Its been a long weekend of macro research for me looking to see if the data and macro trends can help illuminate the next macro trade for my book.
Practice comment wise, sometimes this sort of work provides wonderful insightful macro direction and sometimes it doesn’t.On this occasion, so far, I’m struggling to draw clear conviction trades from the data. The macro data is so mixed and unclear its almost impossible to have a clear bias on direction.
The best i can say is that, in my view, the gap between US equity capitalization vs macro economic indicator performance and corporate earning performance is at extremes currently. We have had a very macro & earnings soft patch in recent months. I don’t believe the weather can explain this. US housing remains weak as does consumer credit uptake less student and auto loans. Rates are rising and forward guidance language is altering. Capex increase expectations are seen as the savior by many with little in the way of evidence that this trend is about to commence.
Now from a risk perspective when the spread between the macro and corporate performance to stock price is wide its better to reduce and increase cash holdings. Some argue cash and bonds. This is a debatable and less of a high conviction allocation due to the Fed’s tapering. I prefer cash and even precious metal allocation increases. From a trade perspective playing for a higher high in some sectors, especially those like banking that have been badly beaten up is a valid short to medium term trade but this is a different matter. Allocation wise better to reduce cash longs and use short term leveraged trades to cover any bounce higher. Out of money option puts on the 3 to 6 month time frame should be a part of the mix, I suggest.
As a general comment on reading macro data as follows. Looking for the next high conviction trend from macro reports can be a thank less task. As “Wild” on the forum rightly said this morning, even when you do your homework and nail the directional macro trend, policy interventions can often scupper your trade (para phrasing). Top down macro trades are only useful when price and technical indicators clearly confirm the trend is already in motion. If you enter pre price confirmation the entry has no momentum and you can easily be knocked out of a valid macro trade.
With this said its been like a breath of fresh air to return to price and market technical indicators. Price is the summation of all the economic noise in a way that no economic document can synthesize so cleanly.Price is also what we are paid on so with no more delay lets turn to price.
Here the outstanding AG report:
They are placing a high conviction that the US equity markets have topped out already or are in the process of forming a near term distribution top and they apply the same conviction to european markets. They place a lower conviction on EM markets and see relative strength. The commodities they don’t clearly make a case in either direction though as a late cycle instrument and (historically) often an inverse correlation to equity markets they could out least out perform here i suggest. The Euro continues to look vulnerable and the dxy triple bottom supportive. The GBP in stretch. JPY, looking for direction.
Here GS with their conviction trades:
Note their high conviction trades are short USD vs jpy (2), long USD vs AUD (3), long USD vs EM currencies.
They are slightly bullish sp500 so long as the 2012 bullish trend line holds. Their conviction is gradually lowering on US equities. They are bearish Nik225.
High conviction bearish stance on the pms, as usual and quite strong positive (2) conviction on the beans.
Given the high level of correlation between the AudUsd and the various commodity indexes this is bearish commodities from GS in general, no late cycle bounce in the commodities it seems.
And here Fitzpatrick who has turned bullish on US equities given the recent sell off and strong bid within trend.
I quote him here,
“Skeptical participation still seems to be the way to go”.
This is a very fair comment I believe and in line with my comments above,
For my own book the ES and NQ put options have time expired. Half the NQs I covered at their lows last week and I booked the profit on the WTI futures. Trading profits up and down have remained solid in spite of the recent choppy conditions. This is good although im still running a higher cash ratio.
Near term trading wise, from failed moves come fast moves is one of the most useful trading adages I know of. The recent attempted correction appears to have failed from price. A fast move northward should ensue. If this fails to run then we have more weakness ahead.
Here Fitzpatrick
Here the barcap team
Here the SC team
Here the CS wealth
Here Barcap on commodities
Commodities have been the great under performer since 2011 (also the ftse100). Here is a useful chart:
I’m closely monitoring the commodity indexes here looking for a decisive breakout or not here. In price theory she has a breakout out and their is positive momentum. Near term i’m looking for weakness which would tie into the AUDUSD call by GS. On negative divergence to momentum on the sell move I would enter long as a trade to test the hypothesis that the late cycle commodity bull run is in motion. Lets see, as ive said before its not a high conviction trade as yet. The macro data is slightly supportive and price is starting to support from an em equity index basis. India and the “MINTS” Mexico, Indonesia and Turkey are looking very positive but China continues to drag for now. If china can turn we would be off to the races for the audusd, rji and ftse100 most likely.
On the ftse100 for a moment: The 100 index has currently one of lowest valued pe ratios in the major markets. On solely her pe measure she is around half the price of the sp500.
Since April 2010 the ftse100 has increased by a dismal annualized rate of 3.3% under performing most developed markets.
Here a chart of her performance vs the sp500, dow30, dax and cac40 over the last 30 months.
Given the low unemployment in the UK and high growth rate, according the IMF the strongest g8 growth rate for 2014 her stock market under performance looks surprising. Importantly the oil and gas together with the mining sector still makes up 25% of the ftse100 weighting. This 25% has badly under performed given the cooling occurring in EM economies. Other heavy weight components like HSBC alone make up 7% of the index. HSBC is also heavily exposed to EM markets. (Worth noting the ftse250 correlation to the sp500 index is near 100% in recent years! Dollar trade weighted she is out performing).
Swiss team later today as usual.
All the best
Rich