Wednesday, 23 March 2016

Turning to the dark side.

As regular readers would no doubt have become infuriated by, I have been pretty bullish for risk assets for for the last 2 months as the original game plan for the year sort of played out as hoped, apart from a pretty painful interlude whilst I was away in Austria in early February. Though it was a skiing trip, it felt more like a visit to a very Germanic Spa run by Herr Doktor Proctologist but I survived the delving of the market depths during maximum noise and rode the move back higher to this point.

And here we are effectively at the end of March having had nearly every great ‘trade for 2016’ washed out, stopped out or back to flat. Or all of that. Which really does justify the timing rule of ‘how to make your annual market predictions’ which states

"If you have to publish before the start of the year then don’t do so until Dec 31st. Doing so in November wastes a month of information to consider. Preferably publish your trades for the year in March of that year, or even later. The first few months of the year nearly always go the wrong way and you will have three months extra information to trade on. You also have the advantage of everyone else’s trades looking pretty stupid by then and investors looking for alternatives”

Where now? After the ECB and the Fed it looked as though it really couldn’t get much better for equities. The ECB had unleashed a package of unnatural unconventional methods to get things going, The Fed had shocked, nay stunned, the market with its swing away from outright hawkishness (though I'm not sure why the market was surprised as this was what the market wanted to hear) and outright fears of imminent China death or Western recession were receding fast. Great stuff. Metals and commodities did the “hang on, they aren’t meant to go up” move that backed the whole ‘risk on’ thang and credit obliged by stepping down from the parapet after being told how important it was that it didn’t jump .

But the last week has been a bit of a quandary to me. US stocks spurted up but European versions have struggled with Dax at 10000 and FTSE at 6200 being veritable struggles to breach, despite the US rallies. Now much of this can be excused by USD FX plays but still, it’s FTSE that has been troubling me as it really hasn’t breached that 6200 level I was so looking to break a couple of weeks ago and it should be nicely representative of all the things that are putting in bounces - miners and oil and emerging market interests all with a good US stock reflection. But it hasn't.

The way it has behaved around the 6200 level would, if I saw that in an FX market, make me think that someone has an awful lot of optionality at that level, but surely we aren’t being driven by a large option position all the way through March? No. I’m probably being too suspicious but the price behaviour has tweaked my concern.

Today added to my concerns towards a continuing upward path as a certain degree of momentum is needed in supposedly correlating markets to keep the third party on its way up, yet the momentum is fading.

Metals - a favourite lead indicator for me since mid February. Copper has lost its bottle

Oil - likewise, but it has the added concern that the storage figures really haven't given much hope despite the monster bounce. It's an overhang that is hard to ignore forever.

AUDJPY - Another of my favourite 'up' trades has lost momentum and today was a notable down spike.

Fed speakers - The tone of recent individual Fed board Governors is not as dovish as the group speak suggested at the last meeting.

Financials - Whilst banks are pretty zombified, with them not being allowed to make great profits but having their downsides cushioned to protect society from contagious meltdown, the action of ZIRP on their profits is devastating. The state of the financials is picking up as a meme.

ECB - We’ve had two weeks to digest that their actions are actually pretty good news but prices have stopped responding.

Aussie Stocks - OK, these double count minerals price action but the chart pattern looks worryingly double top like with a neck line that has past history.

China price action - SHCOMP is rolling a touch but alone looks unconvincing, yet look at H-shares and it looks like a more convincing roll over

Buyback blackout - Corporates are entering a period of buyback restrictions.

April - Tis the season to look at Europe. Greece should be causing stress by Brexit time in June, Brexit should be causing Brexit stress by any time now (I still see the Exit vote as higher than the 37% currently priced at the bookies so of course I’ve bought that price looking for a nailbiting just sub 50ish outcome).

Algos -  Imagine you are a vast algorithmic trading fund and you have parsed the hell out of the last few CB minutes yet prices have stalled, momentum has faded to the upside and is starting to pick up on the downside in assets you use correlation matrices against. What is your model most likely to do on the European open?

Marc Faber - Someone told me he’s turned bullish.

So, put that lot together and apply an aphorism of my own that "Trading markets is like yacht racing. You have to watch the wind and the tide but it's most important to watch for when the others tack" and I have done something I haven’t done for a while. I’ve gone short stocks but will of course flip out should recent highs breach (and yes the large SPX short positions are still there to play havoc on a run).  But for now, I’ve joined the church of the sellers and I am sort of hoping for Chinese stocks to dump overnight as some form of corroboration. I’m not looking for complete doom but a correction in an uptrend, but hey, if it does melt I can still claim a victory. Who needs to be right for the right reasons?

Please excuse me, I have to go now. I have to write a really complex academic paper on why the world is doomed (see yesterdays post here)


PunterinOz said...

Thanks for putting down your comments takes a great level of courage to put these things out there real time. So much appreciated sir.

Happy to be square here not sure I want to be short after this run up. I think there might be one or two good data points out of the US that might get the punters a bit more excited.
The second movers who could not buy it on the way up but now can because they can measure their success by how many ticks from the high might give us a chance to short out to them later down the track.

adamantic said...

I second this - things look like they're rolling over, and an ominous looking trendline hit on the S&P. Look at Tesla for the definition of a V