So, is the market overcooked?

A wave of relief washed over markets from around 12 noon our time yesterday as the first hints at the details of the Euro plan hit the market. This wave of relief turned into a surge overnight as market players reassessed the future outlook.

At the close of play the Dow was up 2.86%, the S&P 500 up 3.43% and US Treasuries market rose materially with the 10 year yield up 18 basis points. Europe was important to the US but so to was the data released in the states overnight which showed there is still some life left in consumers. The GDP numbers were released and were on the money with expectations at 2.5% annualized (not to everyone – THAT’S NOT TERRIBLE). But it was the personal consumption component that was the real kicker with the market expecting a rise of 1.9% but getting a rise of 2.4%. How this can be is a bit of a mystery, but there it is.

In Europe which is of course at the epicentre of this mess equities fairly soared. Some of the big banks were up around 9% while at the end of the Day the CAC in France rose 6.28%, the DAX in Germany rose 5.35% and London’s FTSE was a little more subdued with a rise of JUST 2.89%.

In other risk style assets there were more big moves. The AUD which was just under 1.04 this time yesterday is currently at 1.0732 for a move of +3.2%. Base metals were also higher led by copper which rallied over 6%.

Now obviously there are lots of potential hurdles and hiccups in the road ahead for Europe and while I believe that the political class may have forestalled a meltdown I don’t think they can change their slow growth future. But that is irrelevant in the market at the moment. Sure we can look ahead to the problems down the road, we can hypothesise about the cracks that will occur in the plan and the dire consequences that will flow from that.

But as an investment professional my job is to deal with the market that is in front of me and try to make money. Often that means doing nothing but it means being flexible in my approach. I can believe for example that we are in a secular bear market but that does not mean I am universally bearish. Rather it means I have a trading approach and am happy to buy and to sell as the situation presents itself.

So where are we with Europe?

First thing I would say is that this is a serious effort to deal with the issue at hand. Greece is getting a material haircut to its debt obligations. the burden of this haircut is being borne both in Greece, as is proper, but equally across the Eurozone Government and financial community.

Sure the Irish might have their hand up – certainly I would – and the Portuguese might have something to say on the notion of haircuts themselves. But overall the strength of resolve shown by the European leadership to seek to hold the Eurozone together in a manner that satisfies all stake holders, at least to some extent, is noteworthy and can not be ignored.

Now lets assume we are in a traders market – which I believe – then its important to have some rules about how you trade. While I wont go into my rules specifically I think it is generally accepted that when you are trading you probably make more money running with the trend in the long run than you do by being a contrarian.

Often I find myself however naturally wanting to go the other when we have big moves like we are having this month but given the extreme pessimistic crescendo we saw here is a piece from Almanac Trader that suggests perhaps we should not.  Remember these are the guys I quoted here earlier this week who called 12700 on the Dow by January.

Anyway Almanac has a great table which you should look at showing all the BIG October moves since the Dow started and reckon that,

Market action following these big October gains is not 100% up. However, 17 of the 20 achieved gains over the next three months, averaging 6%. This .850 batting average is still quite impressive. I am not sure how to calculate the slugging percentage, but there are a good number of big hits in there. The three losing years were impacted by exogenous events. In late 2002 and early 2003 the market declined during the build up to the Iraq War. The undecided election in 2000 held stocks down in November and trouble in Vietnam and at home drove stocks lower in 1969 and early 1970.  

Equally over at one of my favourite blogs, Global Macro Monitor they have a piece on the market “melt up” and say that this kind of move has only happened 6 times in the past 60 years and poses the question,

where to for year end?   Is this the November 1998 melt-up after the Russian debt default and failure of Long-Term Capital Management or is it the December 2008 head fake before the March 2009 bottom? 

…The Euro plan?  Lots of unanswered questions, short on detail, and not a long-term solution, in our opinion.   But Mr. Market is running over those who wait for the perfect solution and just flattening the macro bears.

Remember, John Bull can stand many things, but he can’t stand two zero percent and will trump almost any rational discourse of the fundamentals once he takes control of the market.   Always with a stop, comrades.    Good luck!

I agree Mr market is running, in the fullness of time the weak growth outlook in Europe can not be ignored but for the moment I think that while on the day/days this move feels overcoooked and might falter in coming days more broadly over the next week/month it has legs and would be playing it accordingly across equities and the risk spectrum. But remember in a secular bear market you are trading not investing so be ready to pull the ejector seat when the time comes.

www.twitter.com/gregorymckenna

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial advice we are happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au

, , , , , , , ,

Subscribe

Subscribe to our RSS feed and social profiles to receive updates.

No comments yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: