What do post-election rallies say about future returns?

Another day, and the Trumpflation theme keeps on rolling.  Equities go up up seemingly every day, US back end yields are at eighteen month highs, and the dollar keeps on rolling against the other two member of the G3.  The strength in USD/JPY is particularly impressive, fueled, no doubt, by expectations that the BOJ will step in to defend its JGB yield target. 

Still, Macro Man does wonder if tactically, at least, certain aspects of the post-electoral landscape aren't getting a little long in the tooth.    Consider that speculative short interest in eurodollar futures is at an all time high:


as is duration-weighted positioning in US bond futures.  The indicator below is expressed in 10y future equivalents.   It doesn't include the ultra future, which is only a few years old, but the recent picture with that contract included looks much the same.


USD/JPY, meanwhile, is heading straight for the neckline that was such good support for more than a year.   Now, of course, it should present formidable resistance.

Record levels of fixed income shorts and the dollar about to hit a technical headwind just before a key policy meeting.   Gee, what could possibly go wrong?

More generally, however, Macro Man thought it would be useful to put the current post-election rally into context, and to see if there were any lessons to be learned about potential future price action.  Does a strong post-election rally bode well for future gains?  How does the current 5.4% rally in the SPX stack up with history?  Inquiring minds want to know.

Macro Man looked at every election since 1896 and tracked the performance of US equities between election day and inauguration day, and then for the one year following inauguration day.   He used the S&P 500 when data were available, and the Dow in the pre-SPX days.   One thing to note is that before the 1936 election, inauguration day was March 4, having been moved to January 20 after FDR took office in 1933.  It turns out that there is relatively little relationship between the post-electoral price action and equity returns in the first year of office, with a correlation coefficient of -0.18.   Yes, it's negative, though that's partially a function of a couple of notable outliers.


Still, it's hardly a ringing endorsement for the notion that just because the market rallies (or sells off) after the election, it will continue doing so when the new guy takes office.  The individual electoral datapoints are set out in the table below.

As you can see, the Trumpflation rally is already quite a bit bigger than average, though there have been post-war rallies that have been bigger (Clinton, JFK, Ike.)  Then again, we're only halfway between the election and the inauguration; if the market keeps this up, it will be the biggest post election rally since Hoover.   Gulp.

It is interesting to note that new presidents tend to see higher-than average equity returns for their first year in office, though it's also the case that they tend to see the market go down after they're elected.   (Perhaps this is because of either a poor economy that gets the incumbent chucked out or uncertainty after a popular two-termer leaves?)  Note also that there is a much bigger gap between post-election and post-inauguration performance for Democrats than there is for Republicans.   When you add it all together, however, the market has tended to perform a bit better between election day and the end of the first year of a term for GOP presidents than their Democratic counterparts.  That being said, the margin isn't big enough relative to the sample size to offer any substantive conclusions.

Ultimately, what we can say is that post-electoral performance is no guarantee of future returns, or even a reasonable predictor.   Enjoy the Trumpflation rally,  but understand what it means (and what it doesn't mean) for the future.



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Nico G
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December 12, 2016 at 8:08 AM ×

sell now, buy post FOMC dip, get out of all longs on the 28th

forget about selling the 'news' on Inauguration day, US equities will have tremenduous difficulty maintaining current valuations come January 4th

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Anonymous
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December 12, 2016 at 10:48 AM ×

Hmmmmm, I am doing the opposite (buying now to sell the post FOMC rally).

Isn't over one hundred percent of the net market return over the past twenty years associated with FOMC meetings (the day before the announcement, the day of the announcement, and the day after the announcement)? Certainly agree with you that a significant correction is coming, but now (and the next three days) is not the time I want to be short.

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Rx
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December 12, 2016 at 1:52 PM ×

Hi MM -- excellent piece as always. May I inquire how you are calculating the duration-weighted positioning? I have Bloomberg and am wrestling with the appropriate fields. Greatly appreciate any further insight, Rx.

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Macro Man
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December 12, 2016 at 2:53 PM ×

@ RX, I made this a number of years ago. I believe I looked at the duration of the CTD for bonds, 5's, and 2's and calculated the ratio of those numbers for the CTD of TY, then applied those ratios to the futures positioning.

