Trading the Indices on Fundamentals

[FXtrader8911]

I should add to the above that recent consumer survey in the US resulted in 70% saying they would avoid made in China items were possible, 54% said that they would be prepared to pay more for items not made in China. If this sentiment is picked-up by brand names and they start again to do the manufacturing themselves and outside China, then Trump's objective will be reached. Globalization is at the crossroad, all we need now is the likes of Apple to wake-up to what the consumer wants, I'm sure Trump will be doing a lot of nudging in that direction to help things along. I hope Australia and the UK join-in also.

On the markets... Germany has officially announced they are in recession for Q2, the DAX reacted by rallying almost 2%... such is the disconnection between the economy and the markets. I think market players are setting-up themselves to where they were in late Feb... keep ignoring all bad news, then, all at once, pull their head out of their ass, see reality and panic sell. I remain positioned for a sell-off.

 

[FXtrader8911]

Here's something that hasn't been seen for a while... a crack the marble shell of big tech wiping-out 10 days od gains! Twitter's biff with Trump has reminded people that big tech is under the microscope of the regulators. The virus sort of took the limelight away from many issues, this was a reminder that these issues are still around.

 

[FXtrader8911]

Riots have again closed down many businesses across the US, Hongkong events have escalated the China-US & China-AU relations re-igniting trade war threats and the hopes for a quick coming virus vaccine have been dashed. The latter is what caused the rally in late May but a reversal of those hopes have not reversed the rally while renewed business closures adding to unemployment figures and China trade tensions have by-and-large been ignored.

Geoff Wilson, a well-known fund manager says "there’s more pain to come. The longest bull market in history is unlikely to be followed by the shortest bear market in history, but in the short term, ‘fighting the Fed’ seems to be a dangerous game."

The Fed and other central banks have indeed created liquidity and have reduced rates, markets like both, but central banks can't create demand, without which, earnings can't grow and unemployment can't reduce. Reality and sentiment must eventually reconcile.

 

[FXtrader8911]

My performance in May at $28k is much below average, I've been very cautious in trading the volatility as every dip was expected to be the start of a correction but then it wasn't. The experts that acknowledge the disconnect between the economy and market prices are being countered by those that believe prices are justified considering the Fed and Fiscal action, then there are gurus such as Larry Summers (Chief Economist at the World Bank) who are against the Fed's action saying the zombie companies and the distorted unemployment figures this created is just kicking the can down the road without actually resolving anything. Whatever one's view is, there are plenty that agrees and plenty that don't, there is no precedence nor forward guidance to support either the bears nor the bulls, however, commonsense must say that markets will eventually have to reflect an average earnigs multiple. My view is in Larry Summers camp i.e. When things normalize and bail-out ceases, companies must decide to retain a heavy work-force to turn the fiscal loans into grants of slim down, I believe the latter will happen, pushing unemployment up and earnings down causing markets to correct.

It is also to be noted that most of the rallies are on low volumes and created by retail investors, the astute big boys that saw the writing on the wall got in in April, the rest are staying out and in fact, are looking to short markets.

There is also some economists that are saying the Fed's long term near-zero rates are pushing the US towards Japanization and facing a decade of stagnation, I don't agree to this view as the US has an active immigration policy that allows the work-force to remain young, productive and innovative, however, it will be increasingly difficult for the Fed to normalize rates without upsetting markets meaning that investors need to monitor inflation carefully.

 

[NotKnown]

The markets are powering ahead and the ones I watch all look more or less look the same in shape. A couple of maybe blips but all bought back. No real consolidation or sideways movement so the next weeks will be interesting to see. It is almost as if there are no economic problems in the world economies and it is business as usual. All a bit strange.

 

[FXtrader8911]

The markets are powering ahead and the ones I watch all look more or less the same

Indeed, even AU facing its 1st recession in 30 years has unphased a rally. Re-inforces what I had said a while back... save your time, just watch the US, all the others just do as it does, a silly correlation as not all stimulus is equal nor are economies in the same space, but anyway, nothing makes much sense at this juncture so why shouldn't all markets perform as one.

