Wednesday, March 04, 2009
Macro Man has a confession to make.
Regular readers of this space will know that he has been structurally bearish on stocks for more than a year, a view that paid handsome dividends last year with short positions in US and European indices. He came into 2009 with the view that the low was not in, and fully expected to be an enthusiastic participant in the equity short trade again this year. But Macro Man has a dirty little secret:
He's not been involved with the short trade at all in 2009.
Macro Man's investment style is to maintain a structural, long-term view that dictates most of his directional bias, and then use tactical analysis to time his entry points. The philosophy worked beautifully last year, when he enjoyed exquisite timing on entering shorts in May and September.
His problem this year has been twofold: his tape-reading has been poor, and the fundamentals are now something of a moving target. He entered 2009 expecting a bit of a bounce, and while he got one (for the first two trading days of the year), it vanished more quickly than he anticipated. He's never really been in sync with the market since, despite what in retrospect has been a fairly straight-line decline through key technical levels.
In fairness to himself, though, his fundamental analytical framework was telling him that it was not time to be aggressively short. His SPX forecast model, which had registered record negative readings for September and October, bounced smartly by year-end. (As a refresher, he is more interested in the relative output of this model than then absolute level of the forecast; like any linear model, it will understate extremes.) So really, he cannot beat himself up too badly on this one: his framework was not giving him the "full speed ahead" signal on the short trade, largely because the price decline had rendered stocks much less expensive than they were in mid-2008. In any event, he has managed to capture decent returns in other strategies where the confluence of his fundamental view and his tape-reading has been more harmonious.
What's troubling him now, however, is that despite the decline in stock prices, the forecast return is deteriorating again. There seems to be something of a negative feedback loop, wherein fundamental factors (like Macro Man's earnings momentum model) are being negatively impact by stock market declines. Such is the stuff of which Depressions are made.
And while macro punters seem to be be pretty clearly short stocks, it looks like the broader equity crowd, like Macro Man, may have missed the boat. Put/call ratios have remained remarkably sanguine this year, and anecdotally Macro Man has heard that real money funds keep buying dips. Similarly, the old blog traffic-o-meter has yet to show signs of visitor spikes that tend to accompany market bottoms. It's as if the the financial world is comign to an end...and no one can be bothered to give a damn.
What is curious is just how relentless the bear market has been. 12 of the past 15 trading days have been negative for the SPX. How unusual is that? Macro Man decided to check. Using rolling 3 week windows for the last 81 years, he pollted the number of positive days in each of them, shown below. Of the 20,366 rolling windows that he looked at, only 312 (1.5%) have had three or fewer up days.
So a bounce would not be a surprise...but then again, neither would an utter collapse. Gee, can you see why Macro Man has remained on the sidelines? While VIX has famously not kept up with equity market declines, from Macro Man's perch options certainly don't loook cheap. For fun he priced up June 500 puts in the SPX last night....they were offered at 14, nearly 3% of the index at strike! That just doesn't look particularly attractive; Macro Man thinks that his bearish global view continues to be more elegantly articulated via other strategies and markets.
And that's a state of affairs that he has no shame in confessing.