Monday, 16 July 2018

Looking beyond the day-to-day trading patterns

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Looking at day-to-day trading patterns and trying to draw meaningful conclusions is, by and large, a mug’s game. Worse still is to draw conclusions from trading on the last day of the month – especially August. Month-end rallies driven by index buying are nothing extraordinary, after all. Still, a new all-time high for the Nasdaq cannot go entirely unnoticed, especially not at the end of such a volatile month. The S&P 500, in passing, also did well and closed within just 9 pts of its own top, while the Dow, though still a bit further away from record territory, is also only 150 pts off the record.

There are supposed to be nothing but nervous longs out there and market strategists can be observed combing the countryside looking for signs of hedges being applied or cost-effective put strategies being sought. So far, that searching has been a labour in vain. The VIX, once dubbed the “fear index” has become nothing more than a spot-market proxy for stocks – having spiked twice to the 16 area during August, it was at 10.6 last night, below its one-month, three-month, year-to-date and 12-month average. Nothing to see there then.

Yesterday, I had a longish exchange with Bill Blain, my highly respected opposite number at Mint Partners, who under the headline footnote of “It will not always be summer, build barns” wrote in his own morning missive (albeit tongue in cheek): “Personally, I’ve still got October 12th at 10.30 in the morning tagged as the moment the big equity crash occurs and I get out my buying boots ready for the opportunities that will follow. (Why Oct 12th? Why not..? The date has a nice ring about it as day of manic market mayhem – and the following day is a Friday the 13th… meaning it will panic folk even more!)”

Bond market operatives are generally much more cautious than their equity market cousins. That is not surprising given the levels of some bonds. Bond markets are also much closer to the machinations of the monetary authorities and the are therefore also significantly more conscious of how desperately manipulated prices are. As I have observed in the past, if we regulated individuals just devised a thought in our minds to do what the central bankers are practicing every hour of every day by way of creating a false market we’d be off to jail for half a life without parole.

There are two schools of thought here, one of which says the can’t go on like this, the other which reckons they’re so deeply into it that they can’t stop. I tend to belong to the latter which is where most of the equity community seems to be congregating – which is why, apart from one little wobble in the spring, I have consistently believed in staying long risk assets. The first eight months of the year are littered with the corpses of those who thought it was high time to short the hell out of the bubble.

Incidentally, for those who think markets are very thin, the Dow traded its seventh heaviest volume of the year yesterday. That said, three of the previous big volume days were option expiries and three were also month ends – but there is nothing out there which would have one sense a pending reversal in sentiment and so it seems to be that the party is far from over. 

Coming back to Bill’s observation, I guess the key question is whether the bond market can correct without it dragging the equity market into the abyss? Though it has never happened before, this might be the time for the mould to be broken. I still believe than until bond yields can compete with dividend streams, the risk for equity markets remains contained. Bonds used to be the investment of choice when it came to capital preservation, of return of capital and not return on capital. Indexation and benchmarking have removed capital preservation from the thinking of professional portfolio managers who no longer get measured by the ability not to lose money. Who can forget Felix Zurlauf, the UBS portfolio manager, who made headline news across the world in 1987 for having sold all his clients’ equities just ahead of the October crash but who was then severely reprimanded by his employer for having strayed too far from the model portfolio.

September will be an interesting month but not one, in my mind, which will shake the markets too hard.

Meanwhile, the Brexit divorce negations continue with both sides screaming blue murder and accusing the other of dreaming impossible dreams. I have been there as have, no doubt, many if not most of my readers. I noted yesterday that the biggest problem is that Brexit is in the hands of politicians and that they would deal with the political subjects before they considered the economic issues. It’s a bit like a couple fighting over who gets the flat over the shop before having accounted for who is actually going to run the shop. Brexit is one of those situations where there is simply not an answer to every question and until the participants begin to focus on nailing down the answers rather than the questions, progress will be slow to not at all.

Sterling remains the main whipping boy and it held on to the €1.08 handle it had regained after Wednesday’s beating. I was tickled by a comment I received back on my suggestion that sterling was a the easiest short of the year. It came from Chris Charlton of Centa Asset management in Frankfurt and read “There is an old saying in the FX markets: “There are only two positions possible in the cable, short or very short” Who am I to disagree with a life-long forex man?

Alas it is that time of the week again and all that remains is for me to wish you and yours a happy and peaceful weekend. For me it is more than that as today I begin my own summer holidays and I shall be out for the whole month of September. I need a bit of time to let my brain catch up with my mouth. What happens thereafter is not entirely certain as I have a medical issue which will require some major treatment. By missing September I might also miss some of the fun, but having written 142 daily columns so far this year and being a bit tired, it has to be a price worth paying. Anyhow, I’m sure there will be plenty of excitement left once I get back. September brings on the German elections and also Young Macron’s attempt to please everybody while risking pissing them all off. I shall be crossing France by road but hope to be safely back in Blighty before the protests hit the streets and the Molotov cocktails begin to fly. I’d like to thank everybody who has supported me so far this year and hope to be back soon with freshly sharpened verbal knives.

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