Monday, August 7, 2017

Placid at the Top

There is hardly a breeze even at this high altitude.  I have never seen a top so calm.  Which means that it's probably not the top.

Volatility usually happens when you get eager buyers and sellers clashing in a surge of volume.  We are definitely not getting that here, despite the potential bear catalysts in ECB tapering and Fed balance sheet reduction.   The equity market already faced a little heat back in late June when Draghi hinted at ECB tapering but both the bond and equity markets shrugged that off quickly.  Will that same catalyst be able to provide a bigger downdraft the next time?  It is questionable because the market has mostly priced in those events already, with the Bunds going from 0.25% to 0.60% over a few days last month.

There is the China put ahead of the National Congress meeting in the fall because the leaders want to make things look good and will pump plenty of money to do so ahead of the meeting.  So you don't have many worries out there, and I don't considering the debt ceiling a real worry.  That has been more of a political spectacle than anything else.  They always raise it after acting like the world will end if they don't.

The only long lasting downdraft that I can see is if we get that global growth slowdown that I see coming soon.  It doesn't have to be a big one, just enough to affect earnings negatively and inject volatility into the market.  Even a move in the VIX from the 9s to 15 would seem like a big earthquake.  This market has gotten so used to the calm conditions that a 1% down day these days feels like 2-3%.

The calm, overvalued conditions are not what precede a top.  It is unstable, overvalued conditions which do.  Right now, we are not even close to those conditions.  Which is a bit shocking considering how overvalued the equity market is.  Yes, the weak dollar is helping the US multinationals but that comes at the expense of Europe and Japan.  So globally, there are no net effects.

I was short last week and I covered for basically break even.  I gave it a shot on the short side, but it's taking too long for the move to develop and my conviction level has gone down to the point that I'd rather be flat than a little bit short.  Back on the fence and waiting for easier opportunities.


Anonymous said...

I said 2500 right? I call the top at 2550 which we should get there by September. Should be a bloodbath this fall. Best to buy puts expiring in Jan 2019 in case we're wrong and average up into the trade. At worst we could get to 2750 drawing a long term chart, trying to visualize it in my head. If we go to 2750 it could take till 1Q2018 before a top. But by the end of 2019 I don't doubt we will be close to 2000. Economy is at full employment and there is little slack left. Just one little break to the other side caused by anything, some debt default, oil, war, no tax deal and we be fucked.

Market Owl said...

Not as confident as you about a rally into September, I actually think September will be weak with debt ceiling hanging over the head of the market. Once we get past the debt ceiling than we can probably have a short term rally. Yes, I agree we should be close to 2000 in 2019.