The Market Flush: When Nothing Works and There Is Nowhere to Hide

It was strange enough that the VIX was lower on Wednesday when stocks tanked, but now the flush is really taking hold on Thursday. Stocks are down 1% on average, gold is down 4%, oil was down close to 2% and the face value of long-dated Treasury notes and bonds were getting crunched as long-term yields were rising. The move is after weak Chinese data, but the real culprit is that the markets believe that Ben Bernanke is going to turn off the bond buying faster and sooner than what he really said in Wednesday’s post-FOMC press conference.

After Abe’s Japanese expansion already seems to be lower, now the expectation is that the FOMC will unravel the stimulus in an unhealthy manner. It seems a bit odd to think that, after literally trillions of dollars of global and domestic stimulus and quantitative easing measures, the FOMC will just really wreck the party all at once.

The aim of any economic easing pattern always boils down to what the markets call a “soft landing.” What the markets are trying to telegraph right now is a “hard landing.” These are exactly what they sound like. When the Fed really does start to end quantitative easing measures, it is likely to be a tapering, as the word gets used over and over. The markets are treating it as though the tapering will be a decapitation. Barring any major policy changes, this seems premature even if fighting the tape often comes with a serious price.

When you see the flush trade come up, it means that the only place to hide is in cash. At 9:40 a.m. EST:

• S&P 500 -18.79 at 1,610.14
• DJIA -169 at 14,943
• NASDAQ -44 at 3,399
• Gold -$81 at $1,292
• Oil -$1.60 at $95.62
• 10-yr. Treasury yield now 2.40%
• 30-yr. Treasury Bond yield now 3.47%

When you see this occur, the only place to hide is in cash. Just remember that the tide always turns, and when it does, the saying is that “Cash never rallies!”