Another goal for the Polemic FCBE 'Fade CB expectation’ trading model. I feel very sorry for Carney’s kids who must be so confused in late December to find the presents they were strongly hinted to get may not turn up until January. How old are his kids? Maybe they’ve never seen a Christmas present at all, though they have often been mentioned as imminent.
THE BoE vote to hold rates steady came in at 8-1 which wasn’t exactly a close run thing so I do wonder how the market got it so wrong. But that didn’t stop sell side analysts immediately chuffing out reems on why it was a ‘hold’ despite swearing blind it would be a cut an hour earlier. I should have taken this as a clue that self-doubt is not part of the behavioural makeup of the protagonists because my first thought was that if I had screwed up the BoE forecast so badly shouldn’t I question my ability to forecast other central bank actions? This lead me to believe that the BoE inaction that led to GBP rocketing and FTSE falling (double whammy from interest rates and GBP moves), would lead to a questioning of the current complacent maxed out belief that central banks are going to print until we have hyperinflation. So I sold some US stocks. It was like micturating into a hurricane.
But many of the reasons for the belief in the need to cut rates and stimulate are less acute than they were mid-Brexit panic. The UK markets have not melted, the BoE have not had to do emergency anythings, Osborne didn't have to present an emergency budget, UK stocks are fine and the mighty pound is less unmighty than it was last week.
Meanwhile, expectations of BoJ action are hot, scorchingly hot. But then so is the BoJ's ability to disappoint. The Fed targets many things and most of those are sentiment and most of that rhymes with ‘Rock Rices’ and those are at record highs. Surely the pressure for them to stay accommodative is waning fast, so why the mad onrush of stock buying? "Because it's going up ‘innit”.
There is more to it than that. There has been a massive sentiment change. There has been a throwing in of the towel from the bear camp with ex-permabears wandering around picking up reasons to buy like used cigarette butts from the street, or more like spliff roaches as they may well be toking on the tail ends of a high. But when people only just latch on to the reasons they should have been buying 20% lower it normally means one of two things
1- The fifth wave (Elliot chart theory). The euphoria one, the irrational exuberance one. The FOMO rally. The 'load the boat' and 'mortgage the kids' rally. Indeed the analogies to 1998/9 have already appeared. I am hearing some ghastly reasons to buy but I haven’t seen the TDI (Taxi Driver Index) being triggered yet. With bonds, equities and commodities rallying one could say that the only thing actually moving is cash. Cash has fallen in value against everything. Now this fits nicely with the belief that money is going to be printed and could be the first signs that monetary policy is truly and utterly broken and we all need to buy gold, which is also going up. The fifth wave should be detectable by record leverage being employed but at the moment it still only feels like stop losses on long cash positions.
2- It’s a towel chucking blow off. The shorts and cash positions being stopped out and the sudden deafening silence from the peloton of disasters that we're normally subjected to has me thinking something mighty nasty is going to creep up on us.
Volatility is pretty cheap at the moment in stocks and it may well be worth buying straddles in SPX. No, not just buying VIX, we want direction too. But for my pennyworth, I’m going to short stocks on the belief that CB euphoria is going to wane and something, something.. is going to upset things. By the way, What happened to China? Wasn’t it meant to have vanished up its own economic fundament by now?
Now, lastly, I am going to unveil my secret weapon. Under this dust sheet is, not a planet busting laser, but the mighty 16th of July indicator. Every year I trot this out and sometimes it works and sometimes it doesn't but it used to work very well in the heady days of the massive late 90s bull run and fairly well since. Tthe July 16th/18th period used to mark turns in trends. As to why, I have no idea, but option expiries and US Humphrey-Hawkins Testimonials have all been cited.
"Sell into strength," they say. Well, it hasn’t been much strengthier for ages. They also say "never sell a new high". Hmmmmm.