Trading the Indices on Fundamentals

[Overnight]

.... The significance is that sentiment is not in line with fundamentals. No doubt sentiment can drive markets for a long time... this is how bubbles are formed, however eventually markets always gravitate towards fundamentals which are lower to where they were in 2018.

The sentiment went TOALLY off the rails in both Jan 2018 and Oct 2018, when the fundamentals CLEARLY supported the levels. THAT is why I felt my longs were sound. The market reaction at those times were totally overblown.

The fundamentals from 2017 until forever until May 5th supported up. So why did we get a brief bear market in NQ, and whatever else?

 

[FXtrader8911]

The sentiment went TOALLY off the rails in both Jan 2018 and Oct 2018

I didn't say markets are attached at the hip to the fundamentals, I said sentiment pulls them away from fair value but then they will gravitate towards the fundamentals again (but not necessarily stay there for long). In Jan bond prices peaked at 3.17 (from memory) causing a stampede to bonds at the expense of equities (follow the monkey game) but then prices quickly returned to fair value, in Dec (and Oct) it was Powell policy error that frightened participants creating serious negative sentiment, in both cases the gravitational pull towards the fundamentals caused the recovery, however, Powell stupid policy error caused permanent damage so, based on the new fundamentals, the recovery to previous highs is an overshoot... time to short, quite simple.

I did not get the point of your post! Go read my opening post, it is in line with what the later "what the fuck" post said... fundamentals give you the fair value to where the gravitational pull will go to, sentiment causes the deviations from the fair price, you buy or sell the deviation to make profit, and, you button-down the hatches and ride-out sentiment surprises if you hold positions before the swing. That was your problem? I did not quite get what fucked you up if U are aretrading on fundamentals (the title & object of this thread)

Current highs are above the fundamental's fair value, prices could go higher but eventually a correction is likely.

 

[FXtrader8911]

All eyes are on G20 now

For the Europeans it's a chance to show off their pomposity, for the Americans it's a chance to beat their chest in front of an audience to remind all they are the superpower that sets the rules, for the Chinese it's a way to show their populous they're in an exclusive club, the Japanese go there to remind all the're still around.

As for the Trump Xi meeting, too many expectations.... China is going through the transition from "developing" to "developed and will fight to the end before admitting they grew-up and need to start following rules and spend on R&D. It will take more than Trump to make them change, but he's done something to start the Chinese thinking about it. Then, here's the irony, when China toes the line there will be Vietnam, Burma, Cambodia, Nepal, etc to deal with, after them there will be Africa... Every developing country thinks themselves entitled to a flow of technology their way, if the devolloped rich won't give it them then they feel justified to be robin hood. The 2nd irony is that the Americans invented globalization, themselves went to China to set up the factories with their technology, the Chinese outsmarted them all and ran with it, took the gifts and replicated them many times over, flooded the West with cheap goods that reduced the then 15% inflation to the now 2%, it can't be reversed without massive inflation. Since Roman times jobs requiring hard labour always flowed to poorer areas and the smarter ones benefited from the technology that came with the jobs . The good news is that equalization of all countries might be reached in about 150 years, the US will then no longer need the likes of a Trump to stop the theft of American innovation, but then, the USA might not be a super-power anymore. The world changes

 

[FXtrader8911]

THAT is why I felt my longs were sound. The market reaction at those times were totally overblown, and they fucked me up.

If trading on fundamentals you need protection. Sentiment swings are always present but in an era of bot trading, the fastest flash crashes can be caused by black swans or fat fingers, bots will feed on each other causing dramatic moves, sometimes for no obvious reason.

Being diversified in positions does help but the best protection is to hedge i.e. hold positions that have an inverse correlation to the positions held. Treasuries, gold and oil used to be good hedges but not so much now, the VIX remains a constant and reliable hedge... it will gravitate to between 12 to 14 when nothing is happening and will inversely correlate quite faithfully to the S&P500 by a factor of 6 when movements are dramatic, it is a most useful hedge to counter a serious sell-off, it is, however, a costly insrtument to hold long term, it, therefore, needs to be managed, not just held. e.g. when you are net long you need to buy a proportionate quantity of VIX units then reduce the quantity as you reduce the longs. If there is a flash crash and the VIX spikes then you need to take the profit on the VIX and get out (as the VIX moves some 6 fold of the S&P, most of the loss on the S&P will be covered by the VIX move). If your assessment of the fundamentals was correct, the S&P will eventually recover and the VIX will gravitate to its parking level, in between, the account balance does not suffer and as a bonus you have doubled the profits (perhaps tripled them if I had sufficient funds to buy more S&P at the lows).

 

[bone]

Hmmm...

When I saw this thread I was expecting discussion about price to earnings ratios and cumulative analyst buy/sell/hold recommendations.

