Is the SPX in a secular bull market?

Yesterday's core PCE deflator was slightly weaker than expected, but only by the smallest of margins.   The monthly change was 0.1494%, this close to being rounded up to 0.2%; the y/y change remained (a low) 1.7%, but nevertheless printed its highest unrounded level in more than three years.  While the short end caught a small bid, the rest of the market was suitably unenthused in what was generally a very quiet day of trading.  Will Janet Yellen be similarly phlegmatic?   We'll know come her speech at 11.30 NY time this morning.


There was an interesting discussion in yesterday's comments section about whether equities, or at least the S&P 500, are in a secular bull market.  Macro Man's answer is that "it depends".   If one acknowledges only two world views, secular bull and secular bear, then Macro Man would acknowledge that we are probably in a secular bull, albeit likely at the tail end of it.   If, however, one is to countenance a third state of existence, a transition phase of extended range trading where neither bull nor bear arguments hold sway, then Macro Man would place his chips on that spot of the table.

While the sideways price action in neither the SPX nor earnings over the past eighteen months is unprecedented, by the same token neither offer a compelling argument that this remains a secular bull market for the SPX.  While the retrenchment in earnings does have precedent, it is generally rare outside of recessions/bear markets; in the modern financial era steady rises in equities have typically been accompanied by steady rises in earnings.  That the latter have foundered even as the denominator in EPS has shrunk courtesy of buybacks would suggest a darker than normal story for gross earnings.  Again, this is hardly a sign of robust underlying strength.


One measure that Macro Man likes to look at is the 2 year change in both price and earnings.  As the chart below illustrates, the two measures generally track quite nicely and provide some corroboration (or warning sign, as was the case in the late 90's) of underlying trends.  As you can see, the two year change in both price and earnings are both barely positive; the only two times that they were both negative over the last thirty years were the bear markets in the early and latter portions of the last decade.  It is for this reason that Macro Man said that if forced to choose between bull and bear, he would stick with bull....but a tired one on its last legs.


Ultimately, the whole notion of "secular bull" and "secular bear" may not be that useful.   To be sure, if you're a pension allocator with a two to five year time horizon, it is an important distinction...and the chart above might suggest lightening up on equity positions (which, to be fair, it seems that many pensions have been doing.)  For most others, however, the cyclical oscillations within secular market directions provide ample opportunity to generate some decent P/L.

As things stand, in any case, Macro Man plumps for the "sideways" third option, which entails buying weakness and selling strength, and assuming that nothing will carry on forever.

Continuing on with the CTA proxy model project, Macro Man rigged it up for a number of dollar-cross exchange rates.  Readers will probably be unsurprised to see that the proxy models are short dollars in every single one of them....except cable.

EUR:


JPY:


GBP:


AUD:


CAD:


NZD:


MXN:


ZAR:


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henner
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March 29, 2016 at 9:09 AM ×

Looking at P/Es is fair enough but the relative pricing of equities compared to all other yielding assets is just as important from my point of view. I mean that's all the talk I'm hearing from my colleagues/friends when they wonder about asset allocation and where to put their capital. "Bond yield is shit, yields from property still alright but going down and a lot of hassle to manage (in Germany that is) , dividend yield from equities is still fine". Big Asset allocators shouldn't think that different or am I wrong?

to illustrate I just compared the dividend yield of the Eurostoxx50 (taken from the first active dividend yield future) to the 10Y year yield of Germany +200bps (as sort of a average corporate bond proxy). http://imgur.com/3AhFNAu if you care. Nothing to worry for equities from that side.

I would be interested what you think about this.

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March 29, 2016 at 10:12 AM ×

I am no expert Henner, I would think you could argue the same for AUD/JPY. But there is no guarantee high carry means high price return. Anyway better wait for MM.

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Anonymous
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March 29, 2016 at 10:28 AM ×

Henner, you have answered your own question. Look at the graph you provided, but instead of graphing it up to now, cut off the graph at 31 March 2015 When the spread was historically high at that point in time. What has happened to the eurstox50 since then ?

