Macro trends, volatility and bottoms

Stock prices are highly volatile. Some much more than others. I do a Control Panel only once a week to try to tease out the signal from the noise, to discern the underlying trend.

The entire market is influenced by Macro trends, such as a Federal Reserve decision to control inflation by raising interest rates. Investors who don’t account for this are like fisherman in small boats who don’t pay attention to the tides.

Small, overpriced companies with low (or no) profits, high borrowing and no prices are the first to be crushed when lending conditions tighten. But investors may exult when a day of volatility pops the price back up. Even when the overall trend is down.

An investor who doesn’t like volatility should look for low beta stocks. They tend to be the stodgy old companies which are scorned by investors who want high growth. High growth stocks are often volatile, which tends to obscure the underlying trend and enable “cognitive anchoring” to a higher price point which may never return.

How to find a bottom?

The “mungofitch 99-day rule” won’t find the exact bottom, but it gets the investor out of the market after 99 trading days without a new high and returns the investor 99 trading days after making new highs.

I look at charts of volatility (VIX) and Financial Stress. VIX over 30 coupled with Financial Stress of 1 or higher is often a market bottom. Note the spikes in 1998 (the Asian financial crisis), 2002 (the bottom of the tech stock crash), 2008, 2011 (the European debt crisis), 2020 (Hurricane Covid).

VIX over 50 coupled with Financial Stress over 5 is a sure sign of a financial panic, a liquidity crisis so severe that the Federal Reserve is forced to loosen lending immediatly to prevent the entire system from locking up. The only examples since 1990 were 2008 and 2020. In retrospect, these were clear bottoms and fantastic buying opportunities.…

The market is currently very far from financial crisis since Financial Stress is very low. This gives the Fed plenty of leeway to raise interest rates by raising the Fed funds rate and selling longer-term Treasury and mortgage bonds. Volatility is rising but the stock market drop is not leading to a crisis so the Fed will continue its current strategy.

Fortunately, financial panics are rare. Hopefully, we won’t be seeing another one soon. It’s harder to find a bottom when the charts don’t jump up and bite you on the nose like 2008 and 2020. But even the minor bottoms come with a rise in Financial Stress over zero. This happens when lenders are more reluctant to lend so speculators can’t cheaply bid up the price of assets.

I think the coupled charts of VIX and Financial Stress are useful bottom detection tools when used together.



OOPS, I meant to write, “Small, overpriced companies with low (or no) profits, high borrowing and no dividends are the first to be crushed when lending conditions tighten.”



This is one of those superior posts that begs for a SUPER-REC.

Wish that was an option.


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Putting some ideas together…

If the US financials are holding Chinese debt instruments and swaps as the FED takes liquidity of our financials the stress on the financials will soar.

The day by this mid fall that a larger Chinese financial has failed outright will be globally cataclysmic.

Meanwhile the dollar will continue to appreciate. The FED taking greenbacks out of circulation is just one more reason on the supply and demand side of the rise of the USD. Expect commodities to steeply fall.

Sorry, you can only recommend a post to the Best of once.

OOPS, I meant to write, “Small, overpriced companies with low (or no) profits, high borrowing and no dividends are the first to be crushed when lending conditions tighten.”


Oh, maybe that’s why I haven’t bought companies that don’t pay dividends for the past 15 years?

Tim <who somehow missed the tech wreak when he pulled it all out of the German bank to move it to Canada when we were getting ready to move back in late 2000>.


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IMO, until the public stops looking for a bottom, the markets still have a long runway to maximize pain.

As in all major panics, there are a confluence of events that drive the surge. Then blind-side issues start their confluence of events which purge all of the wild hope and speculation, then the moderately hopeful and, finally the stodgy investors. All get crushed and the common wisdom shifts from FOMO to Never Again!

The current confluence of events causing the beginning of a purge seem to be: Crypto questioning; world-wide pandemic which is seemingly ceaseless in mutations; War in one of the bread-basket areas; resource nationalization; onshoring of manufacturing; high prices of the factors of input leading to higher end user prices; the specter of famine; the reversal of 30-40 years of declining cost of money; polarization both domestically and internationally; the surprise lock down of one of the world’s cheapest manufacturers (China); increasing risk of serious conflict spreading; economic warfare; cyber warfare capabilities that include may diverse targets (infrastructure among them); instant global communication being weaponized; the rising risk of internal conflict due to food scarcity and high fuel costs; decades of low interest rates leading to major malinvestment (the force of damage is yet to be fully recognized); droughts in the major food growing areas not in a state of war; the potential for defaults because of massive debt loads on all levels which were only bearable in low rate environments; decreasing affordability of home ownership as bank rates rise.

I liken the current confluences to mountain State rivulets combining to form white-water rivers. We are, IMO, still in the head-water area and approaching the standing waves and we’re body surfing instead of being in a durable raft.

What other factors will also be added? Will passive investing save the day or will people putting money into 401k plans decide that they cannot keep throwing their money into a declining market, nor can they afford to have any money going into savings because they need every dime to meet the current monthly necessities?

The term paradigm change just doesn’t seem to do justice to either explaining the process nor in predicting how much change will have to occur before the new paradigm is established.