Obviously it is not completely exact as CTDs change, but close enough I think to merit not changing the CIX every time the CTD for a given contract changes.

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abee crombie
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December 12, 2016 at 3:34 PM ×

From a noted bear, Horseman fund

When the fund went net short in 2012, we spend many years all alone in
our positions and worldview. This is how I prefer to be. In January and
again after Brexit, the market has come much closer to our positioning, and
returns have been poor as a result. In the month since the US election, I
again feel all alone in our positions and ideas, while at the same time the
macro indicators in China, as well as the increasing desperation of the
authorities there to reduce capital outflow means we are getting close to the
devaluation and crisis that I have long expected.

I'm gonna have to start going with Nico, Rising Dollar, Rising Oil, Rising Stock market, Rising Yields. I dunno, something has gotta give. These markets are manic. PIN....

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Anonymous
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December 12, 2016 at 3:38 PM ×

If this reversal in yields and dollar materializes... anyone going for long GDX punt?

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washedup
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December 12, 2016 at 4:14 PM ×

@anon 3:38 - I have a little bit on with plans to add on GDX through to say 19 - one concern I have is that the dollar may be entering a supernova phase next 2-3 months, and GDX is ultimately a piece of paper owned by others alongside other things, so will stay small.

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Maverick
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December 12, 2016 at 4:52 PM ×

Very interesting piece, MM.

Agree that things feel long in the tooth, especially as most expect potential policy negatives to precede positives by a year or two. But I can't help but feel that this time is a bit different. After 9 or so years of conventional and unconventional monetary policy exhaustion, a painful recovery and regularly revised down growth projections, there is a deep, pent-up investor force that seems to want to blast their way out from under the gloom. A type of irrational normalization. Although, not entirely irrational. Trumpflation was just the nucleation point for the normalization process. A turning point, in a year where QE was seriously questioned and thoughts turned more markedly towards reforms and fiscal easing. It just seems to be accelerating a process that would have occurred eventually.

The rational bit is that investors are accepting steeper curves on the basis of improved growth expectations, explaining the positive momentum in risk assets. Then add to this the large swathes of financially repressed funds, eager to move out of riskier and riskier instruments and credits they were in just to get some returns (nevermind risk-adjusted). The latter tends to suggest this rally could go on a lot longer, but I have no analysis to back up how long. I'm of course skeptical as hell - like many on here - but it may be time to just put the policy details and 2nd order effects to one side and apply a low pass filter.

Anyhow, volatility appears to be cheap, so with all the talk of a 2017 filled with political risk, it seems sensible at the very least to boost protection.

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johno
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December 12, 2016 at 5:01 PM ×

The front-end doesn't seem interesting here (nor the dollar), especially with Yellen right in front of us. But duration still seems a sale. Lots of room for rotation by retail out of bonds into equities. Pension and insurance companies unlikely to bid aggressively. Issuance to go up under Trump. And higher rates less likely to be recessionary if nominal growth and credit growth pick up (make it easier to roll the debt load without default). Both ECB and BoJ are reducing their QE, especially in the long-end (abandoning the depot rate floor should mean a quite material shortening of duration of ECB's QE). Speculative positioning is very short, but it was very short yen in the early months of Abenomics. This may be one of those cases where speculative positioning doesn't signal a mean-reversion trade.
Cons would be something going wrong in China, or fighting between Trump and congress. I also wonder whether we have to worry about a collapse in supply by corporates if interest deductibility is eliminated, as is being proposed.
We'll see how the 10Y and 30Y auctions go today and tomorrow ... timing of my comments are often laughably off.
November discretionary macro returns were pretty poor. Not sure this makes me feel better (I was down in-line), or just lame. One person who should be feeling good is MM. Good calls this past month, MM!



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Leftback
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December 12, 2016 at 5:12 PM ×

Anon @3:38. We are long GDX and short UUP, as Dame Janet and her happy band are rarely big supporters of Bucky when it comes down to it, and are frequently found jawboning it lower by a variety of means. The statement will ignore politics and talk about the measured pace of recovery, a gradual change of monetary policy etc... Yellen knows full well that Trump's policies risk a slowdown and crash in China and that any infrastructure spending will not happen until late 2017.

