First up I wish i could be more certain of near term direction here. Issues such as market breadth are very inconclusive. Lets run through it.
The bulls can point to the sp500 and % stocks above their 200 dmas as maintaining a solid bullish continuation of this 6th year of this bull market. Certainly the recent sp500 price move has been accompanied by an improvement in market breadth for this index and her sectors. To be clear this has come even as economic activity has gone negative on the quarter and earnings have sunk. The bulls suggest this is all in the rear view mirror now. We have essentially had a 6 month price consolidation as a response to the data weakness and now we are ready to move ahead again, against the usual seasonal & mid term election cycle patterns. Dow transports and semi conductors, usual historical lead indexes are showing the way and it is higher. (Both are deeply over bought!) Health care marches relentlessly onward. Interest rates are falling once again. Its never cheaper for low credit quality companies to borrow and that supports earnings, capital formation as well as M&A.
The bears also have much evidence at their disposal inc very weak market breadth in the wider nyse which has not improved and once again shows negative divergence. Recall a clear 40% of NYSE stocks are still below their 200dmas even as the nyse breaks to all time record highs. That is not a healthy indicator of a sustainable bull market folks. The dow is better but hardly compelling. The put call averages show much bullishness remains which is highly geared from nyse margin with once again falling hedging of positions. The nasdaq and 100 are better but not conclusive as yet.
On the cross correlated instruments we have the US$ bounce (usually risk off). We have EM’s still inconclusive and EM’s inc shanghai looking weak on the bounce. We have the usdjpy pair inconclusive, the nik225 failing to join the bullish bounce. We have key sectors failing to join, as yet, inc finance in US and Euro zone. We have commodities inconclusive as yet even though they are a usual late cycle performer. Etc etc.
The usual price correlations are still not mean reverting back to historic patterns and until they do we have to be skeptical of this latest breakout by the sp500.
For my own book im playing this for a bullish consolidation, at present. This remains one of the most powerful bull markets this century supported heavily by the desire to reflate our system by monetary means. This is a government sponsored bull market. The technical picture is no longer a screaming sell and therefore given the recent momentum upward again the lowest risk and highest return trade is for a continuation of this bull, tired or not. I’m therefore positioned for a mean reversion move for the correlating asset markets and usual late cycle historic out performance sectors. A selection would include rejoin of the 2013 bull market cyclical move by the nik225 which also suggests the start of a new secular bull market for Japanese equities. (By the inverse a carry trade). Commodity related themes (inc aud) bounce and resumption of their secular move higher, inc gold.
A conviction trade is it not. We have weakness here and evidence on both sides. Playing the mean reversion is a reasonable to take at this junction but its not at a high conviction level as yet and its not therefore at a high leverage level and I would reverse these positions on evidence ie Aud breakdown, shanghai breakdown, eurusd breakdown without ecb qe, nik225 breakdown and jpy strength, sustained US finance weakness and yet more stretch (narrowing of the breakout) of cheer leading US sectors. etc etc.
I hope this is crystal clear. Without delay lets move to the trio and some yardeni cftc & cross correlating charts that are very insightful as well the latest factset on earnings.
First up GS. Worryingly I find myself on the other side of GS in terms of Euro near term (target 1.34), I’m neutral having been bearish as we are at the trend support here, deeply over sold also vs Cad. AUD they remain committed to the AUD bear market whereas i recently added and am playing an end cycle commodity out performance, though not at volume as yet until price provides more support. GS remains super bearish gold and is suggesting gold is trend ready for a high momentum and volume breakdown here.
And here Fitzpatrick, remaining an uber bullish US indexes and the US$. He is nearly all in at 85% allocation. Long US$ vs JPY, GBP vs AUD, Short Eur vs USD. He is under water at present. The positions do not offset each other either. If i was asked to make an observation i would suggest taking some positions that are less closely correlated to ensure that the account was protected a little more from a directional move by the US$ against him. Its a win lose set of positions and win or lose that simply spells risk to me. There is no brilliance in running a risky set of “all in” correlating directional positions. (Apologies to Fitzpatrick but you understand my point).
Next up here AG. And AG represent the frustrated bear here. They are not deviating from their bearish call but they are feeling the pain here.
Trading and investing is not a game of being right or wrong. Its a game of knowing how to determine when you are right or wrong. Ie we have all been wrong and the trick to sustaining the P&L is when to acknowledge the issue. I would therefore, like the UBS team’s practice, like to hear what the lines in the sand are for the AG team. If the aud breaks out and the Nik225 climbs above 15000 would they throw in the towel and if so how would they play the reallocation. We have to consider our moves three steps ahead and we have to always be prepared to be wrong. This is one of the first rules in trading and investing in fact.
Next up lets take a step back and use yardeni’s research to look across asset markets to some mean reversions and spreads between instruments and indicators.
First up latest cftc report from Yardeni
And here the excellent tech run through by the team,:
And here, least we forget the “barbarous relic”, Yardeni on gold
We have seen this so many times during this bear market but gold once again looks “cheap” on a fundamental basis. The 1970s bear market was deeper and so we could well see gold to that Goldman’s target of 1150 and still maintain her secular bull market. From memory, a move to 1050 would be in line with the 1970s cyclical bear mark move. We all know what occurred when that cyclical bear ended and the secular bull resumed. Aside from long term call options on the miners and the underlying i have no leverage on the asset class again having taken the leveraged profit off the table two months ago.
Lastly here the latest Factset comments on this very weak earnings season:
All the best
Rich