Trading the Indices on Fundamentals

Pre-market Tue APPLE warned that it will miss its guidance, the first concrete evidence that markets are factoring higher earnings than reality for this quarter, and possibly the next, yet, after a small dip, markets are recovering thus again ignoring reality... another strong sign that investors are focusing more on the short term return rather than on the long term preservation of capital.

On the bond side, investors are no more cautious than those in the equity market. The recent defaults by Argentina, Venezuela and Puerto Rico are being ignored, these sovereigns and other weaker sovereigns are having little trouble in issuing more debt despite the lack of credible pathways to balanced budgets and ability to repay debts... does this sound familiar? America, although not a weak Sovereign, has the same inability to produce a balanced budget nor to ever repay its debt. Bond players are participating in a Fed sanctioned Ponzi scheme.

Why are market players behaving as if Bonds & Equities have unlimited up-potential? because everyone seems to belive that central banks have their back, perhaps this belief has been spurred on by Trump so they are ignoring everything that points to the need to put a handbrake on fiscal stimulus.... the day it happens, the house of cards crumbles.
 
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FXtrader8911 said:
Blackstone Group was one of the few Wall Street firms that did well through the financial crisis mainly through the foresight of one of its founders, the billionaire investor, Stephen A Schwarzman. Schwarzman is a keen observer of market cycles, having seen seven major recessions and market crashes in his career. He recently released his book, ‘What It Takes: Lessons in the Pursuit of Excellence’ The book covers the methods of picking market tops and bottoms. Schwarzman believes that market tops are relatively easy to recognise (much easier than market bottoms), he believes that a surplus of cheap debt, relaxed loan covenants, and overconfident buyers are some of the best indicators a top is near, he goes on to say "Investors are deluding themselves.... they think they want to make money, but in reality, they just want the psychological comfort of investing with the crowd"

These words appear to be very relevant to where markets are now.
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Well, did he call the top NOW, then? :)

I think it's completely different to state that the conditions for a market top is present and to actual time a top and say this is IT. This has been proven many times now, both by the top pickers on EliteTrader and by other even great traders elsewhere.

One example would be Michael Burry:

In 2005, Burry started to focus on the subprime market. Through his analysis of mortgage lending practices in 2003 and 2004, he correctly predicted that the real estate bubble would collapse as early as 2007.

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During his payments towards the credit default swaps Burry suffered an investor revolt, where some investors in his fund worried his predictions were inaccurate and demanded to withdraw their capital. Eventually, Burry's analysis proved correct: he earned a personal profit of $100 million and a profit for his remaining investors of more than $700 million.[6] Scion Capital ultimately recorded returns of 489.34% (net of fees and expenses) between its November 1, 2000 inception and June 2008. The S&P 500, widely regarded as the benchmark for the US market, returned just under 3% including dividends over the same period.[6]

According to his website, Burry liquidated his credit default swap short positions by April 2008 and did not benefit from the bailouts of 2008 and 2009.[18] He subsequently liquidated his company to focus on his personal investment portfolio.[18]
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So, in the end, he was completely right, but I believe he was suffering deep drawdowns before he finally was paid. I don't fully understand the position he had on, but I'm sure it's perfectly possible he could have blown his account if the collapse came at a later point in time.

Again, it's the timing aspect which is so difficult.

I'm reading Hedge Fund Market Wizards by Schwager now. It's a great read that I think you'd enjoy if you have not read it already. The first interview is with Colm O'Shea - another trader which predicted the financial crisis and profited from it. He started being bearish on the entire economy as early as 2006.

Still, he explicitly said that he did did not position himself short in equities then since "...being short equities is a very hard trade because they might still keep going up for a long time".

He also said something very interesting about how after a long bull market most money is concentrated with bullish money managers and that most bears are unemployed causing dips to be bought by these relentlessly bullish money managers.

I quote again: "So, you shouldn't expect a big bull market to end in any rational fashion."
 
Laissez Faire said:
Well, did he call the top NOW, then?
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No, he didn't and neither am I.... the conditions are there but there is yet no catalyst. Timing is indeed the wild card, one can be right but continue to be wrong for a long time. I'm watching inflation figures carefully as believe that, in the absence of a black swan or a sharp reversal in earning, will be the catalyst that will change central banker's tact. For now, I've set targets to exit longs, if reached I'll then be on a strategy that the next dip after the targets might be the start of a correction.
 
