Trading the Trend

[ducati916]

So the market down 2%+.

The VIX:

The Headlines:

You could include in there the Bank's headlines which came after the market close, but that is more sector specific, so as far as the market goes, probably irrelevant.

The 2 big ones are above.

We also have the 'experts', the Economists:

Then we have the market internals. These are intra-day, the other market internals are updated after the close.

The intra-day internals are telling a very different story to the (a) market and (b) the news headlines.

We have an intra-day divergence. Usually (but never 100%) divergences are very reliable trading signals. I will always trade a divergence, simply because the probability is so high for success.

I will (obviously) update the other internal charts once the close is in and see whether the intra-day divergence is confirmed at the close.

Assuming for the moment that it is: its Friday, we have a two (potentially) market moving news stories and general sentiment in the country (and many professional money managers/commentators) is generally bearish, possibly increasing again because of the two featured news stories. As a Market Maker, what direction will give you increased transactions (thinking not just today, but continuing into early next week)? Time and time again, false moves (either higher or lower) only to reverse them later.

We are once again, sitting on that '300' level through the w/e.

jog on
duc

 

[over9k]

Europe ended up closing a combination of flat or down after being up significantly earlier on (for them).That's gotta sting.

duc - you don't care about credit spreads?

 

[ducati916]

Europe ended up closing a combination of flat or down after being up significantly earlier on (for them).That's gotta sting.

duc - you don't care about credit spreads?

Yes I do.

Nothing worth worrying about currently.

jog on
duc

 

[over9k]

At what point do you consider it a concern?

 

[ducati916]

At what point do you consider it a concern?

When the Fed. will no longer guarantee picking up the tab.

jog on
duc

 

[ducati916]

If you fancied following the Hedge Funds, here are their change in position:

jog on
duc

 

[ducati916]

So the EOD internals:

Both sitting on support. It can of course be argued that support will fail and stocks will continue their decline.

Market price also sitting on multiple technical support.

New Highs increased over yesterday. A divergence. Always worth noting.

Bit of a messy chart: simply an oscillator. At support also.

And simply that the QQQ with the Tech. heavy emphasis, had simply run to far to fast.

The point:

The macro-fundamentals driving the market are unchanged, primarily the Fed. Absent any fundamental changes, does the news have any impact other than on short term sentiment? The answer (should) be no: if it were to then the underpinning fundamentals would also be expected to change: for example credit spreads (highlighted earlier in the thread). This is not (currently) the case.

Therefore we are left with technical based reasons. Given the absence of fundamental drivers, I would expect the technical support areas to hold.

jog on
duc

 

[ducati916]

Media thinking on COVID:

Bulls point to several factors in their favor: The Fed is highly supportive; Congress looks ready to add more stimulus; and treatments are slowly starting to lead to better health outcomes. But the uncertainty about those outcomes is causing volatility to spike, with the Cboe Volatility Index, or VIX, rising to the mid-30s on Friday, above its long-term average of 19.

Are statewide lockdowns coming back? Most analysts say no. Governors are highly reticent to issue broad stay-in-place orders now that they have better capabilities to test people widely and pinpoint hot spots. But it doesn’t take government-imposed shutdowns to affect the economy. When the disease is spreading, some people get scared and stay home.

Amid the uncertainty, investors have piled into popular stocks. The five largest names— Alphabet (GOOGL), Amazon.com (AMZN), Apple (AAPL), Facebook (FB), and Microsoft (MSFT)—now make up just under a quarter of the S&P 500. The valuation gap between growth and value and momentum and value is now wider than it has been since the financial crisis, and perhaps the widest ever.

Lerner thinks that tech will remain strong, because investors will look for companies that can grow organically at a time when economic growth remains threatened.

DeBusschere, however, sees a rotation coming. Value stocks can outperform under two scenarios, he argued. Either scared investors move to more defensive stocks, or Congress passes a fiscal stimulus package that spurs economically sensitive stocks to rise.

VIX also sitting on resistance.

jog on
duc

 

[ducati916]

Sectors

Just the broad sectors (again). Only Tech. really overbought. Plenty of room to run broadly speaking.

In Healthcare, Biotechnology the real out-performer. Everything else, room to run.

Food and Beverages the big under-performer, surprising?

No real surprises there.

Food based commodities all still in the doldrums, except, chocolate!

Bonds, particularly the long end, great place to have been.

The miners out-performing the physical product.

The various indices:

Big Tech. in the QQQ.

If you had gone for the x2 leverage

jog on
duc

 

[over9k]

U.S is over the hill of summer now too so expect plenty of seasonality (i.e usual winter contractions) to kick everything in the nuts even more. Though I think you already made a post on seasonality.

