Eurodollars have spoken: Powell is bluffing. In November, the Eurodollars market was still drinking the Fed kool aid and believing what they were saying. They were pricing in further rate hikes in 2019 and 2020. The Fed is still projecting 2 rate hikes for 2019, but the Eurodollars futures are telling a different story. It is now pricing in a small chance of a rate cut for this year.
Whenever there is a disagreement between the Fed and the STIR market, I usually agree with the STIR market. It doesn't mean that I blindly follow and believe what the Eurodollars market says. But this time, the market is forecasting future economic scenarios which are highly probably, and the economists and the Fed are still too anchored to 2018 in forecasting 2019 economic conditions.
After a massive financial bubble pops, you get quick and unexpected deterioration in the economy, mainly because rising asset prices have served as a substitute for low population growth and low wages in maintaining consumption growth levels. This is not just in the US and many other developed countries, but also in China (dependent on rising real estate prices).
With house prices going down and now stock prices, the US consumer will definitely scale back. The meager wage growth and lower oil prices will not be enough to offset this. Especially for the high end consumer, which is cutting spending rapidly.
We have a big gap down on the first trading day of the year, which is not common, but when it does happen, it is usually a bad sign for January (see 2014, 2016). I continue to believe that those panic levels on Christmas eve will be retested this month, so I am looking for a good spot to short. SPX 2530 as a very hard level to break through, so anything close to that is probably a good risk/reward short. But this market is so weak, it might not give you that level to short at before it goes back down to retest 2340. Maybe the bulls will get trapped into buying after a dovish Powell speech or trade deal rumors pushes the market above 2510. That would be the ideal time to short.
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3 comments:
Great blog. Been following you for a while.
I am bearish too but having a hard time pulling the trigger with VIX near highs, and summation and bullish % index near all-time lows:
http://schrts.co/Ucm3wQ
Instead of shorting outright, I sold a few wide credit call spreads on ES today using .30/.10 deltas. We might be range bound at these levels until VIX can drop below 18-20.
I am usually a net buyer of option premium so I usually do debit spreads looking for 2-1 to 4-1 risk/reward trades. If I don’t have enough confidence in direction, I will stick with just putting on smaller size positions in futures. I am fairly confident that investors will be reluctant to have a lot of equity exposure for the coming earnings season. So looking for selling to pickup in the middle to later part of the month.
Also we are currently in buyback blackout period so once these passive new year asset inflows are done with (takes about 2-3 days), we should see buying dry up.
good blog!
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