Sunday, 6 March 2016

The four peaks.

Friday saw lift off for the metals and oil leaving Brent oil up on the year. Yes, higher than the close of Dec 31st. Sorry to labour it but considering where we have been, what has been said and the last week's EIA storage data, that really is one hell of an achievement. Falls in US production finally being seen are cited as the reason for the rally but let’s be honest, it’s speculators. Why speculators? Because global supply and demand swings have have not swung 35% either way since December as the price of Brent has. Speculative long positions from Hedge Funds appears to be running pretty high and that break in the chart neckline shown in the last few posts has seen spectacular lift off on Friday. The same happened with copper. Much as with equities, so far this has been blamed on short covering but as discussed before, this can have a self feeding inflation loop that could quickly drive the switch to real longs. Which leads on to asking, "if inflation does start to rise what are the chances of it being blamed on ‘just short inflation positions being covered’"?  The great 'just' word again. But if this is just short covering by leveraged accounts it will just delay any inevitable slow down in the path towards reducing global supply as drowning commodity suppliers will be able to offload some of the weight of their hedging to Hedge Funds at higher prices, buying themselves a few more months of survival.

One popular theme being bandied around a lot recently is the theory of Abundance. I posted my own thoughts on that last July (also worth a reread with respect to China playing a blinder with regards to commodities). But the proliferation of articles citing Abundance at just the time that commodities are starting to rally and recession fears wain leads me to coin the phrase ‘Peak Abundance’. We are probably at it. Remember, there’s always too much of what you don’t want right up to the point that you want it. Just go and look for a phillips head screwdriver in that tool box that was full of them when you wanted a flat headed one and you’ll see what I mean. They’ll all have vanished.

Equities pinging 2000 in SPX and 6200 in FTSE saw some ‘bigfigurutis' kick in and rejection of these levels was noticeable on the close. FTSE was the one that really didn’t do as much as I thought it would on Friday. China had rallied overnight (OK, blamed on state intervention, but 3% up beats 3% down anyday), my favourite FX play of long Aud/jpy was motoring, cable had fallen back a bit and copper and oil were skyrocketing, so I really expected FTSE to take out its recent highs above 6200 with ease and crack on significantly. But it didn’t, damn. Whilst we are talking of UK linked things GBP is looking pretty perky despite the popular doom calls of 2 weeks ago during 'Peak GBP bearish'

One of the key figures for me last week was the non-manufacturing ISM figure on Thursday. A break below 52 would have been most troublesome as it would have shown services were following recent manufacturing ISMs but coming in above 53 was just fine and a green light to play the growth trades. The Non Farm Payrolls were once again a mix. Lovely headline, shame about the wage data. NFP’s came out as a ‘Corbyn’ - Lot’s of jobs, not much pay.

Post NFP commentary did seem to focus on the weaknesses with the cry to sell stocks picking up again. No doubt the falling close has many prepared for a Monday sell off. The technicals would also support such if you are a fan of bollinger bands and a raft of other momentum signals suggesting an overbought environment. BUT and here is the big but..

Positioning as reported in the BAML flow data is suggesting, nay, crying out that despite the 12% rallies we have seen in DM equities from the base and the rampant rise in EM and Credit, cash levels are ‘at mountainous levels’.  Peak Cash. And their bull bear index is showing levels of bear sentiment comparable to the lows of 2011.

To hear that this is still the case after recent market rallies is astonishing and trumps any short term oscillator technobabble. There are going to be a lot of folks still chasing performance benchmarks and though it may well be safest to be in cash as the world is indeed not looking pretty, we know that the quickest way to remove yourself from the fund management gene pool is to miss your benchmark by a country mile. Your only hope is that all your peer group did the same. Maybe those figures are the result of them all having joined a fund manager's trade union with the rallying cry of "One short - All short”. Or, it’s a giant game of chicken that is going to end with the chickens getting hit by a thundering herd.

One other question to ask is 'if there is an abundance of cash knocking around, even if it is used to buy equities, what happens to the cash that is given to the seller of those equities?'. It only becomes someone elses cash position until they spend it on something else.

The path of most pain is upwards and it's double pain if youve just reshorted thinking that a nice round number is the top. I remain long of risk assets but am fully aware that Monday could be nasty for a turn lower on technical reasons and Thursday could be a kick in the markets kidney’s from Draghi as he rations the meds (meant as Medications, though equally apt as the Mediterraneans). Peak ECB Hope


Celeriac1972 said...

Peak peaks?

Great article. Many thanks for sharing your thinking.

For FM's who've been holding elevated cash balances during the recent rally it's now too late to chase. The strong ones who are well supported by their clients and their employers will know this. They'll accept the career risk and sit tight for now. There are plenty of scenarios that might yet take them from zero to hero....

Anonymous said...

How recent were the baml chart/Flow data ? Alot has happened in the last week so wondering if sentiment has changed ?

Polemic said...

Published Thursday. Don't know the sampling date but as published under 'weekly flows' would suggest not long before.

Hotairmail said...

I think the market had gotten so Bearish it simply couldn't go down anymore. What is more surprising if this is still a Bear market is how bullish the rally has been. Proper risk on.

I don't have access to all the stuff you do I'm sure Pole, but I do keep a weather eye on AAII, NAAIM and Rydex funds (all on stockcharts). So you can see what I mean above. However, further, the Rydex Bear funds whilst fallen, clearly have a lot of way to go to reach normal levels - but perhaps much of this is plced for the entire duration of what people think is a Bear market. On the other hand, Rydex Money Market funds where people park their cash in down periods seems to have quickly returned to normality. I'll attach a couple of links, but I don't know if you'll be able to access them:


Polemic said...

THanks Ham, yes, could access those thanks and they do go a way to countering the BAML survey. Just makes this inflexion point even harder to gauge.

Hotairmail said...

Found a BAML article citing the 'highest cash levels since Nov 2001'. It quoted this as the survey period:

"The survey was conducted between Feb. 5-11, among 198 participants with $591 billion under management."

Polemic said...

which was the ding dong low so would be natural to think things have changed but they also, apparently, mentioned recent marketing confirming the huge levels.