Dollar sentiment is extremely strong; yen and bond sentiment are at extreme lows. This rally has been built on relentless addition to one position: long USDJPY and long spooz/banks. A reversal of the main FX trade here is likely to set the entire machine into reverse and send us into the long cold winter quarter, when US GDP traditionally slows to a dead stop.

Another thing that will be at a standstill here in the US is the mortgage/refi market, which has been frozen by the recent yield spike. If rates aren't 50-100 bps lower again by May (2.00% 10y), we will be in another housing crash by October. The Fed is not going to allow that to happen - think of all the MBS on their balance sheet!

For those who doubt my argument, here is some data. 5 of the last 6 Fed rate hikes have been followed by rates falling, not rising. The December rate hike is fully priced in, and at present the market is also pricing in more rate hikes (2 or more) in 2017 than we will actually see (probably one, after a very slow Q1-2 '17).

So your choice this week is clear: Bucky, The Banks, US Small Craps, Unicorns and the Trumpflation Fantasy? Or La Paloma Blanca, Goldfinger, Utilities, Cold Hard Reality and Mr Bond? It's really a great time to receive rates, probably the best time since Spring 2010. Enjoy the show.....

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Leftback
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December 12, 2016 at 5:48 PM ×

Auction of 3y this morning was tepid, although indirect bidding (foreign demand) was strong. The real test of demand in the Treasury market comes this afternoon (10y auction) and tomorrow (30y). Not for the first time, we expect the bond market to pivot around these auctions, as reasonable demand sets in motion a short squeeze that might become even stronger as the lovely Dame Janet comes into focus at her press conference tomorrow afternoon. Dollar weakness today might be a sign that the smart money in FX is already anticipating lower US rates.

LB understands that all shades of opinion are represented here (even 12y-o HFMs) but is shaking his head a little bit at one or two commenters who are suddenly [and rather late in the day] and abruptly very bearish fixed income here, and are clearly victims of Recency Bias. This is all very reminiscent of May 2010 (as well as other Death of Bond moments, e.g. Dec 2013, summer of 2015). We will all have a good laugh about this in March when we have a 2.00% 10y again ....

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Leftback
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December 12, 2016 at 6:18 PM ×

There may never be any $1T stimulus to fuel the flames of Trumpflation. Over Mitch McConnell's dead body, apparently:

http://www.marketwatch.com/story/mcconnell-says-he-doesnt-want-trump-to-propose-trillion-dollar-stimulus-for-infrastructure-2016-12-12?link=MW_latest_news

The above indicates what we and others have been pointing out for weeks. Trump doesn't control spending. Mitch and Paul Ryan do, as they did under Obama. That's why this country isn't going to go anywhere for another four years. Mitch's fat ass isn't moving and Ryan isn't going to fix the infrastructure, b/c Wisconsin doesn't have any. The House is not going to do anything for working people and this "Reflation Trade" is going to be a massive bust.

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washedup
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December 12, 2016 at 6:31 PM ×

"Mitch's fat ass isn't moving and Ryan isn't going to fix the infrastructure, b/c Wisconsin doesn't have any"

LMFAO.

Chinese (state run) media called Trump an 'ignorant child' - sadly, many Americans would agree. What twilight zone are we headed into when the CIA, the Chinese Govt., and liberal elites all agree on something. I think Mr Trump will find out quickly that being the underdog fighting the establishment gets you a very different type of treatment than when you appoint a Goldman cabinet and are now part of aforementioned establishment. It is clear to me he wants to be popular much more than he wants to be successful, which leads us down an uncharted roller coaster paved with heated WD90 as far as policy goes.

I agree the reflation trade will be a bust - the two paths before us involve either higher inflation with the same s@3ty growth, or much lower inflation with worse growth. Now go munch on your raw broccoli.

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Maverick
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December 12, 2016 at 6:34 PM ×

@LB don't know about 2% US 10yr by March (tempting thought, and why not?), but I'm thinking it could well be <2% by this time next year.

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Leftback
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December 12, 2016 at 6:37 PM ×

Details o the auction of 10y, with my commentary added. We repeat our observation that is is very much like 2010.