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henner
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March 29, 2016 at 10:55 AM ×

@Anon
right, the Index sold off 20% since then implying that the yield spread is not a valid indicator of future returns... (partly that was giving back the ECB-QE hype however)

but should we discount it entirely? at which pricing metrics do you look at?

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Anonymous
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March 29, 2016 at 11:12 AM ×

Not saying discount entirely, but there are no sure things and you pay your money and take your chances. But if you want something more empirical, academic papers have tested and found that valuation ratios like schiller cape (Or tobins) explain about 60% (If I remember correctly) Of return behaviour but thats really long term (10 To 15 Yrs). But even these ratios have problems (Look up Ship of thesus problem at philosophical economics blog).

Anyway I too would like mm to chime in as I have nowhere their experience.

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Booger
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March 29, 2016 at 11:30 AM ×

My guess is Yellen will stay the course with the dovish guidance from the March meeting. It would make no sense to change course from only ..err.. 2 weeks ago ? Something along the lines of we need (much) more time to evaluate the effect of the December hike and no rush to do anything soon.

I think Tim Duy makes a good comment about soft credibility and hard credibility:
http://economistsview.typepad.com/timduy/2016/03/oil-inflation-expectations-and-credibility.html

By standing pat, they increase inflation expectations and increase hard credibility that they meet the inflation target. There seems little gained from talking up rates or the dollar here as it is bad for oil, credit, earnings, China, tail risks, snuffing out the current recovery.

Anyway, I think if she was able to say what she wanted Yellen would say:

(to ECB and BOJ): stop sucking on the teat of U.S growth or more bluntly: "stop sucking on me tits you scurvy scumbags"

(to China): "carry on sucking until you can remove that bomb attached to your head"

(to Fed Hawks): "get in line with the program bitches..."

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Anonymous
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March 29, 2016 at 12:05 PM ×

"GP TRNDR" or "GPC TRNDR" on BB will give you another version of the CTA trend with stop losses.

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henner
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March 29, 2016 at 12:09 PM ×

@Anon: thanks for pointing out to the "Ship of thesus" article. very interesting read.

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Europeanbull
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March 29, 2016 at 12:17 PM ×

my2cents on the yield gap debate (I do have spend a significant amount of work on this topic):
- by itself most comparisons of equity yields with sovereign yields do not produce results, that help you more than classic and one-dimensional metrics (Shiller, Tobin, even Price/Book) do
- The interesting question is why that is the case, as any cashflow should be valued higher the lower the discount is:
In the US, where we have descent data, the historic cost of equities tends too fluctuate far less than the bond yield does, with mean and median around 8%. (some time ago I actually reverse engineered dividend-discount models over 50 years with perfect foresight based on shillers data set and solved for the implied cost of equity with results that supported the above).
I would also point to Damodarans blog posts on risk premia from January.
What does that mean? Basically the equity market seems to have its own view of the world and does not really care what the rates market implies. A cynic might say the equity market actually tries to discount the future, whereas the best explanatory variable for US treasury yields is TRAILING smoothed nominal GDP growth...

For practioners the value of yield gaps is infinitely higher in bottom up work --> use of cash, buybacks etc.

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Macro Man
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March 29, 2016 at 1:40 PM ×

I would echo much of what Europeanbull says above. Earnings/dividend yield spreads to sovereigns are not much use at all in predicting short-intermediate term results for equity markets.

There do appear to be distinct valuation regimes, however. Pre 1955, US earnings yields were almost always above UST yields. 1955-2008, they were almost always below. Since then, they've been above again. Obviously QE has a lot to do with this....but doesn't mean it cannot or will not continue. The same dynamic is at play in Europe- even more so, actually, with respect to divvy yields given the indifferent quality of the firms that are among the largest dividend payers and the generally high payout ratio for the index.

