Feels right to be short, but equity markets are demanding patience
This morning I received a note from a reader, he congratulated me on a nice call recently. It was the short stocks and long VIX trade from last week. Firstly, its nice to get a positive comment from one of the traders I have known for many years and also one that I respect very highly. I commented to him that it feels like the right trade for many reasons, but doesn’t seem to want to reward us by trading lower. He agreed, but suggested that we may have to wait until September/October before we see the real move lower.
Why it makes sense to me that we should trade lower in global equity markets:
- Stress in Turkey as interest rates rise, domestic equity markets struggles, currency has weakened dramatically in 2018 and the banks will have trouble funding while European banks have large exposures. Turkey is important to Europe and NATO.
- China growth seems to be slowing for various reasons, which if this is the case and it continues to slow, will affect the whole Asia region.
- Other EM markets that we follow, have been showing and continue to show strain: South African Rand, Indian rupee, Indonesian rupiah, Argentine peso, Chines renminbi all have weakened a great deal. (This helps until it becomes too much)
- Peripheral European stock markets have struggled and underperformed since May.
- The Fed hikes and balance sheet trimming are part of the cause for the above, and the Fed seems focused on continuing to move rates higher, which will exert more strain on the funding for corporates and governments.
- We are seeing strong dispersion in terms of performance in the U.S. stock markets depending on sectors. In the S&P 500 Consumer staples and Telecom Services sectors are both down over 7% ytd, while Info Technology and Consumer discretionary sectors are up over 13%. Telling us that the 5.5% up move year to date for the S&P is not a broad based love fest.
- Corporate borrowing yields are on the rise in the U.S. while High yield is holding in well.
- Tariff battles, sanctions from the U.S. as well as general unease as to where the next trouble area is all add uncertainty to investors.
- U.S. deficits are growing and look as though they will continue to do so under the current administration. At some point the market will begin to focus on this.
The reality is: the U.S. markets are most likely benefiting as investors reduce risk in EM and reallocate to the larger markets. For now the market is content to buy on dips and as my friend in London told me this morning, we may well have to wait until the Autumn to see the real pain. (Equity markets lower in Autumn sounds familiar….)
Testing key level in the global developed stock markets: iShares MSCI World UCITS ETF (replicates broad exposure to wide range of companies in 23 developed countries)
|Ticker||Date Opened||Entry Price||Stop||Target Price||Current Price|
|EURUSD Put Option / Strike 1.1300 / Exp. 26 of Sept.||2/7||0.0056||premium||below 1.1300||0.0093|
|Long VXQ8||8/8||12.90||12.90 (trail stop-ITM)||16||14.80|
|Sell EU Stocks 50 CFD||8/8||3492||3492 (trail stop-ITM)||3350||3375|
|Sell US 30 Wall Street||8/8||25620||25620 (trail stop-ITM)||24950||25146|
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– Mark W