Instead of allocating capital to expensive tail risk bets on direct asset class collapse (in equities, credit, and commodities), it appears, just as we detailed previously, the 'smartest money in the room' is "betting" indirectly on a stock market crash through eurodollar options.
What we must remember is this: we are in a bear market, and the risk of a countertrend rally is present, but confined. The opportunity on the downside movement dwarfs the risk of a push higher, as these charts illustrate.
"If one is looking for key technical indicators to ring the bell on the cyclical bull market- maybe it has just rung loud and clear. A renminbi devaluation will only sever an already badly frayed safety rope..."
In a year in which AAPL not only entered a bear market, but dropped to multi-year lows, the SNB almost doubled its total AAPL holdings, which as of December 31, 2015 amounted to 10.4 million shares, up from 5.6 million a year earlier
"... if China FX reserves data is better than expected, we think a bear market rally is likely to be vicious."
Some people say that gold is dead. They point to deflationary pressures and a bear market that started back in September of 2011. The bulls have been wrong for years; however, that may be about to change…
"Based on current valuations, the prices of most stocks don’t appear to have factored in a recession scenario, ‘hence the downside should we see a recession could be rather severe',... the shares of most companies could still fall another 50% or more from current levels."
And so we are back to square one, where global economic growth is so weak that the Fed's relent is back in play, corporate earnings are collapsing, where 30% of global GDP is now produced in "NIRP" nations, and where more than half the global markets remain mired in a bear market, that the only thing that can "save us" is precisely the same thing that has brought us here: coordinated, global central bank intervention.
The psychology dominating the minds of most institutional investors over the past few years has been that things were slowly getting back to normal. This has weighed on institutional demand for gold in a big way, and been a meaningful factor in the bear market (manipulation aside). The problem now is that this assumption is quickly being called into question, and if this psychological shift gathers pace, the shift back into gold could be very meaningful.
Yesterday we reported that following a spike in calls by the sellside to "sell the rally", hedge funds did just that and according to BofA client data, hedge funds dumped the most shares in the past week in two years. Today, JPM's Adam Crisafulli repeats the firm's now default call for 2016, noting that "the bigger picture backdrop for the market remains the same."
The recent reversal is definitely positive. Both false breakouts and false breakdowns often turn out to be reliable trend change signals. An additional bonus in this case was that the initial breakdown has induced widespread capitulation. Contrary to the immediately preceding rally attempt, the current one has been a “scared rally” so far. The mainstream financial press is still busy penning obituaries on gold, which is generally a good sign as well.
It didn't take much to fizzle Friday's Japan NIRP-driven euphoria, when first ugly Chinese manufacturing (and service) PMI data reminded the world just what the bull in the China shop is leading to a 1.8% Shanghai drop on the first day of February. Then it was about oil once more when Goldman itself said not to expect any crude production cuts in the near future. Finally throw in some very cautious words by the sellside what Japan's act of NIRP desperation means, and it becomes clear why stocks on both sides of the pond are down, why crude is not far behind, and why gold continues to rise.
On our scales, the balance between risk and reward in U.S. stocks falls heavily toward the risk. We see a reasonable likelihood of a ruinous loss against a remote possibility of a big gain. So go ahead and panic. You may be glad you did.
“The real enemy of investors is not these fairly routine 10 or 20% downturns. The real enemy is the bear market that is associated with a recession or crisis, the one that knocks your equity block down by 40 or 50%. And actually it isn’t even the depth that is the real enemy. For most investors the enemy is time.”