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abee crombie
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March 29, 2016 at 1:52 PM ×

Interesting 2 year ROC chart MM. FWIW, I am generally in the same camp though I might have a wider range of outcomes. I still think sub 1700 Spoo's in the cards at some point. But it might just be after we make new highs. I'm kinda confused here, so no real big bets on it

While european indexes have sold off since QE, if you look at what the best performing sectors are they are overwhelmingly defensive/ yield oriented, so maybe that is how it is expressed vs outright index values.

Also I think washed. or BinT touched upon this. SPX operating earnings are still quite different from GAAP.

We are going to get a bunch of high frequency PMI & trade data which should be interesting in the next few days. while we can debate the strength of US economy, what has not been debatable has been the massive drop off in Asian exports, which is the manufacturing hub of the world. However in Feb we saw a decent bounce from many, including Korea, Japan, Taiwan, Singapore. Will be interesting to see if trend can continue. We could be at a cyclical turn here, with decent implications for the global economy.

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washedup
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March 29, 2016 at 2:19 PM ×

I've always been astounded by the relative yield argument (equities vs treasuries) and the fact that serious academics espouse it - one is a security backed by a Govt that owns a tax collection agency and nuclear weapons, and the other is a security that has been known to plunge 50% from its tops frequently, for no other reason than things had gotten a bit out of hand to begin with. If 20% of fortune 500 CFO's came clean on earnings tomorrow spoos would plunge 20%, but if the US govt restated GDP would anyone sell treasuries?

Seriously - how is risk taken into account in the yield model? Perhaps I'm missing something. I know what it is, the upside of equities makes up for the downside asymmetry, but the distribution is still wider so there really should be a premium in equity dividend yields vs the 10 yr, atleast till the point where inflation risks ever become serious or uncontrollable.

Abee yes I think this week has some good 'this way to that' data coming up - good luck trading.

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Leftback
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March 29, 2016 at 3:53 PM ×

Crude and other commodities are in reverse again, and lately that has not been equity positive.

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Eddie
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March 29, 2016 at 4:15 PM ×

Hehe... one of my favorites.

I think the question is how you define "secular". Napier and Easterling use definitions based on Tobin's Q resp. CAPE but under both definitions "secular" means something between 4 and 20 years.

A market is usually called a secular bear market if stocks move sidewards, more or less. New highs are possible, but by and large the market is treading water. When I look at you S&P chart this definitly holds for the period between 2000 and 2012, say. A possible argument that we are still not in a secular bull market would be that valutions were not low enough in 2009 (single digit CAPE or Q below 0.35). Or to put it slightly different, if you had bought and rolled treasuries since 2000 you would have made more money than in equities, even today.

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Anonymous
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March 29, 2016 at 4:25 PM ×

Washed,

This week Scott Grannis calculates three different methods of S&P valuation. In one he uses NIPA profits (based on actual profits reported to the IRS). All three valuations point to eguities that are fairly priced to slightly overvalued, but not grossly overvalued.

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washedup
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March 29, 2016 at 4:33 PM ×

anon 4:25 - care to pass the link to grannis if u have it? Thx.

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Anonymous
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March 29, 2016 at 4:39 PM ×

Calafia Beach Pundit scottgrannisblogspot

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Anonymous
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March 29, 2016 at 4:43 PM ×

Its: scottgrannis.blogspot.com

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Anonymous
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March 29, 2016 at 5:50 PM ×

Lower for longer... Cheers LB !

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Anonymous
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March 29, 2016 at 6:12 PM ×

yellen's a joke- what an idiot...economy is great but we can't move from near 0 fed funds....i am really looking forward to seeing what happens on uptick in inflation prints....

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DownWithTheBeanCounters
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March 29, 2016 at 6:27 PM ×

I'm looking forward to seeing an uptick in inflation too. I bet the Fed is with me. Anyone who's worried about prices getting out of hand can sell the USD long end at lofty levels right now. My feeling is that the 30yr will tell you when it's safe to raise rates and the answer is a resounding "not now".

Or... maybe Yelleni is a Neo-Fisherian and is very worried about out of control inflation so she's keeping rates low to tamp that down.

