Hey, scott. Thanks for having me. We keep moving away from this bottom why are we going to have a shock drop once again, as you put it well, its a great question so most of these indicators are absolutely useless over time the ones that actually work are the ones most correlated by extremes in human nature in other words, you get a human nature extreme and inflect so what happened this time, and we measure like a shock drop is looking at a tenweek rate of change on the vix. And when it gets over 125, which it did, we looked at times in the past where that kind of quote, unquote, shock happens. And you typically get a 5 rally off of that shock low. So weve had just about a 5 rally off that low and then you go down and retest and typically break that point so i think, you know, what were calling for i get it. Guys are jumping on the retest bandwagon. But its typically what happens when you get a shock. Well, we already kind of had a retest and weve also moved far more than 5 off of what the low was. Correct and so now that immediate retest, scott, doesnt count i mean, every time that you have a shock and the instances that we put in our note, every time you get a shock, you get an immediate retest you even did it in 87, youve done it in any major shock environment. But thats not the retest were talking about. Were talking about, you bounce the market back, people are d g thinking, okay, its safe to come back in and then you go back down and retest that low. As you know, im one of the highest targets on the street and im probably too low i want to make it clear. I am absolutely not calling for people to trade this low or move im saying, get ready for that lower move, be prepared for it, when it comes dont let it shock you. And you want to take advantage of it. You say maybe the retest doesnt count. Maybe the correction shouldnt count. I mean, maybe no, no maybe the correction was totally overdone maybe it was ack scentuated by products until we sit here today. So the tenyear yield moved up 20, 25, 30 basis points and were falling out of bed because of it . It could be i mean, anything is possible but you could have said the same thing in 2010. Remember the flash crash i mean, honestly, i went to the bathroom, and i came back, were down 500 points. I couldnt figure it out and all of a sudden, you bounce back from that and then you made a lower low. So i look back, and again, scott, its not about the fundamentals the fundamentals, even with higher Interest Rates, are still very sound again, thats why were at 3100. The problem is, its a human nature trait when you get so few bears and so many bulls, and you shock them you get this rebound rally and when i say that the retest the immediate retest doesnt count, of course it counts it all counts. What im saying is, it doesnt count as the retest that generally happens after a shock drop, which is typically 30 trading days later so what im saying is, over the next few weeks, youre going to get this grind lower, and i absolutely want to be buying that grind, and use the liquidity to our advantage in the financials, info tech and industrial sectors. Thats easy to say now. We have another drop of magnitude, what peoples sentiment is going to be aaron brown has a question for you. Scott, you know my line corrections are only natural, normal and healthy until you actually get one then everybody kind of fades, saying its fundamental. And this one should be no different. Im sorry, erin. No, thats okay so tony, we agree that it was not driven by fundamentals this was a balltargeting move that was purely technicaldriven with that in mind, we have seen a lot of that supply now taken out of the market. We have seen a lot of those ball funds go to zero or get considerably draw down in terms of total assets under management so with that now clear on the table and not yet not outstanding there as a potential driver for this move, who do you think that incremental seller is going to be, and whats going to drive that because its not going to be a technical move were both saying that fundamentals here are positive so whats going to be the driver of that move or who was going to be the driver of that move . Well, actually, erin, i wouldnt say that it wasnt a fundamental move we came into 2018, expecting increased volatility and increased up side. And in mid january when we called for a pullback in the market, it was based on volatility of fed policy in other words, up until that point, you had absolutely no fear that the fed might do Something Different than what they said they were going to do. Maybe even less. All of a sudden, you get the labor report, and people start to get very nervous that they cannot predict what the fed is going to do. And that creates angst, which creates volatility so your sellers are those that are fearful of inflation so i dont want to say it wasnt a fundamental reason for the pullback as a matter of fact, i think the gun was the etns and the volatility vehicles you talked about. But i think the actual shooter, the way that it fired, was off of fear of fed and higher Interest Rates. So tony, its joe weve had this significant snapback and i think were really not paying enough attention to what is going on here in the growth story and a lot of the nasdaq names. Youve seen over the last couple of weeks tremendous rebounds in apple, alphabet was 9. 97 on february 9th, all the way up to 11. 