted on Monday morning that the bears had an opening to get the upper hand this month. But right now the market has not delivered a clear signal that the broader bull market is ending. For once, stocks have become much cheaper and less loved heading into earnings season, perhaps a better setup than rising into reporting season on a high.

It’s become a less-generous market, one in which every driver of positive feeling (strong economy, surge in earnings, U.S. growth outperformance) kicks up offsetting forces (rising bond yields, Fed tightening, global imbalances). It is certainly a late-cycle environment, with all the jitters that brings. A bear market of some description will come at some point, and if it’s close that would represent no great injustice or anomaly; this bull market doesn’t necessarily owe investors any more than it’s given.

But knowing what we know now, it’s likely that the latest skid is another gut check for investors – one that may not be over yet – rather than an existential threat to the bull market.

2018-10-11 15:27:00

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