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Anonymous
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March 29, 2016 at 6:54 PM ×

Yellen summary:
- Rates low forever
- Stocks up

One of these days Nico, MM & the other bears will wake up to this paradigm. Until then expect their calls on equities to be wrong.

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AB
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March 29, 2016 at 6:54 PM ×

Asset prices discount future cash flows. Equity cash flows grow roughly at the rate of nominal GDP growth. The rate of nominal GDP growth from 2002-2008 has fallen by about -2.5% post 2008. The 30-yr bond yield has declined by about the same.

Look at the dividend discount model formula and note that r (interest rates) has declined by about as much as g (nominal GDP growth rate). It is the spread between the two that matters for valuation.

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Anonymous
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March 29, 2016 at 7:08 PM ×

Oh Janet. What a useless slut you are.

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Anonymous
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March 29, 2016 at 7:59 PM ×

"The moral of the story: The Fed raised rates. Markets tanked. The Fed never raised rates again." (NorthmanTrader)

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jbtfd
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March 29, 2016 at 8:00 PM ×

As I've keep saying... "just buy the dip baby". The Fed will ALWAYS bail you out.

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johno
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March 29, 2016 at 8:17 PM ×

No point in whining (or being ungentlemanly). As much as some (me included?) would like a hawkish Fed to create some new, juicy macro moves, it just isn't happening. Yellen saying US inflation is a function of the global economy, and with the global economy doing worse, a correspondingly lower rate path is needed to get the same inflation outcomes. MM has presented some interesting econometric analysis here in the past to substantiate the more global nature of US inflation since China entered the WTO, so it shouldn't be a shock.
All that said, indigenous inflation probably shouldn't be dismissed and Yellen admitted the big rise in TFP implicit in the Fed's projections, calling it a "huge source of uncertainty." If indigenous inflation picks up - as it may be starting to - then we may have some exciting Fed-catalysed trades to do.

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Anonymous
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March 29, 2016 at 8:27 PM ×

Hmmm oil and copper not playing along... Odd

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Nico G
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March 29, 2016 at 8:35 PM ×

anon 6:54

for the 654th time

i trade Europe. European equities are in a real bear market.

Take me off your mailing list thank you.

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Polemic
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March 29, 2016 at 8:35 PM ×

last anon. Yes. Noted that myself earlier. they are the fly in the 'lets all fo fed crazy' ointment play. I ve been turning into a day spiv today as my faith as a born again bear is being sorely tested. I'm pretty close to renouncing my new faith if things bust thru recent highs again, day trader style waffle here -> http://polemics-pains.blogspot.co.uk/2016/03/yellen-are-you-fully-in-price.html

Plus the point that there i little point n reading or listening to Fed thing these day when algos can do it and trade on it o much faster. Getting to the point you really can right the new form the price.

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Anonymous
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March 29, 2016 at 8:49 PM ×

Whats your line in the stand pol ? Ur blig says 51 But we are beyond that now.

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Anonymous
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March 29, 2016 at 8:54 PM ×

May be a stretch, but yellen highlighted international weakness ala china, and copper/Oil is bound to that ?

http://www.bloomberg.com/news/articles/2016-03-29/aluminum-copper-advance-as-u-s-home-sales-rose-dollar-fell

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Anonymous
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March 29, 2016 at 8:59 PM ×

In 'FX Land' it's highly amusing to see the Fed torpedo the ECB/BOJ and all the other currency manipulators. Do these f*ckers not realize they are outgunned? Good work Janet. Too funny for words.

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Anonymous
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March 29, 2016 at 9:01 PM ×

Yellen's dovish speech is not really a surprise, as Booger said that she only said the same thing two weeks ago.

But apparently the equity market acted like it is surprised. I believed that Yellen just offset whatever been said by Bullard and others. The market simply returns to the state of post-last FOMC.

With the quarter end and the earning season in sight, sp500 should have a few days of rally and VIX is likely to tank again, IMO due to window dressing and better than expected earnings for the big tech/finance companies which almost always beat earnings. I believe that there would be a good short entry after that.