30, back to where the earnings gap is. Youre seeing the nasdaq lead the market higher. If the market was going to sniff out another selloff, wouldnt you see a little bit of a transition right now, where some of the value names would begin to anticipate that and perform better we saw that with apple in january ahead of the selloff apple was clearly underperforming. That is nowhere near in sight right now. Yeah, joe, its a good point. So our call on well, typically, when youre getting hit in something, youre not going to start investing something new. Youre going to buy what you already like thats down so i think a lot of the folks that are already fully invested in the technology space, when you get an opportunity to buy what you already know and already know has good fundamentals, youre going to do it on weakness and i think thats probably why some of these higher social media stocks and higher beta tech stocks ahave rebounded but why did the market correct just because yield curve flattening is the fed raising rates. What does that make companies do if your labor inflation is going up, if all your inflationary pressures are going up, you need more productivity. So coming out of a flattening yield curve, the best space should be in those that take advantage of productivity improvements those would be the ones that finance them, the financials, the ones that implement them, the industrials, and those that have the Technology Behind that implementation, which is info tech so i think there is a real fundamental reason, joe, for the kind of move up in those three sectors that we have seen. Again, its buy more of what you know. Tony, heres what i tell you, and erin it definitely was a fundamental move i agree with you that was exacerbated by what we have seen through the whole market and so forth apple was an index move back up. Because the fundamentals on apple to me, i wouldnt say collapsed, but they continue to deteriorate as we have seen. So was it fundamental or was it fear it was fundamental. It was fundamental you had labor costs coming higher what number big deal . When youre at this inflexion point in the market, one number is going to matter from a kneejerk reaction and as you see other numbers, the market is not going to wake up one day and say were at 5 , lets correct no, but 10 on one number but is it justified is it justified thats not justified, but thats my point it started as fundamental and gets exacerbated by more than 50 of the market trading off algos. Thats a reality going forward. Judge, thats a realization of this. Okay, so youve got a fed thats very nervous about the good economic numbers, the labor inflation number really kind of scared them. So you had to arbitrage out versus what the Market Expectations were. And it was the first time you actually had a feeling in the marketplace that the dot plot was going to be right, which has been wrong for years but youre in the situation now where were going to have this continuing conflict between a fed that thinks the numbers are too strong, yet because of the way the citigroup economics index showed there was such euphoria among economists toward growth, youre going to get fed worried about data but investors disappointed even by the good data that creates a volatile environment that shows conflict for the next few months. Were going to have multiple 5 kind of moves. And then youre just going to grip it and rip it, because its all about higher earnings and higher Economic Activity and pizza hash tag giddyup once you get through this volatility of fed policy. Tony, if we look at earnings consensus for this year at 157, and we test that low of 25. 30, were talking about 16 times on this years expectation. What would cause the market to go below that, given the fact that we have eps growth, we have a lot of positives moving earnings higher . I would truly think theres something called the Monetary Policy uncertainty index that the fed tracks and if you get an increase in rate fears, guided around that Monetary Policy uncertainty, you could have again, some of these volatility products drive you lower than that. But fundamentally, i mean, i think we should be way higher. So i dont think it would be justified. But anything can happen. Tony, your record low unemployment, an immigration policy that wants to keep the lowcost labor out so if you own a hotel instead of paying minimum wage, cant hire anybody, youve got to boost it up youll see inflation wage inflation, to your point, scott, that you were saying one number no, you will. You look forward how about productivity enhancement, too. Its that the market is a discounting mechanism and its not going to wait until we get there. And tony, to your point, you said, when we get through the fed volatility, if you get through the fed volatility, the fed is going to be at 5 and then its game over for a while. So you dont want to get through it. One thing i watch is the move index, which is the its basically the vix on the bond market the move index led the volatility move in the vix higher about a week preceding it so you started to see it on the 17th start moving higher and then start to see the vix a week later start moving higher. The move index right now, which is the bond market volatility index, is moving downward. Until we start to see that moving up, i dont think were going to get another vix scare. Do you not think we are going to get any sort of meaningful more so than we have in rates thats going to depress multiples, even if earnings expectations are not quite as high as they turn out to be . See, i think were in a whole new phase of a buckll market. After the tax reform were in now a phase were going to see higher inflation, higher volatility and higher stock prices but as we get higher Interest Rates, were going to have this tantrum that goes on with the fed, with higher inflation indicators, and thats going to cause a lot more volatility, like were seeing. But netnet, you know, the price isnt going to change more than the facts. And we have eps growth, global synchronized recovery, and were going to have a higher s p at yearround. I agree im not disagreeing. You cant whistle past the graveyard and saying that inflation is not going to hurt you. At some point it is. Last friday we had this conversation on the desk, and one of the things that i suggested, and i think some of i think maybe josh misunderstood what i was saying is, i was not saying you needed to sell i think on that february 9th low. Thats not what i was saying but i think in the rebound, part of the rebound is that there is this sentiment that Still Believes we need to go down and test that low. We havent as much as we have rebounded, we havent removed that sentiment and i think maybe thats one of the reasons why were continuing to appreciate a significantly, as we are, because most people still expect, myself included. Im amazed at the speed of this rebound. Everyone thought, well, were going to go maybe not take out the lows, but go test it again. That hasnt happened and i think sentiment still reflects that, and i think it reflects it in price appreciating. Tony, i give you the last