"The afternoon's auction of $20 B 10-year notes saw moderate coverage at 2.39 and somewhat sloppy bidding, with the high yield awarded at 2.485 percent coming in about a half of a basis point above the 1:00 bid. Demand from end investors was concentrated in indirect bidders, regarded as a proxy for foreign accounts, who took down a fairly large 57.5 percent of the $20 billion offering."

Foreign demand for Treasurys remains strong. This is not surprising, in view of the spread between US and equivalent (e.g. German/Japanese) government debt.

"A weak 6 percent takedown by direct bidders left dealers with a hefty 36.5 percent share, however."

Domestic small investors not interested, no surprise there, speculator sentiment is at extreme lows. Dealers are carrying a lot of this auction (so expect those dealers to pass on the offering to investors at higher prices in the days to come).

"The 2.485 percent high yield was 46.5 basis points above the November auction awarded rate and nearly a full percentage point above the August auction yearly low at 1.503 percent."

We have come a long way, almost 100 bps since August. Probably too far, and certainly too fast.

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AB
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December 12, 2016 at 7:23 PM ×

It sounds like McConnell will object to anything that will actually help anyone. I fear that Trump will deliver an economic policy similar to Gov. Brownback in Kansas. It is a good thing that we can try out policies on a smaller scale in cities, counties and states.

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Anonymous
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December 12, 2016 at 8:10 PM ×

You guys are too pessimistic about the Trump trade. Trump's three arrows: tax reform, deregulation, and infrastructure spending. The first two will be implemented early next year and that is the main driver of this trump rally. When it comes to the action on the infrastructure spending, the market should have already priced in everything and some more, so that will be the time to bet on a crash.

Now, I do think that market is daydreaming in the fantasy land right now. But it does not mean that the market will wake up now. The only catalyst would be the reality: when Ryan presents a tax reform bill or when DOL/EPA/DOE began to nullify old regulations. That is when all the fantasy meets the reality. So we'd better educate ourselves on the legislative calendar of the next Congress. It almost certain will give us a hint of the date of the fireworks.

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Anonymous
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December 12, 2016 at 8:14 PM ×

"Nico G said... sell now, buy post FOMC dip, get out of all longs on the 28th forget about selling the 'news' on Inauguration day, US equities will have tremenduous difficulty maintaining current valuations come January 4th"

Thx for the head's up. I am fading your call again. We increased our equity long positions from 50% to 100% last week, and are now leveraging to 150% long (gradually buying every minor pullback). This rally is only getting started. FOMC will cause a massive boost to equities and the ECB will allow for a bailout of Italy's banks, resulting in a massive lift to EU equities.

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Anonymous
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December 12, 2016 at 8:25 PM ×

Folks the real story here is fixed income. Bonds have been in a bubble and this is bursting. Bonds will continue their decline, resulting in further outflows, and causing a self-perpetuating sell-off, resulting in them taking out the 2013 lows and falling further still. The money will all flow into stocks. Equities are going higher than any of you imagine possible. I expect spoos to hit 2600-2800 in 2017.

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abee crombie
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December 12, 2016 at 8:27 PM ×

Anon, 8:14. Register a handle please. Nico is wrong sometimes like everyone else, and his time frame is perhaps not as long as everyones, but at least he has the balls to stick his name to them. Stating your strategy of just going balls long, or just going against Nico adds very little value.

Anyways, I am kinda confused with equities. Gut feeling says dump all my longs, but charts look OK, internals ditto and seasonals very good. So I trimmed a little.

At least my bitcoin call is working so far. Though I am expecting a pop at some point.

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Leftback
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December 12, 2016 at 8:36 PM ×

This is now officially Tool Time. Only the margin monkeys are left long, and retail will be left holding the bag. The smart money headed out the back door last week and was buying munis, preferreds, utility stocks and corporate bonds:

http://www.cumber.com/trumpophobia-to-trumpophoria-central-bank-lessons/

Anon @8:25, you couldn't be more wrong. In a few weeks we are heading into the largest fund flows of the year in January, and most of that comes from pension funds and 401(k)s; the majority of that ends up in fixed income; smart money is already front-running that flow and snapping up yield in what continues to be a low yield universe.

