Global Macro Trading Journal
- Thread starter Daal
- Start date
Ah my bad, I misunderstood.
In that case I'll point out that by several measures (mutual fund cash 20bps above all time lows, retail money-market fund assets back to 1999-2000 and 2005-2006 levels) bullish sentiment is fairly extreme, or at least the average investor is not 'holding back'. To my recollection we have actually not seen the sort of blowoff mania psychology you describe since 2000, but it hasn't stopped the market from falling. In 2007 there was actually quite a bit of fear about the implications of subprime securitization and derivatives. Yet then as now most people were long and Wall Street was forecasting calm waters ahead, using exactly the same marketing tricks (estimated forward operating earnings for instance) to do so.
Simply because investors are afraid of something doesn't necessarily mean it's priced in, and certainly not that the fear is unfounded. Look at GoC - he believes that he can 'sell when there is evidence' that some crisis is erupting and escape with some or most of his paper gains. But he is long now, and from a sentiment perspective that's all that matters - even if he's only expecting 10% gains for the year, rather than 50%.
As for me, see my posts above. At the moment I trade ES intraday with longer holds in cyclical bull phases when intraday volatility compresses too much, and also look for secular buy-and-hold-for-years type opportunities in all asset classes. Lately I've been trying to get more into short- to intermediate-term macro as a way to diversify, productively deploy excess cash, and keep my mind occupied and up-to-date with the latest macro financial/economic developments.
You might have misunderstood my point a little. I am not talking about 'sell when there is evidence' for something potentially imminent, such as a China recession, or European blowup. I mean for long-range hypotheticals, such as corporate margins contracting significantly, the Fed turning into Volcker Mk II, Israel nuking Iran etc.
I make a clear distinction between plausible bear themes that could conceivably happen in the medium-term (few weeks to 6 months), and BS 'what if' scenarios that currently exist only in people's imaginations.
SPX valuations are stretched by which measure? Historic PEs are not above the norm.
Margin compression only matters to the extent that it affects earnings. Ditto for demographics.
Bear in mind that stocks will gain 10% intrinsic value each year, other things being equal, simply by a combination of 3% inflation and 7% earnings yield being accumulated on corporate balance sheets. To be a long-term bear you have to think that valuations will contract by say 15-20% per annum for 2 or more years in a row.
Except why would you lump corporate margin contraction in with the other two? (The other two being straw men as previously stated... to my knowledge no one on this thread has intimated a snowball's chance in hell of Bernanke becoming Volcker, or talked much of Israel / Iran.)
In contrast to deliberately far-fetched plots, the possibility of margin contraction is not only likely, it is probable -- the only question being when. If profit margins stay permanently wide, capitalism is broken.
Furthermore, a strategy of waiting for "hard evidence" (in respect to margin contraction) has serious holes in respect to the fact that the market is a sentiment-driven forward-discounting mechanism (or at least it is supposed to be, when it is functioning properly, most of the time).
This means it isn't necessary for an air-tight jury case to be presented in order for equities to significantly decline on profit margin concerns. All that is necessary is a shift in sentiment / perception as to forward expectations.
If the market chooses to see profit margin contraction as an increasing likelihood, given various shifts in the macro environment, then all that is necessary is for a sentiment / perception "tipping point" to be reached in order for valuations to compress.
The clearest guide to when or if such a tipping point occurs will be price action interpreted in the proper scenario context. Meanwhile, stubbornly waiting for "hard evidence," as opposed to keeping a finger on the pulse of sentiment and expectation, could cost a very large chunk of open profits as the market goes ahead and looks forward.
To me the math is very simple.
Corporate profits historically have grown by 6% a year. Lets assume they will grow by 5%(Due Fed not being active enough to boost NGDP and US becoming a more mature economy, plus debt levels). 7 + 5% = 7.35% per year
But that's assumes PE ratios remain constant, since I'm on the secular bear camp I don't think thats likely. That should knock it down to 5% a year or so. My bet is that the bulk of this return will come later not right now given overvalued overbought overbullish condition Hussman mentions
Rosenberg had a system where one would buy when the ISM(not sure which ISM) was at 40 and sell at 60, it consistently beat the market. Buy low, sell high.
The VIX was at 15 a few days ago, its hardly a contrarian bet to be a bull. A VIX system that buys at 30 and sells at 15 could probably be just as effective(If anyone has the results, let me know)
Furthermore what a lot of these sentiment indicators might not show is that the LEVELS MIGHT HAVE CHANGED. The indicators have data from the Great Moderation where its was POSSIBLE for bullish levels to reach very high points simply because there weren't big shocks to sentiment, now during delevering they exist in abundance so anyone waiting for the sentiment levels to reach 90's stock market bubble levels will just keep waiting while everything crashes before sentiment gets to ridiculous levels(they will just go to silly levels now)
During secular bear rallies are to be rented, not owned
Um, no. Firstly, to be technical about it, a risk/reward scenario is a prediction. Secondly, if you read my post you will notice that I focused exactly on several different scenarios, and my perception of the different risk/reward for each - if you disagree with my perception that's fine, but it's blatant misrepresentation to claim that I was not considering risk/reward scenarios.
As for tail risk, there is no more asymmetry in being short here with a stop above the highs, versus being long with a stop below support. How does a long here with a stop have less optionality than a short here with a stop? A short with no risk control could run into a repeat of 1987 or 1999. A long with no risk control could run into a repeat of 1998 or whatever. I specifically mentioned what would prove the bull case wrong - if that happens, then it would be time to cut losses for someone who was trading from the bullish side.
Just like your interpretation of the gold market and charts (where I had no position, FWIW), you are taking your intrinsic view, then distorting objective criteria to try and fit it into your market opinion. Back then you said that if gold went bullish, you'd be able to react to the market and switch position. Now you are saying it's a mistake for me to do exactly that with the stock market. Double standards!
If a bear market or correction is starting, the market will tip its hand by breaking out and closing 1+xATR below the last major low (1340) and not rebounding back above that level. At 1360 (when I posted), that gives a risk for longs of about 30-40 S&P points. If the bull case is intact and this is just a normal pullback, the upside is at least 1410 (50 points) and there is a non-trivial chance it breaks to new highs and reaches 1475-1500 or higher before the bull is over. The is a good risk/reward ratio and certainly not a hail mary trade with unlimited risk as you try to misrepresent.
Shiller P/E ratio: http://www.multpl.com/
The norm is approximately 15 - which we briefly touched for a few weeks in 2009.
It actually seems likely that Shiller PE's will eventually overshoot to the downside, given the extreme nature of the late 90s bubble and selling pressure brought on by boomers (and their pension funds, etc.) drawing down equity positions in retirement.