The Wisdom of Crowds

Friday's post-ECB hangover was so severe that the Eurostoxx only managed to rally a little over 2%, the SPX a bit over 1%, and US fixed income actually had the temerity to close down on the day.  Of course, without the benefit of a "surprise" easing announcement out of China, the resultant crash might have been so violent that residents of spare rooms all around the Heathrow area may have been preparing to abscond to the Ecuadorian embassy to avoid prosecution by the world's financial authorities....

All kidding aside, Macro Man has found the divergence of opinion on equity markets in particular to be fascinating.  Judging by conversations with friends and the repartee in the comments section, it seems as if there are four camps when it comes to views on equity beta:

* The Bulls.  At least in this space, every day they go up, a healthy cohort of this camp tend to remind others that global central banks are engaged in monetary easing.  Macro Man suspects that most adherents of this view actually have slightly more nuanced rationales than those shared in the comments section.

* The Bears.   This group is sceptical of the recent equity rally, because of a) global growth concerns  b) valuation concerns  c) declining efficacy of monetary policy concerns, and  d) Fed tightening concerns.   Of course, in an  equity market like this one, there are two kinds of bears:  the quick and the dead.  They sell strength with defined stops, and generally cover a portion on weakness.   Judging by the comments section, this group remains engaged and doesn't believe the chart break.

* The Opportunists.  This group appears to be equally happy to buy weakness and sell strength, and perhaps even to stop and reverse if a significant level is breached.  Fading extremes makes a lot of sense in volatile, choppy markets, but when the environment changes, "everyone has a plan until they get punched in the mouth."

The Agnostics.  This mostly silent group doesn't have a good feel for equities and so isn't really playing.

Macro Man would generally characterize himself as an Opportunist in this rubric, but finds it increasingly difficult to resist the siren call of (at least temporary) bullishness.  Among the factors driving this pull are:

* Seasonality.   We're entering the sweet spot for the so-called Santa Claus rally, with both November and December averaging gains of more than 1.5% in the SPX going back to 1950, making them the two strongest months of the year.


* Potential ECB easing.    Regular readers will know that Macro Man has been generally constructive on European equities for a while now.   When value meets catalyst, good things normally happen.

* Reduction in Fed uncertainty for December.  This could well be a temporary phenomenon, depending on how the next couple of weeks (featuring the October Fed statement and payroll data) shake out, so it's admittedly far from a credible reason to go whole hog on the bull side.

* Positioning/year end race for glory.   Hedge funds generally have not had a good time of it this year; according to the most recent HSBC hedge fund report, the average US long/short fund was down more than 3% year-to-date (though these figures do not include the last couple of days' trading.)   Throwing a bunch of risk at one or two themes in the last couple of months is a time-honored tradition, and one that seems like it has a reasonable shot at happening again this year.

Short euros would also look to be a potential beneficiary of this phenomenon.  Last year at roughly this time, Macro Man conducted a poll that accurately noted that long USD would be a popular trade into the end of the year....and it worked like a treat.   Given that this space has a reasonably diversified readership in terms of the four camps listed above, he thought it might be useful to call upon the wisdom of crowds again.   Readers are encouraged to respond to the poll below



to give us an idea of where the informed consensus lays.

In the meantime, strap in for a big week with the Chinese Plenum (where the growth target will be very closely watched for downgrades; Macro Man would not be surprised to see one), the Fed, and BOJ, among other things.  May your trading be as wise as your poll responses....
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Leftback
admin
October 26, 2015 at 10:23 AM ×

LB is sleepless in La Jolla, CA.

Love it when you do these polls, but hate to participate, as that 2-3 month time window is always the most difficult to predict. Count me among the Opportunists but not as a Rampant Bull. I prefer to wait for really good entry points in order to maximize the risk/reward proposition and am not well suited to grinding out small gains unless it is in traditional fixed income vehicles.

Still have modest equity length here, but not all in. A combination of the strong dollar and continued weakness in China gives me pause at present. Certainly not bearish, and find your last item, the Performance Steeplechase, to be as persuasive as ever. Watching and waiting here.

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Booger
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October 26, 2015 at 11:43 AM ×

I found this article by a fellow called Dwaine on the current situation interesting. He reviewed sustained (over 20 days, the recent one was 42 days) 200DMA crosses since 1972:

"The “Goodbye Kiss” is when after the initial commencement of a protracted period below the 200dma, the SP-500 attempts an assault on the 200dma in a “retest” of resistance. In every of the 13 instances since 1972, the SP-500 fails at least once to breakout from the 200dma."
"The table above shows that it takes 31 to 96 trading days (bars), or an average of 63 bars below the 200dma before the “Goodbye Kiss” occurs....The history also shows us that this attempt to breach or temporary breakout of the 200dma is likely to be short lived and result in a further 4% to 36% (average 20.2%) correction."
http://recessionalert.com/the-sp-500-200-day-average-kiss-of-death/

A sample size of 13 is not large, but I thought the article was very interesting. The options are a) no goodbye kiss (powers through 200DMA and new highs b) goodbye kiss is also kiss of death - bear market starts c) goodbye kiss or 2 kisses and failures of 200DMA before breaking to new highs. Either way I think short for 70 points is a reasonable punt here.

