Friday, March 21, 2014

What Me Worry?

Alfred E. Newman market.  Interest rates going higher, on more hawkish than expected Fed. China ready to crash at any moment.  U.S. economic data coming in worse than last year, with much richer equity valuations.  The consensus view is that the market is fairly valued, with moderate upside, but almost no downside.  And EVERYONE believes a 7-10% correction is a buying opportunity.  A 7% correction takes you to 1750.  That is higher than any period before October 2013.  A 10% corrections you to 1700, higher than any period before August 2013.


So what was considered expensive at all-time highs just 5 months ago, is now considered a lifetime buying opportunity.  Just because there is a lot of liquidity, doesn't guarantee that it all goes to the stock market.  With this much dollar liquidity, and an imminent QE from Bernanke Lite, aka Draghi, I don't see how you don't get a monster rally in bonds when the hot money in stocks flows to bonds.

The logic of the end of QE reducing demand for Treasuries forgets the fact that without QE, stocks ain't going up either.  And if stocks don't go up, the Fed will NOT raise rates.  There is no wage pressure with the excess of labor.  Real unemployment rate is around 15%, not 6.7%. With zero percent interest rates, how do you maintain 10 yr yields at 3% or higher?  That kind of steepness in the yield curve is not in equilibrium, but one based on temporary irrational fears of Fed tightening.  And those Fed tightening assumptions are all based on a stregthening economy.  The only part of the economy that looks strong to me is one that benefits from a bloated stock market.

I jumped the gun on the emerging markets short, and will reduce the position today.  And wait for an opportunity to buy Treasuries if 10 yr yield goes over 2.9%.  Assuming stocks don't go down, the first week of April should be an interesting time period to enter a long bonds and short emerging markets trade.

6 comments:

Anonymous said...

Hi MO,
- I am seeing large cap is outperforming small cap and hype stocks. Does it mean anything?

- Where can I get advance/decline ratio/line? Is it useful?

Thx.

Market Owl said...

Large caps outperforming small caps is a sign of breadth narrowing, which was a precursor to the tops in 2000 and 2007.

I don't use the advance/decline line, so I don't even know if it useful. I keep it simple, I don't use too many indicators.

Anonymous said...

And about the short natural gas trade, when would you cover? Thx.

Market Owl said...

Natural gas usually bottoms around the end of March, so probably next week is a good time to cover. I don't see natural gas going below 4.20.

Anonymous said...

The equity volume spiked up yesterday. Does it mean smart liquidation is happening? Thx.

Market Owl said...

In most cases, volume isn't a useful indicator for future market direction. The only time I find volume meaningful is in individual stocks which climax on extremely high volume, marking a top or bottom.