Trader Talk

The great reverse!

Traders work the floor of the New York Stock Exchange on the evening of January 23, 2014 in New York City.
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The Great Rotation has arrived! In reverse: Out of stocks, into bonds!

The market opened and almost immediately began drifting down, but the disappointing reading on the January ISM (51.3, well below the level of 56 expected) dropped the market further.

The ISM is full of comments from respondents to the survey blaming weather:

  • "Poor weather impacted outbound and inbound shipments."
  • "Good finish to 2013, but slow start to 2014, mostly attributed to weather."
  • "We have experienced many late deliveries during the past week due to the weather shutting down truck lines."

A similar story emerged from January car sales, where GM (GM), Ford (F) and Toyota (TM) all said severe weather hurt sales.

It seems clear that weather has had an impact on the economic data, but it's difficult to say how much.

What is clear is that traders are in no mood to give the market a "get-out-of-jail-free" card on the weather, and that makes sense. After all, weather is a non-recurring event. More worrisome is concern that the consumer may not be as great a shape as assumed, and that may be the reason car sales are disappointing (though the auto execs do not seem worried).

Regardless, much of the high-volume action is in ETFs. For example, the iShares Russell 2000 (IWM) is on track to do twice its normal volume; the iShares Russel Midcap (IWR) also has a shot.

This suggests that many professional traders are using ETFs to lighten up on their exposure.

Mid-caps and small-caps are notably underperforming the big-cap S&P 500 today; part of this is due to a slightly higher beta for small- and mid-caps. Liquidity issues also matter because these markets are nowhere near as big as, say, the S&P 500 futures market, or even the Nasdaq 100 e-mini market.

Regardless: What's clear is that many have tried to exit at the same time, and you know what happens then.

So where's the money going? Into bonds! Mostly short-term. The iShares 1-3 Year Treasury ETF (SHY) is seeing roughly 15 times its 30-day average volume (!). The iShares 3-7 Year Treasury (IEI) is seeing over 30 times normal volume! Even corporate bond ETFs like the iShares USD Investment Grade (LQD), the largest corporate bond ETF, is seeing roughly twice normal volume.

The bigger picture, as many traders have noted to me, is that the investment outlook is quickly changing: "The consensus narrative heading into 2014 was that stocks are the place to be, bond yields will rise (albeit at a more moderate pace), and avoid any interest rate-sensitive assets," one ETF trader wrote to me. "We think expectations got ahead of market fundamentals...Yes, the economy is still recovering. Yes, stocks will be better plays over the long term. But, perhaps, things will take a little longer to heal than most think. Markets were priced for perfection, so any disruption to the narrative predictably hit risk assets."

By CNBC's Bob Pisani