Interesting movement in natural gas. Looks like it has broken down and may test $2. THis cannot be a good thing for US gas drillers.

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abee crombie
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October 26, 2015 at 12:17 PM ×

Booger, I hear you on Nat gas but we are also at a slow month (not too much heating yet), that said Jan 16 Nat gas has fallen big time as well. Though LNG exports should start in early 2016.

As for the recent move in equites, look at the S&P 500 equal weight index, Russell 2000, Midcap etc. I'm very bullish longer term, but I just think the current rally is being led by a few.

The only market I have good confidence is that you should be selling rallies in commodities.

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Polemic
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October 26, 2015 at 12:57 PM ×

Yup MM, you can count me as an medium term opportunist. European equities are running the january 2015 rule book at the moment as thats the last model for ECB QE, which is fine, but the background isn't s healthy as back then. I m happy to against play extremes in sentiment and am worried that the market misfiling for the error that always gets them. Thinking they know what CBS are going to do. The last string of ECB will they won't they was good example and I am thinking that next months show cannot install much more confidence that they are going to act, so risk is for disappointment on even the smallest non-dovish reference. A

As I mentioned in my last comment, there is a reason the ECB is dovish and that is because things are not great.

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washedup
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October 26, 2015 at 1:20 PM ×

"Macro Man suspects that most adherents of this view actually have slightly more nuanced rationales than those shared in the comments section."

MM - thx been looking fwd to that survey, especially given its stellar record over the years!

I definitely fall into the opportunistic camp - as for the observation above, what nuance do you see, exactly? The best I can tell the bullish argument falls into 3 categories:

1) Don't assume that just because CB easing hasn't worked ti improve macro, that it suddenly won't start working - this will take crude back to 70-75 and china will flutter and settle gently like a pretty butterfly onto a bowl of global goldilocks' porridge
2) As long as you buy now and sell before everyone else on Dec 31st, nothing to worry about - all about seasonality - remember last year?
3) This feels like 1998 in equity land, in that valuations and prices are silly and something LTCMish just happened - therefore, the next 15 months must be exactly like 1998-2000, i.e. valuations and prices will get much sillier. That sets a clear target for spoos to go up in a straight line with no stops or late revelers allowed in - therefore, buy now.

There is a 4th one, which alleges that CBs are so desperate that they will actually show up and buy equities because the alternative is an apocalyptic collapse to, drumroll, david tepper's buy target at 1600. I will leave this one out of the debate.

Am I missing something? Trust me I have no problem jumping into the bullish camp, just trying to maintain perspective!

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Anonymous
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October 26, 2015 at 1:31 PM ×

ZIRP Nirvana...Overwhelming the selling...( See table 213 of the Fed Z1 )

"Q3,’15 buybacks continue, as the initial reports have Q3 33% higher than Q2,’15 and 6% higher than Q3,’14"

https://twitter.com/hsilverb/status/658457622564225024

"$SPX issues continue to reduce share count, as 24% of the 172 issues have reduced share count by at least 4%,adding at least 4% to their EPS"

https://twitter.com/hsilverb/status/658457769142521856

"#SPX Indus (Old)cash just shy of record, but at $1.32T it is enough for companies to do whatever they want, with the key word being ‘want’"

https://twitter.com/hsilverb/status/647042042376359936

Ratio of insider buying to SP500 (via XTrends)

http://imgur.com/UR5BvmA

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washedup
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October 26, 2015 at 1:43 PM ×

anon - thx for those links - any thoughts why all this did not matter in the period from aug 15 to sep 30?

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Macro Man
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October 26, 2015 at 1:54 PM ×

@ washed, I reject that this is "like 1998 in equity land", at least based on the factors that I believe drive equity valuation and pricing over meaningful amounts of time. While there are certainly some similarities with respect to EM, there are enough fundamental differences that I think you have to analyze the current situation on its own merits without resorting to analogues.

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DownWithTheBeanCounters
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October 26, 2015 at 1:54 PM ×

Bull:

Everyone hates this rally.

http://blogs.wsj.com/moneybeat/2015/10/25/money-managers-see-risk-in-rally/

http://www.wsj.com/articles/u-s-companies-warn-of-slowing-economy-1445818298

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wcw
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October 26, 2015 at 2:07 PM ×

MM, while hardly an objective metric, the feeling of the current tech boom around the Bay Area is different to '98-9. The peak of the O-G internet bubble was stupid and fun. Cats could get funding, and did. Pets.com was funded not by lunatics but by Amazon.

The current boom is kinda dumb in its own way, but it is super-serious. Cats can still get funding, but now funding cats on the internet means looking for the next youtube.