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Anonymous
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December 12, 2016 at 8:36 PM ×

Interesting post from Nico's mentor, Harry Dent (lolz):

https://twitter.com/ReformedBroker/status/808347646083690496

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Anonymous
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December 12, 2016 at 8:38 PM ×

Here's a nice post for Mr Leftback, who seems to have missed the bond-equity rotation:

https://twitter.com/EddyElfenbein/status/808356512590659584

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CV
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December 12, 2016 at 9:00 PM ×

The disparity of views is certainly high. It's kind of nice to see the POMO anons back in business mocking the rest of us. Good to see that the drawdown earlier this year didn't wipe out all of you. As a contrarian punter, sorry erm INVESTOR, this line-up is close to my thinking;

"So your choice this week is clear: Bucky, The Banks, US Small Craps, Unicorns and the Trumpflation Fantasy? Or La Paloma Blanca, Goldfinger, Utilities, Cold Hard Reality and Mr Bond? It's really a great time to receive rates, probably the best time since Spring 2010. Enjoy the show....."

But I have to say LB ... I have a feeling that a 3-handle on the U.S. 10-year is coming before we see sub 2 again. One last squeeze! As for Spoos ... well all short-term indicators are flashing sell, so there is that, but technicals and internals suggest that the dip should be bought aggressively, at least for now. I can't argue with that. That recent break higher is solid, and it has already put a lot of distance between itself and the recent "panic levels" ...

One thing that I am pretty confident in here is that defensive equities will soon lead again. They are due some outperformance.

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johno
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December 12, 2016 at 9:44 PM ×

I don't know by what magic one can call a reversal here. Maybe a pause in the dollar on the Fed. But just look at how nicely inflation pricing is trending -- the three month chart is a straight line from bottom left to top right. How do you say, it's going to stop right here in a week, or a month? Every time I believe there's significance in some price level, for whatever trumped up reason, I pay for it. There are no levels. Just a trend driven by a major catalyst (Trump).

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Anonymous
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December 12, 2016 at 11:07 PM ×

johno,
Jeff Saut's commentary today included this quote from Edgar Genstein: "The absolute price of a stock is unimportant. It is the direction of price movement that counts."
I would like to rephrase that particular quotation: "The absolute price of a tulip is unimportant. It is the direction of the price movement of tulips that counts."

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Anonymous
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December 13, 2016 at 1:16 AM ×

Nico's hedge fund:

http://www.zerohedge.com/news/2016-12-12/worlds-most-bearish-hedge-fund-suffers-worst-month-history-refuses-capitulate

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Shoeless
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December 13, 2016 at 2:14 AM ×

Anon at 1:16. Again, you need to get out of the basement more often. Horseman Global has annualized at north of 15% since Russell took over in 2010, while being net short for that whole period.

Tonight's Spaghettio's are just plain, I'm afraid. Mom didn't want to pay up for meatballs this week.

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Nico G
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December 13, 2016 at 6:46 AM ×

it's nice to see the comments section alive and kicking

price action feels like a reverse capitulation, feeding frenzy on every risky asset that is left with a pulse, fear of missing out (i mean, check oil...) mirror image to the fear of losing more/selling during winter 2009

Calling 2700 on Spoos at 2250 same as calling 400 on Spoos at 700, euphoria, fear, all the same. I am glad some anonymous imaginary punters are making money on this market, i sincerely am. All that time Spoos wasted trading with no direction.. and we made a killing trading the range, i really wondered how we could finally get a break out, what could bring irrational hope on such a tired market to bring us a vertical wave 5 of 5 of 5 of 5 of 5 etc and now we have it, the Trump cult.

I am seeing some seasoned contributors here so taken by the cult they wonder if there will ever be a correction. Markets are fascinating, the emotions they manage to throw at even the most experienced operators is better than fiction. Price is the only news so far and this price action ain't normal at all. What they call 'rotations' we call 'picking whatever piece of crap that isn't grossly overvalued yet'. Noone makes money chasing a rally, at least wait for a healthy dip

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Anonymous
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December 13, 2016 at 9:38 AM ×

So Dax and Eurostoxx are up circa 1% this morning. Looks like the long-only equity anons are banking coin.

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