Friday, April 15, 2016

Greed Slowly Builds

This market is slowly setting up for another rug pull.  It doesn't happen all at once, but the building blocks of a top are forming.  Tops always take longer to form than bottoms.  Greed is a weaker emotion than fear.  FOMO is a form of greed, it is not real fear.  Fear is when you are losing money and the pain increases the more you lose, until you cannot take it anymore.  It takes longer for the greed to kick in, and it dies out slowly.  Fear comes quickly and once the liquidations happen, it goes away.

All the economic data is slower than last year, yet the prices are near the same levels.  One benefit you do have is lower interest rates in the 5 to 30 year yields compared to last year, which acts as a bit of a stimulus, but it is nothing that is earth shattering.  We are talking about 30-50 bps lower yields across the curve compared to last year.  It helsp with the risk parity funds, as they can hang on to stocks more as bond strength has buffered any stock weakness.  Like 2012 and 2014, you will not get a big move lower in equities with bonds acting so strong.   In fact, I don't think you will see the market get back to SPX 1812 this year, barring an all out Chinese financial panic.  I give that about a 30% chance of happening this year.

The Chinese have responded like most governments and central banks do when the going gets tough, they pump out money and credit.  It just kicks the can down the road and makes the problems a bit worse, day by day.  In the meantime, it provides a temporary floor to their markets which investors love to see.  Everything is short term, morphine and band aids.  Long term solutions are frowned upon by the market, they want easy money and they want it often.  And usually the market gets what it wants.

The OPEC meeting this Sunday in Doha is the big event coming up.  The expectations seem pretty low, because of Iran, despite the Russian rumors of a production freeze.  It is a pointless meeting, and it won't affect the oil market long term.  Short term, there is some position squaring ahead of that meeting so if nothing happens, or there is a weak agreement for a production freeze at these higher levels, the two most likely scenarios, then you probably have the shorts come back into the market to test how much they can take the market down.  Due to positive seasonal demand forces, I don't expect crude oil to go down much, and it should bounce back from any pullback quite quickly.

This is a low volatility boring market.  It is a good time to take a break, plan for future setups, and do some reading.

1 comment:

shzhning said...

Greed is a weaker emotion than fear

This is the best explanation so far I've seen for why tops take far longer to form than bottoms