word. Well, think of what happens in shock nobody reacts, because youre shocked. So its not like you had this tremendous selling on the way down of course, you had some hedging, some other things like that. But if youre a normal person and its two days of down 1,000 points, you kind of look around and say, well, i dont know what to do. And then it bounces back and you say, okay, wow, weve got higher inflation and higher Interest Rates. So maybe ill take a little bit of profit here and then you grind down to retest that low, 30 days later. But, again, i think we have to be careful i dont necessarily think that rates are going to spike here. Youve peaked out the citigroup economics surprise index and when youve done that at such a high level short rates are going up with fed policy but the long rates, what if they just stay here, you flatten the curve . What happens if ten days from now you have a jobs report that does not back up the wage number from the prior month or god forbid you get a revision youre going to get a huge move down in the tenyear note yield and then fear of Economic Activity, again, creating that volatility, judge. People dont know what to make of Economic Data now, because theyre convinced that its so strong i thought you were going to answer my question with saying that stocks are going to go higher if the no. I think the next move is lower on lower long rates, and a defensive move and i think thats what you want to buy. You honestly think that in the next jobs report, if you know, aleve some of the fears about inflation that stocks arent going to go up . You think theyre going to go down on that if you gave me the number, judge, no clue i have no idea which way heres what i know again again, i think that you can peak out the long rates here you can have a strong employment number that can lift expectations for short rates long rates come down, because what happens when the fed raises rates aggressively and more aggressively its a disinflationary move meant to slow down activity. I cant believe theyre going to do that. Tony, can i just interrupt for a second youre telling us you think there is an impending retest of the lows, for whatever reason. Correct. But scott is giving you a scenario, laying it out for you, and you cant tell us whats going to happen on that scenario hear the facts so if you get weise, if you get a strong economic number, what if rates stay flat on the long end, the short rates go up, and you have a down move retesting the low . If you get a strong if you get a high inflation number, ill tell you whats happening youre going to see the tenyear go to 3 , possibly above it in the ensuing days, and youre going to see the market, you know, go lower why wouldnt that happen . There was a time on this show in mid 2016, steve, just for fun and memories, you told me i had a better chance of growing hair than being right because the Economic Data was too weak now were going the other side of the track. No, no, no. Thats absolutely thats not true i did say that about you had a better chance of growing hair being right on something very specific and i still hold on to that. Just like you have a better chance of growing hair than the market not going down. Tony, the markets biggest fear right now is inflation. We can agree on that, right . Correct. So if you get a read that doesnt back up the scare that we just had, why wouldnt the market go up, and not be as worried about that being a problem . You know, thats a great question i think its because of if youre if your reason to be bullish is because earnings are going to go up with better Economic Activity ultimately and you want to have it not curtailed by the long end of the curve and you come in with a i cant imagine it, but lets say you come in with a super weak data point. Youre going to take the long end down, taking out that inflationary pressure. But its also going to put pressure on earnings expectations. So tony can i just ask you this question . People were shorting volatility, and we would all agree that was part of the problem in what we witnessed think people are still shorting volatility right now on the rebound you think theyre shorting volatility honestly, im not sure. I havent talked to anybody. Thats got to be that hazard to be the whole trade got blown up. Thats got to be a critical component of the markets ability, barring some fundamental shift to go back down and retest the lows and, again, i dont know if the market is going up or down no clue. But for it to go a lot of whatifs here. Lets just do this but shorting volatility is a big component of it. Thats really not a whatif. Thats a daily strategy in the marketplace. Well, i dont know exactly what the position on shorting volatility is. Heres what i lets take away the opinion, because honestly, none of our opinion matters. Its all about the evidence, in my view, and history shows it. And that is, when you get a shock drop, we cant put it all on one number. What if you get a different kind of labor report or not this is a human nature issue, where you have the markets shock investors, okay, and real volatile around that low and now youve gone up about 5 . When you shock investors, they cant do anything. Now that youre up about 5 , what if the next two weeks you pull back and retest that low before any of the major Economic Data comes out and i think thats all were saying why would you do that why would that happen . What is going to cause that to happen someone is going to wake up one day and because of human nature theyre going to all of a sudden start hitting the sell button in the next two weeks before the next read comes out . It could be any judge, could it be a walmart number that came out yesterday that all the Financial Press called part of the reason for the drop of 15 i dont know i dont know all right tony, well have you back. Good. Hopefully when you grow some hair yeah. Thanks for coming on today. Tell you what, you owe me a dollar for that, buddy im coming in with a wig yeah, i do. I dont know, weise doesnt look like hes that far behind you, tony. Yeah, i know. For who the bell tolls. Well see you soon tony dwyer. Have a great day, guys. Heres what else is coming up on the Halftime Report. The nasdaq making a run off its recent low next up, one t