One market that amuses me due its mindlessness is the CAC, it follows the US almost to the pt.

 

[Relentless]

...It is also to be noted that most of the rallies are on low volumes and created by retail investors, the astute big boys that saw the writing on the wall got in in April, the rest are staying out and in fact, are looking to short markets...

You're joking right? Retail investors? Retail investors don't have the buying power to move markets like the one that has carried us from 2200 to nearly 3100 now on the S&P. You think that move at the end of the U.S. session today was retail investors pumping the close on light volume ? The smart whales are laughing all the way to the bank. The dumb whales are sitting on the side lines with retail wasting away. They will join in just in time to get the rug pulled out from underneath them.

And volume is irrelevant. The major U.S. indexes have gone up for over 10 years now on low paint peeling volume.

I've read your posts over time. You know these thoughts are simply untrue.

Shake off the bearish bias. Just because things don't make sense doesn't mean the markets have to go down. This rally is proof of that.

 

[FXtrader8911]

volume is irrelevant

Now it's you that is joking. If a poor soul with a fear of missing-out put in a bid of $1,500 for 100 tesla shares then the price of tesla would be $1,500 even though no one else would pay that price and that is the only trade... that's how markets get distorted by unsophisticated retail investors. Anyway, I'm not making the stuff up, people that track these things are saying that fund managers are not buying and haven't bought since April, in fact, when they look at the insurance side of investing, many are looking to go short.

 

[FXtrader8911]

On economic news, the official jobless claims and the total unemployment level at above 20m was a bit worse than expected while the biggest U.S. mall owner, Simon Property, is suing Gap and others over 3 months of unpaid rent totalling more than $66m, yet, here we are with markets at near all-time highs as if earnings were heading back to pre-virus levels within 6 months.

Phil Blancato, CEO of Ladenburg, said: “We’re looking at the worst data in our lifetime yet the rally continues… The market either knows something we don’t or we’re trading on extreme optimism.”

Expectations are that distorted market prices might continue for a while till the Fed & fiscal stimulus ends, thereafter economists warn of a raft of bankruptcies, downsizing and increasing unemployment. It does not take an Einstein to figure that unemployment & diminishing buying power directly affects corporate earning in a consumer-based economy. Furthermore, big business in the US is not attuned as one might think to what the consumer wants, unintentionally pushing consumers to buy imports benefiting foreign companies to the detriment of US companies. An example is the car industry which always manufacturers models not popular with the consumer thus opening the door to imported cars.

 

[FXtrader8911]

A recent survey of retail investors has concluded that these have so far nailed their bullish call on the market. Since the 23rd March lows, the DOW rallied 8,800pts, the DAX 4,800pts, the ASX 1,400pts and even the HSI is up 4,200pts. Now, three critical questions for investors need to be asked: 1) Is there much gravy left? 2) Where are the next sector rotation opportunities? 3) What can make the locomotive stall or potentially go backwards?

Mohamed Aly El-Erian, chief economic adviser at Allianz, has answered this way "watch the Fed". He believes there is no economic reason for the rally at this time, it is an anomaly created by the Fed, likewise, the Fed could be the rally's undoing just by saying they have done enough and will do no more.

This, of course, raises the question of what will the Fed do? Mohamed Aly answer to this is.... Up to last month, the Fed was contemplating expanding its purchases beyond bonds and into equities, the stronger than expected market performance has made that possibility highly unlikely and the Fed is now contemplating whether ceasing its stimulus for fear of creating inflation.

Whether the Fed will pull-back or not is unknown, further, Congress is now also undecided whether to proceed with the planned new $1t stimulus package, Trump wants it but that might well be a good reason for not doing it. The likely compromise is that Congress will wait till July to decide, this leaves markets to digest a lot of maybes, possibilities and speculations. The conclusion to all the above is that nobody will make a call one way or the other at this point, we all need to wait & see.

I have unwound many of my longs on Fri and have moved from neutral to net short. Also, I have put stops on all my new limit buy orders which start at 1,000 DOW pts below Fri close. i.e. Overall I'm still positioned for a sell-off while continuing to trade the volatility.