The major U.S. indices resolved firmly to the upside on Thursday - finally doing something - following the narrowest trading range streak in 60 years. Transports and long bonds successfully telegraphed the move.
But what does it mean going forward and what kind of positioning do long-only investors have? Is there real reason to be optimistic here?
This seems an environment for "rented longs" and nothing more.
To quickly recap the drivers of this rally:
- Positive perception shift on Europe (lowered risk)
- Faith in future stimulus (September QE3)
- Nowhere else to go but equities (zero return world)
Do we really have to go into detail why each of these drivers is more dubious than three-week-old egg salad?
The notion that Europe has been de-risked is laughable … September is fast approaching, with a lack of clarity as to which would be a worse outcome for markets, QE3 denied or QE3 delivered and falling flat … and finally, the "nowhere else to go" argument could (and will) be shredded like tissue paper in the event of falling corporate earnings.
Bears have been successfully vanquished - having already lost most of their fur in 2012 - but one wonders what exactly there is to celebrate from the long-term investment perspective.
Faith in further upside resolution is based on the thin reeds of hope that the global slowdown will not get too bad, that corporate profit margins will not contract and that the ominous looking wedge patterns in the weekly Dow and S&P will not come to a bad end. That's a lot of hope.
Someone recently made the argument that "there has never been a better time to be an investor."
As traders, we may be talking our book, but in our opinion now is an absolutely terrible time to be a long-only investor and an even WORSE time to be without the tools and temperament for going short.
In secular bear markets, equities spend more time going down than they do going up. There are long stretches where shorting makes no sense at all, yes, but there are also stretches where it is the ONLY thing that makes sense!
For the long-only investor, perhaps even worse than the lack of ability to short are the following two handicaps:
A persistent psychological bias in one's thinking, due to the natural orientation of only being able to go long. When one has the strategic flexibility to go long or short, it is easier to attain the objectivity ideal of not being subconsciously biased to one side of the market or the other. Those who can only go one way, in contrast, will always subtly favor market interpretations that favor their bias. (This same applies in reverse for perma-bears who, for some reason, cannot stomach the idea of being bullish at any point in time.)
A persistent and glaring lack of risk management, due to the lack of ability to "go to cash" (if not short), hedge a portfolio, or otherwise sidestep extremely hazardous market conditions. The great Fidelity bull Peter Lynch bragged about always being fully invested and liked to say that "10 minutes a year spent on macro is 10 minutes wasted." Well, Peter Lynch also admitted later in life to being a congenital permabull and he had the good fortune of starting his career at the beginning of the greatest secular bull market of all time, retiring before it finished. His astonishingly irresponsible attitude is a recipe for getting absolutely murdered today.
Don't like the sound of that? Too bad. Look your weaknesses in the eye and deal with 'em.
We saw the potential for this rally resolution - as telegraphed by transports and long bonds - and added to our roster of "rented longs" on Thursday.
In terms of what is next, one might reasonably expect a continuation of "grind-up" type conditions until either:
- Something else breaks in Europe or
- The QE3 catalyst is resolved one way or another…
The feeling at this juncture is conceding ground to the bulls for the next few weeks or so, as the wedge completions do their work - and then, frying pan to the face again.
- Groupon's (GRPN) crummy business model is finally dead. Hooray!
- Facebook (FB) shares hit record low after lockup expires
Good riddance to the social media bubble. Another brazen example of greater fool theory enriching a cast of insiders at the expense of the gullible general public, who once again saw huge chunks of their wealth sent to Davy Jones' locker.
On another side note, there was buzz in trading circles of buying FB "for a trade" on the contrarian logic that the impact of lock-up selling was already priced into the market. To U.S., this seemed too clever by half…an example of what poker players refer to as "Fancy Play Syndrome."
Why do they even bother? Does anyone even care what the "hawks" think any more? The voices of sanity have no traction within the halls of the Fed. Maybe they will after everything goes to hell, but then, no, probably not then either.
Maybe the sick tragedy that is ethanol will get more attention when hundreds of millions of third-world families around the world are literally starving to death for lack of grain as producer countries shut down exports and 21st century weather patterns get worse.
In that light, the following is either hilarious or infuriating, or maybe both (via FT):
Extreme weather has visited Kevin Mainord's farm business twice in the past two years. In 2011 a wall of water deluged his corn and soyabean fields after U.S. authorities blasted a levee to relieve flooding on the Mississippi river. This year brought drought and weeks of devastating heat.
Scientists have long warned of more frequent floods and droughts as the world's climate changes. But for Mr Mainord and many like him, global warming is bogus. "It's more God and nature's dictates, rather than a man-made event," the Missouri farmer said this week as he harvested a corn crop one-quarter of its normal size.
Okay there sizzle-chest…
- Bankruptcy Is the Only Thing That Can Help Greece
- Angela Merkel warns 'time is of essence' on euro crisis
- Peugeot's Troubles Test Hollande's Promises
Whatever, Europe…blah, blah, blah…wake U.S. when the shit hits the fan again (which it will) …
- After Gold's Climb, Few Miners Look Down - WSJ.com
- Chinese Gold Demand Weakens - WSJ.com
- India Gold Demand Seen Slipping - WSJ.com
Still deeply skeptical of gold. There may yet be a wedge breakout and impressive run, in which case we will do what traders do and look for opportune spots to get long.
Gold feels like a sucker trade though. The drivers are just so obvious, and so well telegraphed, and so potentially off the mark in a world where stimulus efforts feel weaker with each injection and deflation is the real boogeyman.
John "wrong way" Paulson doubling down on his gold positions, already being down +23%, doesn't help either.
- Major indices rising wedge into four-year highs
- Bullish trends nearly across the board now
- Bond breakdown confirming risk asset rotation
- An environment for "rented longs"
- Homebuilders (XHB) went nuts to the upside on Thursday
- Gold miners (GDX) strong upside surge too
- Aussie (AUDUSD) breaking nicely (in line with our thesis?)
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Short AUDUSD