Monday, April 17, 2017

Geopolitical Fear

There is nothing more scary to the retail investor than the prospect of war.  You don't get big headlines with talk about Fed balance sheet reduction.  So the big fear was that North Korea was about to do something big over the weekend.  Well, they showed off a new rocket, and then launched one that went nowhere.  It must have been a fairly embarrassing weekend for North Korea, as they just failed in their display of military might while Trump and the crew dropped the mother of all bombs in Afghanistan, mostly to show off.

You got a sell into the close on Thursday ahead of the 3 day weekend on those geopolitical fears.  With nothing eventful happening, you get a small gap up, and with Europe still on holiday today, I don't expect any big moves.  More weak economic data took Treasuries to that 2.20% 10 year level, which put a lid on the up move.  I am keeping an eye on a possible short in the Treasuries as geopolitics is one of the better risk reward fades.  As I've said many times before, war is bullish for the stock market, and not really bullish for the bond market.  Uncertainty is the only reason people buy bonds on geopolitical tensions.  It is not based on any true fundamental basis.

I am in accumulate mode for equities, and will add more if we go lower.  French elections uncertainty is still there, but Le Pen seems to be losing her momentum and have had weak debate performances.  By mid May, with the French election uncertainty out of the way, we should be seeing a higher SPX and lower bonds.  It is still a strong uptrend in equities, and the past few weeks has been a pause to shake out weak hands in financials and other hot money sectors, and to consolidate the big post election rally.
Bullish for the next few weeks.  In the short term, we could have a little more volatility, but I would view dips as buying opportunities.


a/c. 21214 said...

A weekly abandoned baby in the 5-Year would lend credence to your view. How far can Treasuries be talked up? And just how low can yields go? Wasn't it Gary Shilling who said the benchmark would see 1%? And initial unwinding of the FED balance sheet at a potential breakdown level would be ugly, as opposed to selling into the sub-2% level -- 165 or so in the 30-year (right about here in the 5)... What do you think? Or has the talking into the unwind already begun -- making a market with fear? Gun does looked cocked in equities, per your analysis -- passenger cars will be nigh empty when the train leaves the station.

Market Owl said...

I have been bullish bonds, but they have been stronger than even I imagined, considering that S&P is not down that much. I think its going to be hard for yields to go below 2.10%, which would be a best case scenario for bonds.

However, I do think stocks will go a bit lower this week, perhaps getting down to 2310-2320 area. I am slightly long, but want to add more if we can get one more push lower. Put/call ratio is not as high as I want to see to get enough fear. With French elections round 1 this weekend, I think we have a good shot for a risk off day this week.