Wednesday, May 9, 2018

Not Looking Good

At SPX 2680, after what the market has shown over the last 3 months, the risk reward doesn't favor longs anymore.  I tried to be as patient as possible but this market just doesn't have the upside lift, and the bond yields just aren't going down which makes me nervous holding longs.  I have sold my SPX long and will now just wait.  It was a bad trade, wasted capital and too big of a drawdown.  It is possible that it could grind higher, or it could go right back down after hitting resistance here.  I see it as almost a 50/50 situation, not something I want to tie up my capital in. 

The tighter money is having a noticeable effect on SPX and emerging markets price action.  The dollar is getting stronger and at these valuations, even with all the stock buybacks and "good" earnings, it just can't go much higher.  In the long term, I am bearish on the global economy, and slightly less bearish on the US economy, so under that scenario, the dollar will likely get weaker, just because the US is the only developed economy that can significantly reduce interest rates.  That would dramatically reduce the interest rate differentials between the US and Europe/Japan, causing most of the positive carry of a long dollar position to disappear.  That is the long term.

In the short and intermediate term (anything less than 6 months for FX), it is hard to predict what the currency markets will do.  Forex tends to be a momentum market, but much less so than in the 1970s-1990s, making it a hard to either be a trend follower or a counter trend trader with much conviction.  The only thing that plays out consistently long term is that positive carry currencies generally provide better real returns than negative carry currencies.  But since the dollar is overvalued on a purchasing power parity basis, and also historically, it negates some of the long term positives of being a positive carry currency. 

So I won't factor my long term views on currencies in my shorter to medium term trades.  Besides the recently stronger dollar, there are many more negatives for this stock market.  Late cycle behavior, high valuations, higher bond yields and tighter monetary conditions, etc.  The only positives were the long uptrend in stocks (rising 200 day moving average) and stock buybacks.  Without those 2, there really is no reason to be buying stocks here.  Not bearish yet, but not bullish either.  If the traders seem to be getting excited again about stocks, I will definitely be looking short.  Sentiment feels neutral at this moment, so I am not getting any good timing tells yet. 


Anonymous said...

I havent checked in a while. Whats the long term prognosis here? Are we still making new highs? I was thinking this is 2011 again and we at least touch new highs if not go a little higher. Which means fall or so before we can correct for real. The credit union was back to making close to a million net income for march and april. Not as much as 2017 but still relatively strong.

Market Owl said...

I am thinking we top out within 2 months. The economy is slowing, the bond yields are still high, and chart looks bad. Those tax cuts may be the only savior for the credit union. There is no wage growth and inflation is rising.