Another good week for risk assets across the world but lead again by the strong US equity indexes of the sp500 and Dow Jones.
The sp500 has made new record highs but lead by utilities, consumer discretionary and housing indexes. The cyclical sectors of soxx and nasdaq100, Russel 2000 have not yet confirmed the move and to the negative side the key banking index (BKX or IYF) (inc broker index XBD) and transports (IYT) have not yet broken out of the bear trends.
As the team rightly say
“A breakout without cyclicals leading the move cannot be real and sustainable!”
As unconventional measures are being employed all around us it is worth revisiting whether this market saying still holds true in current mkt conditions.
A good question to ask is have the nirp policies nullified this old truisms. Ie can the consumer lead this recovery based on appreciating house prices and consumer cyclical stocks? Maybe banks and brokerage cos have been taken out of this cycle due to the central banks implementing zirp and so crushing their margins? This would imo be a reasonable assumption if the FED were busy increasing money supply herself via helicopter means or other. Ie its something to watch as we move forward. Theoretically banks and brokerage cos were the agents for money supply growth. With zirp their margins are destroyed and they are struggle to expand balance sheets quickly. The FED via helicopter type policies can directly expand money supply to the consumer herself but she is not doing this yet and until she does the old market adage holds true today just as she did 100 years ago. As i say though its worth saving this issue to the trading memory as if super unconventional measures are taken banks could be bypassed entirely from the ms increase process. (Not withstanding the above transports should theoretically join the party in either case).
Europe clearly remains within her bear market trends. The UK is bouncing nicely due in great part to relative commodity strength and the GBP recent debasement. Euro banks have bounced but no clear evidence of much more than a corrective move.
For my own book i have been long US small cap 600 (SLY), Russel2000 (IWM), US Banks (IYF), commodity producers (PICK) Ftse100 (ISF). I have taken profit on all these positions today. The rational on all these positions was that given a high level of cash i needed to be positioned in the cyclical confirmation assets as these would provide the beta, in case i was wrong. I will come to these assets on dips to keep testing the case and being open to be proved wrong by price.
For now we have a stand off situation across risk with the weight of evidence still pointing to the downside in terms of near term weakness. The nik225 remains the most likely candidate for a helicopter money test case. Needless to say that’s a one way trade which scored a good entry on both sides of the trade ie fx and equity, for the moment.
For what its worth I am in line with the Swiss guys that there is underlying strength in this market and higher highs do beckon at least for US indexes in Q4 and alongside US$ strength but as a part of great global reflation trade.
Here the Swiss team:
I agree with all their points
Here Fitzpatrick from Citi who is looking good on his road map aside from a weaker reading in the inflation take off. He discusses in this copy the surprising strength (low rates) across fixed income which would feed into the weakness in price of some key commodities. Copper has not taken off in the way he anticipated yet although many copper producers are showing constructive patterns. It could be read that the smart insider money have been accumulating a position here. Glencore is up 30% in under 10 trading sessions, only 8% of this due to sterling. (The underlying commodities have not moved in anything like the same way).
Louis Capital here:
They have similar charts and note the bearishness for so long as the transports remain within their bear channel.
Ill update this as a v2 shortly.
Rich