Thursday, February 4, 2016

Stuck in a Range for Now

We have carved out the range, and it seems like more and more people realize it, as we are spending less and less time at the top and the bottom of the range.  Around 1860 to 1910.  Sure we overshot the top of the range but you cannot bet on a trend continuation at this moment.  For now, the forces are fairly evenly balanced here with the bull and bear side.  Emphasis on now, because eventually, I believe the bears will take over and take down risk assets.

The market is pricing in Fed inaction for the rest of the year.  The short end of the Treasury curve has been extremely strong, as the yield curve continues to steepen, contrary to paper napkin bond analysts.

Lately, it is as if the investment community has finally realized that if the Fed does nothing, then the dollar is too strong as a lot more was priced in to the FX market.  Of course, the market with the most shorts, the EURUSD, is the one that goes up the most in these a-ha moments.  It has been fashionable for hedge funds to collect their 2 and 20 while they buy European stocks, short the euro, and act like macro experts.  The pain trade is a European stock implosion as the euro keeps rallying.  Remember, European stocks are cheap for a reason:  they don't do aggressive buybacks like US corporations and have no growth.

Now that we are close to the top of the range, I have re-established the ES short.  Dollar weakness helps the US but not if it is due to a weakening US economy.


Anonymous said...

Hi MO, you previously mentioned SPX correction lasts either roughly 7 days, 14 days or 21 days. This time, the market decline has been almost 1 month, so does it mean we are definitely in bear market?

What is the typical time period of bear rally? Is it also roughly 7 days, 14 days or 21 days?


Market Owl said...

It is hard to say what you mean by bear rally. Sometimes you get a one to two week bounce and then consolidate before you selloff again. Other times you get 4 week rallies amd then selloff.
I would say that usually bear market rallies peak after about 3 to 4 weeks, but I have seen some that go as long as 2 months.