Tuesday, March 20, 2018


Did not expect a huge dump yesterday, and then a last hour rally that took back half the losses.  There are plenty of dip buyers lurking in this market, and they showed their hand yesterday afternoon, wasting no time to buy when SPX got to the 2700 area.  The equity put call ratio finally got elevated, the first time during this selloff which started last Tuesday.  Some of it was re-hedging after options expiration, but a decent amount of volume that was looking to buy some put insurance ahead of the Fed meeting and also shorts speculating on further weakness. 

I was waiting for a weak close to load up but we had that strong bounce back into the close, so I didn't pull the trigger.  But my buy trigger finger is getting itchy, and I would like to get long exposure ahead of the FOMC meeting, which I think is overly feared at the moment.  While Powell doesn't seem like a guy who follows the Fed "baby the market" script too closely, some of the recent economic data (home sales, retail sales, Atlanta GDP) coming in a bit weaker than expected will temper his hawkishness.  Also, the market is pricing in 3 rate hikes this year, and it will take a lot of hawkish rhetoric to bump up more than that. 

Recently, the LIBOR/OIS spread has been blowing out, much more that normal, to 56 bps, when it was trading at 28 bps at the end of 2017.  Some will say this is just US corporate cash repatriation after the tax cuts passed, but it seems like there is just not that much dollar liquidity overseas.  Even as the US financials have been performing strongly, Deutsche Bank is already down 20% this year.  The central banks are reducing stimulus to the economy, and it is easily forgotten just focusing on the day to day price action.  I have stated this before, if I am a stock investor, give me monetary stimulus over fiscal stimulus any day. 

When the government runs a huge deficit and issues trillions in Treasuries, without Fed QE, that is money that needs to be taken from the hands of private investors.  That is money that would otherwise be used to support financial assets.  That is why you are starting to see tighter liquidity conditions, because the government is taking up some of that liquidity that private investors would have been able to use. 

Looking to buy the dip today, don't expect a move down to SPX 2700 today, but anything close to yesterday's close at SPX 2713 will be enough to get me buying.

1 comment:

MM111 said...

Medium position at s&p 2722. FTSE position at 7062 not quite as secure it seems.