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FXtrader8911 said:
No, he didn't and neither am I.... the conditions are there but there is yet no catalyst. Timing is indeed the wild card, one can be right but continue to be wrong for a long time. I'm watching inflation figures carefully as believe that, in the absence of a black swan or a sharp reversal in earning, will be the catalyst that will change central banker's tact.
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That guy, Colm O'Shea, was closely following interest rates and credit markets as well.
 
The resilience of current markets is baffling, normally, an event such as a disruption in the supply chain and a co. like APPLE saying it's guidance will not be met would have deflated the positive sentiment and introduced caution, but not this time.
 
Several of my posts stated that I do not like this market, however, after saying that there was even more madness... Tesla, Virgin Galactic and a smaller company Plug Power enjoyed stratospheric surges in stock value, prompting Al Lewis, CNBC Markets Editor, to post the below image and say "This kind of fearless speculation characterizes a market in a late-cycle, when all the safe bets have been played"


20200219_spec_stocks_price_volume.png

Mark Tepper of CNBC’s Trading Nation also commented: "It's very difficult to value something that's generating zero revenues, it seems like fund managers have become venture capitalists"

At the same time, Peter Oppenheimer a Goldman Sachs strategist warned: "Investors are underestimating the risk that coronavirus imposes on earnings growth: "A near-term correction is looking much more probable."
 
Laissez Faire said:
That said, I do enjoy your journal and am glad you finally got paid
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Thank you (I'm replying here out of sight from those smartasses)

Indeed I have been bearish for some time as fundamentals point to lower prices in the face of markets defying gravity, I expect much lower (perhaps to the 27k handle) than what was given in the last session although this might not happen now. During Thu session I had closed & t/p on several of the long hedges in the NIK225, EU & US and increased the shorts... A bit of a daring strategy but it paid off twice, on Fri I then t/p on some of the shorts and reentered the longs that t/p on Thu... two good days back to back while leaving me still hedged but overall net short, I intend to go neutral when 28,100 (DOW) is reached.

I learned some interesting lessons over the last 7 months, however, the beauty of US markets (and the mechanics of the indices themselves that purges-out non-performers) is that 100 years of history tell you they will always make new highs eventually, so hedging shorts is quite safe. Having said that, shorting is not my normal play as I prefer to buy dips at increasing scale as prices get lower, my weakness was that when I saw market cap exceed 150% of GDP, shorting "seemed" a no brainer but in reality, it was a tough call that instead of laughing all the way to the bank is making me work harder than I ever have to manage positions..
 
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I think Fri was just a test run but history says that we are getting closer to the point where the bears will take over. According to Bank of America, who curated a 19 point list called the “bear market signposts”, the coronavirus effects will soon flow through to earning and dampen the spirits of the bulls that still believe that "no matter what" the Fed has their back i.e. bad news is good news. BofA says that since 1968, when 80% of the bear market signposts indicators are triggered, a bear market occurred, currently, 63% of the bear market signposts have been triggered, up from 47% in January. As a testament to the accuracy of this indicator, in Oct 2018 the signposts list hit 79% and markets went on to briefly dip into bear market territory before the Fed made a 180-degree turn bringing the point count off the threshold avoiding markets remaining in bear territory. This time around, although it looks improbable that the Fed will raise rates, Powell, being the idiot he is, could decide that inflation is rampant and hint at a rate hight, but more probable is that earnings might shock, either could tip the point count to 80% and so see a 23k DOW.

My own view? Well, although a 23k DOW would give me a payday of over $300k on present positions, this level is highly unlikely because there is Trump in the mix and there are elections pending. Trump will do anything short of shooting Powel to avoid going into bear market during his watch, therefore, a 27k DOW is possible while 23k is improbable, my strategy is around the 27k handle. Nex year, if Sanders or Warren run the Whitehouse... watch-out! a 21k handle on the DOW might be the norm till they get booted out (or impeached for incompetence)
 
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