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Celeriac1972
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March 29, 2016 at 9:01 PM ×

When Mrs Celeriac's talk and actions are inconsistent with visible influences I have learnt that it is time to question whether she is [a] reacting to something I haven't (yet) seen, or [b] interpreting a known something in an entirely new way.

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Polemic
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March 29, 2016 at 9:12 PM ×

anon 8.49 .. that 2051 level is roughly where I ve kitchen sinked the short position in a few things. if we are over 2060-65 area with all other risk indicating prices also northerly then I m out and taking a break. Let's not forget we have quarter end madness to add to all of this. And what a quarter its been too. Though if you looked at SPX on solely dec 31st and Jan 31st you ll probably wonder if anything had happened at all.

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jbtfd
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March 29, 2016 at 9:31 PM ×

SP500 reaches a new 2016 high. Still running 25% of my long position from the Feb lows.

https://twitter.com/markets/status/714908537370050560

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Anonymous
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March 29, 2016 at 9:40 PM ×

SPY, TLT, and TIP: all three up the same 1% today ... go figure.

Whereas GDX up almost 6% ... anyone got gold?

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Anonymous
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March 29, 2016 at 9:42 PM ×

Alcoa starts the earnings season on April 11. Earnings are expected to decline for five consecutive quarters; hence, the market has very low expectations.

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Macro Man
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March 29, 2016 at 9:55 PM ×

@ various Anons...the repeated I told you so's about how wonderful the SPX is might carry a little more weight if the index hadn't done two fifths of fuck all for the last two years, as the chart in this very post illustrates. Moreover, the losses of my small sale from last week are smaller than the gains I had a couple of days ago. Those weren't worth singing about then, and the losses aren't worth crying about now. If you only sing when you're winning (and on micro time frames at that), it doesn't make you clever....it makes you, to quote another Anon, a twat.

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washedup
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March 29, 2016 at 10:25 PM ×

@Pol went through your blog post - very well written as always - agree with your tactical read on stops etc, I did find it intriguing that you find the current level on spoos do or die worthy - I certainly wasn't feeling that 'generational' opportunity, rather just more purgatory and chop where opportunities stay two sided for the next few months and then either a breakout or breakdown - a bunch of retail chipmunks are also long vol per WSJ, so maybe thats the new pain trade.

Would you be shocked if we did the 'range of death' just like last year? last year was 2040-2130 for what felt like forever - so maybe this year we do a tad lower until summer but same idea. I am guessing august onwards there will be a time when punters discover a molotov cocktail in their undies on a sleepy afternoon.

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Anonymous
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March 29, 2016 at 10:44 PM ×

RE: long vol retail traders, that is going to be a slow death for their bets.

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Polemic
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March 29, 2016 at 10:54 PM ×

Hi Washed..

I suppose it's a culmination of generally being, in the words of Monty Python's dead Parrot Sketch, due to me being @tired and shagged out after a long squawk'. I ve been trading far too much during this down and up and feel we are now back at teh neutral zone. Resolution can come as up down .. or as you say flat line, but i do think that we are at a decision point. If it goes up then I m out and pocket my profits and watch it go up as that would be entering the mania phase of stocks.

Or it goes down in shich case I make on my short term possies but would look to get out and go long at max screamy shoutiness for a return to these levels ( which I see as pretty neutralish) or .. we go no where after no doubt tripping me out of my shorts awhen I also pocket my money and go and focus on other things until we get something tradable again.

I have a pretty nuts way of trading my end of plays when we basically get to a point which i consider neutral. I load up one way or the other in large with tight stops and see what happens. Call it the last super leveraged trade with using a smidge of the prvevious profits. the last lottery ticket, the last roll of the dice. I am pretty close to walking out of teh casino for a while as things get a bit less clear here and my luck may run out.

the ultimate hedge is that if things in the economy do go well and things really boom, we could all make money in real jobs instead of haveing to enter the casino in the first place. But we are all gambling addicts really, we just cloak it in a veneer of professionalism!