None of this speaks to equity markets (my vote, not that it matters, was for a muddle sideways), but it is interesting how the tone around town has changed.

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washedup
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October 26, 2015 at 2:19 PM ×

wcw - thx for that anecdote - would you then suggest that the relative 'seriousness' this time makes explosive exuberance less likely a la '99?
To MM's point - I do find it interesting that adherents to the melt-up led by tech idea, are on the older side (ostensibly because they witnessed it first hand) and in some ways should know fully well that sequels rarely play out similarly. The 'rhyming not repeating' idea may be be a cliche, but boy is it spot on when it comes to describing markets.

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Macro Man
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October 26, 2015 at 2:22 PM ×

Yeah, it's kind of easy to forget that the original tech boom had more than a whiff of 'spending like a drunken sailor' about it on any old thing. Remember when K-Tel stock ripped because they announced an online presence? As you say....stupid and fun.

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wcw
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October 26, 2015 at 2:55 PM ×

WU, yeah, I'd say (on the public equity side, now) that the chances of real froth, where the proper valuation of almost everything once the music stops is zero, currently are low.

MM, yeah, K-Tel was hilarious. In 1999, the internet bubble paid for our Xmas shopping and a crappy-but-free PC besides.

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Macro Man
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October 26, 2015 at 3:23 PM ×

wcw, I love that the linked press release manages to include "empowers" in the very first sentence!

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CV
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October 26, 2015 at 3:24 PM ×

Agree with Polemic on the prospect for disappointment. I think Draghi will deliver, but watch out for the inflation report this week. The consensus has forgot about base effects, and this could knock the doves slightly! Some plain vanilla EZ equity names are up over 20% in a month ... probably wise for punters to heed LB's advice and don't go all in. Mind you, I think that a buy and hold investor could still walk away and come back to a very nice return at the end of Q1 from here.

As it is my day job to parse the entrails of the EZ, here is the short summary from my desk.

1) Consumers' spending has been powering ahead, but I doubt it will last, and this could knock GDP growth if investment doesn't take over.

2) Spain is slowing FAST, will France and Italy take over. Probably to some extent, but a perfect switch of baton?

3) Inflation will surprise to the upside, so Draghi needs to get his next dollop of easing in fast, but I think he will, just in time.

4) Construction could surprise on the upside, manufacturing will likely remain weak.

All in all ... the cyclical outlook in the EZ is pretty stable ... but it will get more difficult next year. I think the push into Q1 could be the final easy piece of meat here for a while. A final point in fixed income. I think bunds will likely remain well supported by the prospect of ever more -ve rates at the hands of Super Mario. But after the front-running comes the taper tantrum, and I think the data in Q1 will give us just that. I am speaking about bunds here, mind ... I still can't get excited about a strong view on USTs, which is kind of worrying since I you know where that is going, you know a lot ;).

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Celeriac1972
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October 26, 2015 at 4:40 PM ×

Polemic, your 4 camps are astutley observed from all I hear and read. Good work.

2 observations:

1. The emotional needs of all 4 camps might be adequately met by a period in which nothing much happens.

2. The "wisdom of crowds" is perhaps most acue when there is a normal distribution of outcomes (as in the guess the weight of the bull competition that prompted the book). I'm not sure that is the case here. I look forward to seeing the distribution of the responses more than any arithmetic averages. I would expect that there will be clustering in these around identifiable scenarios/outlooks. Perhaps your four camps will be discernible....?

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Anonymous
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October 26, 2015 at 4:42 PM ×

"washedup said...
anon - thx for those links - any thoughts why all this did not matter in the period from aug 15 to sep 30?"

Must have conversed with 20 or so experts. None could provide a reasonable answer to your question.

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Polemic
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October 26, 2015 at 5:54 PM ×

Celeriac 72 - Wasn't me who wrote this post .. it was Macro Man.
Pol

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Celeriac1972
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October 26, 2015 at 7:40 PM ×

Sorry!

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Anonymous
admin
October 26, 2015 at 11:35 PM ×

@wcw, the one thing that is persisting here in the Valley is the crazy real estate prices. However, there seems to have been a little bit of softening in the last couple of months. I don't know if that relates to a tapering of the hot Chinese money that has been driving up the prices.

I don't see any 2100 sqft houses in Mountain View going for $2.7 million lately...

But there is no comparison to 1999/early 2000 in terms of crazy stupid stuff. The "MBA Indicator" would suggest that there is some type of softening to come, but not a collapse. The "MBA Indicator" being reflective of how GSB, HBS, Wharton, et al, grads all want to move here and start something.

-- Whammer

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October 27, 2015 at 3:01 AM ×

In addition to the monetary easing, even the bears who didn't believe the breakout (CJF included) are forced to concede that earnings are 'solid/very good' for several large multinationals.

Tried to touch on this with a take on Amazon vs. Wal-Mart. Though positive results in terms of earnings are being driven by secular changes more so than economic growth/acceleration...

Wal-Mart vs Amazon

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Sets Shaibu
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