Trading the Indices on Fundamentals

Bwick said:
What are you preferring to use as the long term hedges these days?
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The one that always works is the same instrument or the VIX, but there are times when a more favourable inverse correlation exists with the likes of Bonds, Oil, Gold, FX, etc, other good hedges are DAX v DOW, DAXmid60 vS&P, STOXX600 v Russell, Etc. One needs to track several instruments, even if not trading them to note what works at that time. Right now, in an environment of high volatility and news sensitive moves, I favour same-instrument and FX hedges. "Long term holds" are not something one plans, it just happens, so if I'm in a hedge that becomes costly (as happened when I unhedged too early) I just play it by ear, sometimes I get it wrong.

The VIX futures behave uniquely, during low volatility, Shorting the VIX actually pays you the contango but during high volatility, the contango on Shorts can be 4 full units against you.

The master of hedging is Edd Thorp, his motto is "master hedging and scale-out of losses", you may want to read up on him.
 
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April volatility has been big, DOW had swings of 3,600pts, on 17th it hit a high since the 23rd March low then easing 1,000pts to current levels. I still think current levels are an over-shoot to the upside and expect around 21,000 to be seen before any sustainable rally happens. Trump is not helping, his daily updates are just chest beatings exercises and do not give the whole facts, adding confusion to already an unknown situation. Andrew Cuomo's daily briefings are no better, full of politics & winging to make the administration look bad. Both these people take an hour to give 5 minutes of information and even that is selected and pained to make themselves look good.

I was anticipating some companies that reported on Q1 to give guidance for Q2 but so far, none have, in fact, rather than giving forward guidance, most are withdrawing previous guidance. In a nutshell, nobody has a clear vision as to when the economy will re-opens and indeed what that environment will look like when it happens. Based on this uncertainty, I do believe markets players are way overconfident to be buying at current levels. When the economy re-opens it will do so in a 20+% unemployment recession, hard to see that current stock prices are sustainable in that environment particularly when the recession is likely to last at least 2 quarters and take at least 18 months to see a full recovery.

My current strategy is to wait for the expected sell-off and unwind my short hedges at that point.
 
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Unemployment claims numbers show a further 4.4m claims were filed this week bringing the 5 week total to well over 26m... markets celebrated with a 1% rally probably on the expectation that the stimulus will be increased... it might, however, the stimulus is a stop-gap measure to slow unemployment and keep business solvent, it does not create pent-up demand i.e. when the economy re-opens many businesses that would have disappeared without the stimulus will reopen, but the question is, will these generate sufficient earnings to retain the staff and indeed remain in business without the Gov hand-outs? Q3 reporting will tell whether markets are getting it wrong at this point.

The VIX and Gold remain elevated despite the rally... perhaps not all players are blind to what is to come. The last time markets were at current levels but before the sell-off, the VIX was at 16, it is now >39.
 
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Mon was another up day in the US on news that 2 states are re-opening the economy. It is to be noted that Singapore eased restrictions 2 weeks ago and saw a 2nd phase of infections with grated deaths than in the 1st phase.... different country but same virus. I think markets should wait and see before rallying, volume, however, was very low (70% down from average) so only 30% of players participated in the rally.

My view remains as it was, I believe that when Q3 guidance is given and when GDP figures came out (expected to show a contraction >20%) markets will react negatively as recovery will need well beyond the 6-month horizon of markets to happen.

It is not clear whether the stimulus will continue after the economy restarts, there are many calls by economists to let "natural selection" take its course so that the economy can power ahead on its own steam with the strongest in charge rather than being held back by zombie companies on life support. There is some merit to these calls, it is to be seen whether the Fed & Trump heed to the calls or continue to artificially prop-up markets. A further factor is that the aid given to individuals (the consumer) is often in the form of deferrals e.g. deferred interest, deferred mortgage payments, deferred rental, tax, etc, meaning that even when the individual goes back to work, they won't buy anything other than essentials for a long time... the belief that the consumer economy will recover quickly is flawed. For me, there are too many unknowns and uncertainties to join in any rally.

A thought: It is not beyond Trump's strategy to keep giving aid until after the elections to improve his chances and thereafter cease the aid & switch to infrastructure spending... just one more unknown in the mix.
 
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I see no real opportunity on the daily chart's of the majors. We had a couple of down days a week back but that was more like a roll over drift. No real direction. We are now more or less living in the roll over range but heading on a slight drift upwards. Intra day there is still some action but I agree with you that it is a wait and see on the longer time frames.
 
On the daily's NK, don't you feel like the last few 'tight' sessions, on low volumes, combined with sitting near recent high's suggest a strong move is on the cards?

Bollingers are tightest they've been since Feb, however, if they are only settling down to their previous range, then it's usual predictive nature of a break out may not be as useful.
 
There might be a strong move on the cards but who knows which way. FX gives some clues into the fundamentals but even then the market does what the market does. All the recent selloffs have been bought back so that maybe algo trading?? I am not sure but much of the market is algo traded. For now, I still think we are in a slow drift up. There needs to be some external event to get things moving (either way).
 
If anyone needed proof that markets are reacting to stimulus rather than economics, today is one such proof... The aid package for small caps was replenished so the RUSSELL surged 1.5% while NDAQ (no stimulus to companies therein) fell 1.5%.

Other than evidence that there is market manipulation, current moves are giving little away as to insight of the next move, today, in particular, all majors were mixed resulting in a flat average. Nothing in today's price action to warrant a change of view that fundamentals are pointing to a downward adjustment being necessary, the Buffett Indicator still shows the "significant overvalued" warning and Buffett himself is sitting on the sideline with $128b in cash. He is yet to buy anything, even when markets were at their lows last month. Also to note that Carl Icahn, who did buy at the March lows, has unwound all those buys and is also sitting on a pile of cash.
 
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For those investors wondering whether to buy or sell a specific stock, a quick guide is to look at what Warren Buffett & Carl Icahn are doing, these two seldom get it wrong, then for confirmation look at what Bill Ackman is doing... if he's contrarian to Buffett & Icahn, bet against Ackman.
 
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