 

[ducati916]

Bad economy, valuations and the Fed. are some of the issues facing the current market.

Valuations:

Barron’s recently talked with Damodaran, who is unafraid to challenge assumptions about controversial stocks. His voice is as important as any other when it comes to determining what a stock is worth. An edited version of the conversation follows:

This is going to be a terrible year. We all agree with that. Now, we can debate whether earnings are going to be down 30% or 40%, but they’re going to be down a ton. The real debate should be about what will happen over the next three, four, five years. How much of this damage is permanent? And how much is transitory? That’s a healthy discussion to have. And when you have the discussion, what happens is, you discover that there are some businesses where the damage is permanent. The cruise-line business. It’s never going to go back to a pre-crisis valuation for good reason. But I’ll make it broader. I think infrastructure businesses [airlines and telecommunications], especially ones with a lot of debt, are going to be permanently marked down after this crisis because people have learned that these companies are very fragile. They are not designed to live through a crisis like this one.

On Valuations:

It remains to be seen what the 'current' earnings will be and the resultant PE. Look at 2008/09. PE went sky high due to the collapse in earnings. There will be a fall in current earnings. It is future earnings that matter going forward. Ultimately, whether the virus abates or not, economies will re-open simply because they cannot do otherwise.

Just how bad might the loss of earnings be, allowing for the posited loss of GDP? Earlier I posted this back of the envelope calculation:

The profit picture going forward is not an issue. The market's valuation will improve.

The Virus.

This seems to be the issue for most people afraid of the market. The Spanish Flu, which was of a far higher virulence than COVID, eventually burned itself out (as all infections do eventually) without there ever being a vaccine developed. The death rate was off the charts, 50M-100M dead and this was after the carnage in manpower of WWI. The market just rolled forward.

The closing of an economy is more damaging to people than the virus spreading freely. You simply cannot close an economy indefinitely. In a free market, people will choose how to manage the risk of infection. In a shutdown economy, your options are vastly reduced. The US will muddle through with partial measures.

The Fed.

Look at the 1940-1946 area.

In the first half of the 1940s the Federal Open Market Committee (FOMC) sought to manage the level and shape of the Treasury Yield Curve.

During World War II the FOMC sought to maintain a fixed, positively sloped curve. The policy left long-term bonds with the risk characteristics of short-term debt but a yield more than 200 basis points higher. At the same time, the Treasury pursued a policy of issuing across the curve, from 13-week bills to 25-year bonds. Faced with investor preferences for the higher yielding, but hardly riskier, bonds, the Open Market Account had to absorb a substantial quantity of bills. What can be learned from the FOMC’s efforts of seventy-five years ago?

Looking at the above chart: the market from 1942-1946 went in one direction: straight up. The Market didn't worry about: (a) increasing debt levels, (b) the war and that there was no guarantee of victory, (c) all of the killing, (d) that the economy was constricted due to closing down of import/export markets, (e) rising inflation and (f) anything else.

We don't today have quite the managed YC, but it is pretty damn close. We have had the same (although lesser intervention) from the 2009 crisis. For financial markets, this works. There are lots of arguments why it shouldn't be used, but in the political world, there is nothing more damaging to political aspirations (and we are in an election year) than people knowing that something could be done (tried) that may have helped, but for moral reasons, it wasn't. In this election, with Trump going for re-election, no amount of stimulus will be deemed 'to high'.

Inflation

See earlier post.

Seasonality & Elections

Summary

Although the market has reached a valuation that could be called 'rich', there are plenty of sectors in the market that are undervalued, which can be seen from looking at the sector summaries in an earlier post. The current correction is a technical correction and was always going to happen. Markets contain within their secular trend, cyclical trends. The real key to investing or trading, is not to mistake one for t'other. Prior to COVID, there were excesses building in the debt markets due to big money chasing yield. A correction (serious correction) was on the cards due to the (once again) lax credit controls on this BBB (junk) debt. That has not been purged from the system, but it has been given a new lease of life with the current Fed posture.

jog on
duc

 

[over9k]

https://www.bloomberg.com/news/arti...e-monthly-sales-record-in-party-like-no-other

Junk bonds are at a record high in fact. But few companies are going to be able to borrow at high ratings at the moment, so hardly surprising.

 

[ducati916]

Dr. Copper:

jog on
duc

 

[ducati916]

Commercials standing below:

The Commercials seem well in tune with this market. Definitely not fighting the Fed.

jog on
duc

 

[Smurf1976]

In a free market, people will choose how to manage the risk of infection.