 

[FXtrader8911]

Overnight some of the fumes keeping markets on a high were blown away... Powell crushed hoped of both a 50 basis point cut and a July cut, while Trump expressed doubt of any agreement with XI.

As was seen in Oct & Dec last, Powell bases policy on his personal vanity, wants to prove he's his own man without favour not influence. never mind that he holds the world economy in his hands, looking tall is more important... he's an idiot... In Oct he announced a policy of "auto-pilot" rate increases and BS reduction that had every economist in shock and telling him he is wrong. He ignores hundreds of qualified voices by reiterating the "auto-pilot" policy in Dec, giving little reason for it, sending markets into melt-down until Bernanke & Yelling had to save the day. Now, that he's got data showing the economy is slowing (he managed to slow an economy that was growing without overheating), the guy wants to wait to reverse his "2 rate hights too many", wants to be sure... sure like..."lets wait till the recession starts" then I'll be sure! What a bozo! can raise without reason but can't lower when there is reason. All for show... Trump wants him to cut so he won't... this is the behaviour of the most economically powerful man in the world?

On the trader side, not much better... Trump says he is in no hurry to resolve the trade issue (keeping corporate America in limbo as they can't make decisions on their supply lines). Too far away from the elections, wants this to be his winning ticket... campaign on "how tough I am" then reach an agreement just befor the vote. On this, he'll end with egg on face, the Chinese will outsmart him.

 

[FXtrader8911]

I was expecting discussion

Me too but takes more than one to have a discussion. So far there has been a sell recommendation but noone is discussing it. No agreement, no counter view, not even a question. I'm making an effort here and giving my views, I see some 300 onlookers per day but no contributors. Noone has a view?

 

[Overnight]

Me too but takes more than one to have a discussion. So far there has been a sell recommendation but noone is discussing it. No agreement, no counter view, not even a question. I'm making an effort here and giving my views, I see some 300 onlookers per day but no contributors. Noone has a view?

It takes time for ETs to respond. There's a LOT of content that flows through the forum each day. Consider what they might be looking at first, before going off.

For example, I took a week off recently, and there are HUNDREDS of posts from all over I have not seen. Fleshing that out takes time.

Here, have a chill pill, man.

 

[FXtrader8911]

Overnight Wed was uneventful, there was a failed bot induced rally on the headline that Treasury Secretary Steven Mnuchin said the U.S. and China were close to a trade deal but this faded when Trump dismissed the claim... Probably a misinterpreted comment the media ran with without verification, fooling the bots but not the humans. EU was lifted on the comment and closed at session highs so a gap down on the Europeans is expected today. NDAQ was the star of the US session on news that the microchip manufacturers are able to circumvent the ban on sales to China, the FANGs & Microsoft recovered some after a big hit the day before. My US Shorts, particularly on the Russell, are doing well. No breakthrough with the XI meeting could well bring the US markets down 10%, currently both China & the HSI are up on more hope than reason.

 

[FXtrader8911]

the swan song we keep hearing since Jan 2018. Yet the market keeps rebounding and touching new highs

The song sheet calling for a sell-off is alwas there, one has to see who joins the chorus to know whether the song is just background noise or something to pay attention to. Agree that in the first half of 2018, anyone making a correction call was doing so just on the notion of "what goes up must come down", but in Oct Powell changed that and then in May 2019 Trump brought trade to a market moving issue with his Mexico tariff threat, now, the ones in the know on Treasuries are joining the chorus.

Yesterday Edwards of Societe Generale re-iterated what Goldman Sachs had warned in March and history is on the side of these guys... ever since the mid-1980s, significant drawdowns in stocks started only when the yield curve began steepening after being inverted... this phenomenon is now in play.

To be balanced, some, however, think what the bond market is doing right now is a positive sign, Tom Lee, head of research at Fundstrat Global Advisors is one of these, he said the sharp steepening of the long-end of the yield curve is “a strong cyclical signal,” meaning the economic growth is set to re-accelerate.

Who to believe? Societe Generale & Goldman Sachs or Fundstrat Global Advisors. Next month is the start of a new reporting season, clues will be in the reporting & guidance... Has Powell's Oct policy error plus Trump's Mexico threat (i.e. unpredictability and disregard of collateral damage for political gains) caused permanent damage? or has Powell's Jan flip flop saved a recession?

My view hasn't changed... I think we will see a serious sell-off by Sep but no recession and a recovery by year-end. I am currently net short with heavy buy limit orders starting at -10% from here and increasing in magnatude as the Dec lows are nearing. That is the play I've been setting-up since Feb.

General note: Trump has gone into election mode... What he will do from now on will be driven by what he thinks the electorate wants, will have nothing to do with logic nor "what's best" for the economy. There will be much co-lateral damage and uncertainty created for business.