Friday, July 1, 2016

Medicine Stronger than the Disease

You are getting the central bank gravy train trade.  Long stocks.  Long bonds.  The market is taking one portion of the Brexit, easier money, and running with it, mostly ignoring any perceived negative impact.  The market is right on this.  Brexit is pretty much meaningless from an economic perspective, as the UK will just make new trade deals, probably better ones now that the pound is a lot weaker.

The central banks have already started to overreact on this, and the bond market is forecasting that, driving down yields everywhere.  The BOE already cut rates and for the first time ever, a UK government bond yield went negative.  The ECB will probably next in line to overreact.  And the BOJ will also likely step in as well.  And so much for that Fed rate hike this year.  They are one and done.

The bond market has refused to go down despite this face ripping rally.  In fact, we hit all time lows in 10 year yields as they plunged overnight, for no apparent reason, as equities were quiet.  You are getting close to the blowoff top in bonds, as you are hearing more and more of the crowd talk about a 1% 10 year yield.  But finding the top in bonds seems even trickier than finding a top in equities.  Tough to fade such a strong move.

Even though the global economy is stagnant, it took a Brexit to finally get all the central banks scared enough to overreact to what amounts to a pimple on an elephant's ass.  It's like treating that pimple with full scale blast of chemotherapy.  The medicine doesn't fit the disease.  What amounts to nothing, the most overhyped "crisis" I have ever seen, and it will result in torrents of liquidity flooding into the market from the central banks.

This liquidity should be enough to take the S&P to all time highs, for the first time in over a year.   It helps to still hear a lot of caution from the Fast Money crowd, still worried about the fallout from Brexit.  Never mind that the UK FTSE is back above where it was before Brexit.  They have been force fed a bunch of BS propaganda from the EU bureaucrats and the rabid media, waiting with baited breath to cover the next crisis.  It ain't coming.

Gut feel is that we get all time highs sometime this month, which should be enough to form a euphoric top.  For the bears out there, it might be a good time to take a long vacation.

7 comments:

Chris Phelps said...

I really appreciate your posts...non doctrinaire. I think I will take a vacation.

Market Owl said...

I will be on vacation also. Hard to chase this S&P, even though I think we go higher.

Anonymous said...

Thanks Market Owl for your posts.
Maybe SPX is going to get parabolic. I'm fed up with this market. If sellers (stupid long term "investors") never want to sell, prices will never go down. Nothing can stop this market. Investors just want dividends. Look XLU, XLP, etc... ! Investors hate cash. We are in a bubble. Central banks make the market. I don't want to be a bear anymore !

shzhning said...

I just a saw your tweet about those who think low bond yields is bearish for stocks didn't look at what happened from 1982 to 2000.

As a fairly new trader, I was puzzled by yesterday's action: both bond and stocks rallied. I'm curious how long you've been trading. Is your observation from your experience or just a reading from chart?

Anonymous said...

Lmfao. Last week you were saying we will probably go down to 1890. Now new highs. Whatever zzzzzzz

Market Owl said...

Yes, this market kind of sucks for those using past price patterns. The market is getting tougher because the moves happen much quicker now, as soon as we bottom, we rocket higher. Very few pullbacks on the way up.

And for the troll: where did I say 1890? I said 1980 -1990 was good support, and we bottomed 1991.

Market Owl said...

Bonds and stocks move in the same direction quite often, It happened a ton in 2012, 2014, and this year. Lower yields is always a positive for stocks, all else being equal. Epecially when you get lower yields without economic weakness.