A Hawk Dressed As A Dove

Two weeks ago we focused on the market adage ‘if it’s obvious, it’s obviously meaningless”, and we prefaced it with the the following list;

It is obvious that:

  • based on fundamentals, equity valuations are stretched.
  • despite his ‘stand-up’ routine with a teleprompter in front of Congress, the Donald has not changed and will continue being certifiably insane.
  • coal mining is not going to “make America great again”.
  • the Donald didn’t know, until late last week, that healthcare was “so complicated”.
  • the search for yield has traveled all the way out to the thinnest twigs at the end of the debt-branch which is on the verge of snapping.
  • populist politicians are preying on the uneducated by perpetuating irrationality and pretending as though globalization can be rolled back when in fact it cannot.
  • the FED is going to hike rates in March and that will kill the bull.

That last ‘obvious’ statement certainly proved itself ‘meaningless’. Traders had sold the rumor of a FED hike leading up to the FOMC meeting, and then bought the fact after the hike. Treasuries had a huge short position against them, and like always, if everyone is on the same side of a trade, what follows? The shorts had to cover, and rates dropped despite the rate hike. The Treasury market is so ‘bigely’, hugely, big that this short squeeze on the futures market is likely to dissipate relatively quickly.

Yellen delivered a “dovish” rate hike which disappointed the big “hawkish” bets, but when we ask ourselves if the upward bias/trend in rates has changed, we have to answer “no”. The business cycle is showing signs of life as evidenced by the following:

  • The New Orders Index ticked up from 38.0 to 38.6
  • The Shipments Index rose from 28.6 to 32.9
  • The Average Employee Workweek Index jumped from 13.6 to 18.5
  • The Prices Paid Index surged from 29.9 to 40.7
  • Firms’ expectations for the next six months remained at high levels, rising from 53.5 to 59.5

This bodes well for future earnings and a continuation of the equities’ rally and, therefore, the likelihood of at least three (maybe more) rate hikes this year. No, we don’t think rates are now biased to the downside.


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The markets are proxies for Human behavior, and they tend to exhibit certain behaviors at market tops. For example, historically, market tops happen when investor sentiment is above 50% bullish, and below 30% bearish. This week, the AAII bullish investor sentiment stands at 31% and the bearish sentiment is at 39%. Major tops don’t usually happen at these sentiment levels (chart below).

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The put:call option ratio continues to move lower (chart below) which is neutral at this point.

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Oil is taking a breather from its price collapse, so we will wait for a better risk/reward entry point (chart below).

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The USD/JPY FOREX pair took a hit this weak, but even though it continued to drop throughout Friday, gold did not follow. This is a sign of weakness on gold’s part if it can’t rally as the USD/JPY ratio drops (chart below).

Gold continues to follow inflation (as measured by the Pring inflation index) and the trend in inflation continues down-to-steady (chart below). The FED has a stockpile of rate-hikes to unleash on any inflation that sticks its head above 2%.

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Forty years of private equity trading, and still learning.