I'm not necessarily disagreeing with the point but I'd argue that we don't have a free market in the relevant areas and haven't had one for a very long time such that, in practice, the option doesn't exist.

 

[ducati916]

I'm not necessarily disagreeing with the point but I'd argue that we don't have a free market in the relevant areas and haven't had one for a very long time such that, in practice, the option doesn't exist.

The free market is long gone. Agreed.

In other news: https://www.reuters.com/article/us-...and-buffett-join-feds-portfolio-idUSKBN23Z0M8

jog on
duc

 

[ducati916]

Good start to the short week. See how it develops. Lots of news (as always) out, some good, some bad. Following the news on a daily basis is (pretty much impossible) and bad for your trading results.

If you are determined to incorporate the news into your trading, then you need to follow the news on a cumulative basis and the sum of that news needs to refute/confirm the bigger macro-picture. This will not be accomplished with any single story.

The 'Virus' is the big Bear story. For the story to have merit, which means that you need to exit or short the market, the news needs to align with the macro-picture. That is to say, if virus = bad, then the economic/political/financial/medical data also need to be bad and getting worse.

It could be argued that because so many sectors are lagging, that is actually evidence that the market is deluded and only advancing on Tech. and nothing else, ergo, the Bears are the only rational chaps out there. I have been waiting for someone to make that argument, but I'll make it myself.

Which is why I am interested in sectors. I'll follow the news/fundamentals in sectors looking for that confirmation or rebuttal of the financial/economic data to that sector. An example: the Banks. The financials are critical to a sustained market recovery. The Banks passed their stress tests last week. The headlines were re. dividends & buybacks. The critical 'news' was of course that their Balance Sheets (were reasonably) healthy and they were not at the point of collapse.

The Housing sector. An enormously important part of the US economy. The 'news' has been ok and improving. Both of these sectors (Banking) have been laggards and of course they are inter-related.

The point being: if you are going to assess the news, you need to assess the news over a period of time and the news must provide confirmatory evidence that your hypothesis is playing out. Markets on a daily basis go up and down. The daily volatility is almost always for technical reasons. The trend however is usually driven by the fundamentals, which, can at times get way out of line and ahead of themselves, but will require pretty conclusive evidence of that fact before discounting that fact.

With regard to the virus story: even if the world (US) went to 100% infection rate, can economies be closed indefinitely? The answer is clearly no. Closing economies indefinitely is something that simply cannot happen. If it cannot happen, it won't happen. Therefore the market will hunt through for the winners, the losers may well go under, but that is just the reality.

jog on
duc

 

[qldfrog]

It could be argued that because so many sectors are lagging, that is actually evidence that the market is deluded and only advancing on Tech. and nothing else, ergo, the Bears are the only rational chaps out there. I have been waiting for someone to make that argument, but I'll make it myself.

Duc, isn't it the argument we have heard from a pister over and over again,9000 times actually?
But you are right it is the key debate.

 

[over9k]

Yes and I've been saying for quite a while that the virus can/will drive the fundamentals. Duc disagrees. He responds to the fundamentals only, which have lagged the virus data.

I've been calling a 2nd wave to hit the data/financial armageddon at roughly the end of this month for weeks now, and things have been *exactly* as I predicted. The trend since ~8 june is pretty obvious.

Australia also has the opposite of seasonality to the U.S and contained the virus which the U.S didn't, so AU travel stuff like qantas is going to pick up significantly once this outbreak in victoria is sorted out. All that's done is delay things another month, but we can still have travel "bubbles" (excluding vic) in the meantime.

I'm still roughly 50% cash, I've hardly bet the farm on qantas or something. AU travel is like 8% of my portfolio. What I HAVE done is get into the most resilient of stocks (stay at home tech) and am now awaiting the employment numbers on the 3rd - if they're good, I get a bounce, and if they're not, I'm going to buy, as stimulus will be a virtual certainty to follow.

You also forget that the virus even now still hasn't properly scared people. That'll change (and is juuuuust starting to now). The mask factories also come online in august and so we'll see a massive drop in virus spread then too. In the meantime, things are going to be ugly, exactly as I already predicted.

 

[ducati916]

Yes and I've been saying for quite a while that the virus can/will drive the fundamentals. Duc disagrees. He responds to the fundamentals only, which have lagged the virus data.

.

The issue for me, re. your analysis is this: it is superficial and does not provide an analysis of the macro-fundamentals at all.

Medically, there was always the potential for a 2'nd wave, everyone and their granny knew that. This superficial type of analysis takes you nowhere.

jog on
duc