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Polemic
admin
March 29, 2016 at 11:01 PM ×

in fact Washed. what I m doing is similar to my ulitimate pension policy, only replace last bucks' with ' smidge of your profits.

Pension plabn is everytime you get down to your last 10k you walk into a casion and stick it on red .. you win you leave and enjoy life until you are down to your last 10k again.. repeat .. You lose .. you blow your brains out. Look at it n game theory payoffs and it makes for interesting analysis. Look at it as an an idea for a film and you have a new 'running man' on your hands.

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Anonymous
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March 29, 2016 at 11:11 PM ×

To the rally monkeys:

" Anonymous March 18, 2016 at 2:26 PM
Anon 1:55 - THis trolling of the bears is laughable.....Was I short into ECB? No. Into FOMC and Opex? No. I'm getting ready to short again though. Equities and oil. Small now. Large on any spike. All about timing of entry"

You can timestamp that to GMT. I got my Dax and oil spikes and well onside. Down about 10 handles in the Emini. With all this fuel that the CB's are throwing, you'd think I'd be well offside? I'm not counting my chickens or any such thing but, the rally isn't exactly a face ripper in the US and it's stalled in oil and Europe.

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Hotairmail
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March 29, 2016 at 11:39 PM ×

Why would two come out and threaten a rate rise in April and then Yellen come out and apparently pour cold water on it within days? Something doesn't sound right. Rather than campaign against each other I thought there was some semblance of collective responsibility for communication, as that is a key part of policy. Or perhaps, "keep the market guessing" is the policy, with Yellen winning the prize to be the Fairy Godmother this time.

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Anonymous
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March 29, 2016 at 11:42 PM ×

It's like they're trying to generate some upside shock. Jolt the market into going bid. Limited reaction really.

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Polemic
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March 29, 2016 at 11:43 PM ×

Or hot air, the market, especially teh US market cannot cope with grey. It has to be black or white, and mkt only looks at last thing spoken by anyone. So .. last week was tending more hafkish than FOMC , and now we are back to total dovishnessexpectation. The truth lies inbetween. But market narrative diesnt do in between. thats actually one reaon i chose th eshort side to load up on rather than the long, on the belief that the next oscillation of Fed expectation has to be back from this current uberdove stuff.

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Down_side_up
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March 30, 2016 at 12:18 AM ×

@ Macro Man

It looks to me like the date axis of all your currency X charts is out around a month.
The AUDUSD peak before today was 0.763 Mar 18th, not in late Feb?

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johno
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March 30, 2016 at 12:35 AM ×

I think all the commentary just reflects uncertainty about the inflation process at the Fed. If you wanted to read some motive behind their varied communications, perhaps it's that they want the market alive to the different scenarios because they themselves don't know which one is likeliest. If I were them, not knowing the future, I would want to discourage markets complacently building expectations around just one scenario.

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Macro Man
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March 30, 2016 at 12:36 AM ×

Those labels refer to the 20th of each month, not the 1st.

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Anonymous
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March 30, 2016 at 4:14 AM ×

i hate to sound complacent but id argue today made nfp irrelevant. bad nfp-dovish. good nfp-doesn't matter, economy will be allowed to overheat. in general i think it means that the fed ISN'T data dependent and any overreactions to data that cause fixed income to sell off should be faded. i don't think i'm saying anything novel here and I don't have an actionable trade idea in rates on the back of this. I do like being long TIPS, as US real yields should go negative (it's what janet wants and euro/jp both have neg yields). Unfortunately, as a retail guy I can't really trade TIPS. I do think grandma's stance is very bullish for growth equities and equities in general. the tailwind from the dollar doesn't hurt either. the recent bandwagon jumping from growth to value should quickly revert. I think we make new highs in spooz in the next 2 months.

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Polemic
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March 30, 2016 at 9:42 AM ×

Right.. that didn t take long. Stopped out of shorts at small costs. Back on the sidelines and will embark upon more enlightening adventures. Who's for lunch?

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