Today we reveal the precise date of the next market drop.
When is it… why that specific date… and what will cause it?
First the backstory…
Market strategist Kevin Muir began noticing strange doings in 2011…
Some mornings stocks would rise for no apparent reason… as from the stroke of an enchanter’s wand.
No news, no rumors — no rumors of rumors — justified the moves:
I tried to understand what was driving the markets at every point. I focused on technical levels, monitored the news and spent way too long staring at the screens.
But on some days, the stock market would get mysteriously strong. It would usually occur midmorning. Often stocks would sag near the open, look like they wanted to break lower, when all of a sudden — out of the blue — stocks would go bid. I couldn’t understand it. There was no “reason” why they should be rising. Yet they did.
Muir flogged his aching brain.
No answers were issuing.
But one day he stubbed his toe on the answer…
These unexplained surges occurred only on specific days.
What days were these?
Days of quantitative easing — when the Federal Reserve expanded its balance sheet through bond purchases.
The scales fell away from his eyes… like Paul on the way to Damascus:
I know it seems crazy, but the Federal Reserve’s bond buying had a direct and immediate effect on the stock market. I don’t know why the relationship would be so unequivocal, but I learned the hard way not to fight the Fed on days when they [expanded their balance sheet].
We know quantitative easing worked miracles for stocks — but the same day?
Was Muir chasing a phantom?
Sometimes a fellow connects some random dots and his imagination runs off with him.
But he tortured his theory… worried it… ran it through the rollers.
Then he started over again.
His observations proved solid as oak.
And the larger the Fed’s bond purchases… the higher stocks rose that day.
Now jump forward…
Quantitative easing has yielded to quantitative tightening.
Associate Wolf Richter informs us over $100 billion has already rolled off the Fed’s $4.3 trillion balance sheet.
That balance sheet is presently perched at its lowest point since June 2014.
And the trimming is gathering pace:
Could this chart partly explain why the Dow Jones is down since the beginning of the year?
And why the S&P is essentially flat?
Yes, trade wars and other bugaboos have settled over the market like a London fog.
But stocks have barreled their way through every fog bank for the past several years.
Why stop now?
Might we find our answer in the balance sheet?
A plausible theory, you say.
But the trade war thesis is more convincing.
It’s more evidence you seek.
For your consideration, Exhibit B, coming by way of Martingale_Macro:
The dates on the left represent days when expiring bonds rolled off the Fed’s balance sheet.
That is to say, days of quantitative tightening.
To the right you will find that the S&P fell on each occasion — as much as 2.2%.
In total, the Fed has offloaded $117.9 billion this year.
And the S&P has shed a combined 4.7% on the days it tightened.
You will note one exception to this pattern… and that exception is Jan. 31.
The S&P was level that day.
The S&P spent the entire month of January in an advanced condition of delirium.
Rising 5.6%, it was the S&P’s gaudiest January since 1997.
Perhaps, just perhaps, this momentum overpowered the Fed’s negative tug?
But we opened today’s reckoning promising to reveal the exact date of the next market drop…
The Fed openly publishes its portfolio — including the dates its bond holdings reach maturity.
And the next significant maturity date is…
May 31 is the date of the next drop.
On that date, the aforesaid Kevin Muir informs us, nearly $29 billion drops off the balance sheet.
That is the largest balance sheet roll-off to date.
“Watch out below,” warns Mr. Muir.
Unlike January… the market seems poised upon a teeter-totter.
And the S&P has no momentum behind it to counter the blow.
Mind you, we do not forecast a cataclysm — but a substantially negative May 31.
So you can go ahead and put us down for it.
The S&P will sink May 31.
We’ll devour every one of these 761 words — without salt.
Managing editor, The Daily Reckoning