Thursday, 14 July 2016

Fifth wave or sweet sixteenth and sell?

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.


northshore said...

"...or more like spliff roaches as they may well be toking on the tail ends of a high"

aka (a) 'generation blunt'.

The Black Hole said...

Well I've been doing this professionally (and profitably) for 30 years and I love selling new highs! You don't get many chances to sell the all time highs in stuff, be it stocks, bonds etc.

abee crombie said...

Love the post Pol. I have similar feelings, but I would argue that US Equities are a beast and do not operate with the same logic that many other markets do.

Blackhole, I assume you werent shorting US stocks in the 90's bc I doubt you'd still be here.

FWIW, to me this is just part of the "Money Game" US equities playing how they always play. I am not a super bull, nor a super bear. Breakouts from consolidation can fail, or they can also lead to a new sustained move. Have to be open mind to both bc we cant know the future, only play the odds

Corey said...

Agree w abee on open to possibilities. Sure the initial move is stops and towel chucking, but im not convinced bears have thrown in. Probably just as many continue to hunker down waiting for confirmation from Russell and other indices before making move.

Having said that global rates have ticked off ATLs. Surprised you didn't notice this happened a day after a major Bradley turn date. Makes sense that the majority has finally conceded lower for longer = lower forever, that rates will come back to bite.

Polemic said...

Hello, chaps. lovely to see you over here.

Yes, there are lots of reasons why this can keep running higher for that fifth wave type biggy mentioned above, but I Am just angling for the downside. Corey, yes as I say the TDI isn't flashing yet so still room for upside. But just think of all those stories that were meant to be killing everything only 6mnths ago. Amazing how a story only counts if the price moves with it.

Blackhole - the problem with new highs is that they are like buses. You wait for ages for one and then a whole load of them come in a row. Only in hindsight does the one true high become apparent. And its normally just above my stop.

abee crombie said...

Pol I think it also depends on how you are managing your $$. If you have a book to trade, then sure you can angle it towards the short side. But for real money, who have been mostly in cash these past 5 years, simply sitting out doesnt do you anything (and thats why yield hogs get slaughtered every once in a while bc they jump into what looks like a safe bet)

For my own personal money, I think US stocks are one of the best bets LT (I'm talking retimrement $$, 20+ years away). You just have to avoid bear markets. While I see many warning signs, I dont see anything that would want to make me change that allocation for now. I hope the bear comes back with a vengence but so far all I am seeing is a strong move up. As I said on MM, I do expect there to be a double top here, and I will short once we go back into the range. (around 2080). Until then I keep whatever equity I have and trim/add around the edges.

Polemic said...

For now that makes sense Abee and I would agree. But of course information changes so we should never consider a 20yr trade a 20 yr trade. As you also know we chat about markets every day and if we really were that long term traders we would have no need for the fine tuning and ideas.

This space would be very dull if we put on the tarade and buggered off. As you know I am very much into trading market moods and see the mood ready fro a turn. (mkt is a freestyle skier doing back flips off a berm but at the zenith). So, I am not talking big 20yr trades . It may only be a week or a day .. we have to see how information changes but right now I'm short of stuff.

What is interesting though is the huge volume of money coming into the market. I ve just seen some flow reports .. huge.

And of course any cash you use to buy stocks just goes to the person who was selling. the cash pile doesnt go away, it just goes down as a ratio to the value of the stocks whose prices you are pushing up.

By the way... we ve had mkt concerned at shortage pof bonds to buy for ECB .. Are we concerned at the shortage of stocks yet? Nahhh.... European banks have loads to go

Polemic said...

When I said .. something . something was going to blow up and crater the markets ( and on the 16th) what I actually meant was.. 'there 's going to be a coup in Turkey on the 16th' and that will mean I am right.

Jeezus .. this is HUGE News. All the world's major political nightmares meet in Turkey

Syria - ISIS - Russia - US- EU - GREECE - ENERGY