After a number of years of increasingly compressed volatility and an endless supply of greater fools willing to buy any asset price dip and sell any asset vol spike, something changed last week. However, as former fund manager Richard Breslow notes, while assets are on the move, there’s no need to be scared… yet.
One thing I’m pretty sure we shouldn’t be doing is taking the recent market moves and trying to compare the relative attractiveness of various assets based on some recalculated dividend yield.
We didn’t get here following classical value-investing techniques nor will the path out follow such a comforting script.
For too many years, we’ve had central banks relentlessly providing front-running opportunities for investors. Just about the easiest environment, in theory, in which to make money. Yet a shocking number of funds grossly underperformed. You either got risk-parity or you didn’t. And leverage wasn’t meant to be used to turbo-charge your best ideas but to double down on the good faith and easy credit of monetary authorities.
The market is only at the earliest stages of coming to terms with the notion of the punch-bowl running dry. That’s why watching the reaction, both official and institutional, to these minuscule corrections to long-standing trends will be an important guide going forward. So far the Fed is sticking with their script and traders are scared they mean it. The BOJ is pushing back on market surmise that less accommodation is coming and being met with skepticism. The ECB seems deeply conflicted and everyone seems happy with that. But the build-up to today’s speech by President Mario Draghi felt like we were waiting for a post- Governing Council press conference. No one is quite sure what the PBOC is up to, but if financial stability is assumed to be high up on their wish list, they will get increased allocations over time.
It’s fair to say that many of the moves we’ve recently been seeing are grounded on nascent global economic optimism given pretty much universally improving numbers. So it’s somewhat ironic that market participants are spending as much time as they are speculating on when they will end rather than on how to reposition themselves for a potential long-term change in the investing environment. This explains why the path to normalization can’t be as painless as we are constantly promised. And why, secretly, investors think somewhere down below the CB puts will always exist.
So where to from here? Positioning will have a lot of say in the matter and on a level that goes beyond speculative leanings. The big investment kahunas will have to maintain a long-horizon, hold-to-maturity strategy, or we are just getting started. CFTC data will provide the noise. Pension funds, other LDIs and reserve managers the resolution. We can only forecast what the future will bring and at the moment and it’s fair to say the situation is fluid.
The best thing to do is look at the closest pivot points to be found and key off of them while waiting to see if and when things quiet down.
The starting point might be based on using a very simple trend line drawn on a chart of the S&P 500 from the November 2016 low to the Dec. 29 year-end close. It beautifully defines the latest impulsive up move. And extends almost perfectly to where the market closed last week (2,762). And not coincidentally where today’s rally off the lows in futures failed.
The dollar is equally on a lot of minds. Watch three things. If the dollar index can’t get back above 90, it isn’t a good sign. And not much of an ask given all the rate talk.
USD/JPY has had a bunch of moments over the last year when circa 110.85 showed up as resistance or support, as the case may be. If the currency pair can’t get back above that, it also is telling. On a less scientific note, ask why EUR/USD refuses to eschew another attempt at 1.25.
The Bloomberg commodity index looks ill. It has to hold above 88 for the global demand story to remain credible.
Last Friday’s selloff did a lot of technical damage and that day’s high major resistance.
My advice on bond yields is: be impressed with the strength of the moves we’ve seen and keep a very close eye on the yield curve which is trying to steepen making last week’s tights look like blow-off lows. If 2s hold 2.05% and 10s 2.71%, then they are trying to send a pretty clear message.
The other thing to keep in mind is that what manifests itself as higher market volatility also means greater sloppiness. You do need your levels and to stick with them.
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