The problem with being a contrarian is the determination of where in a market cycle the “herd mentality” is operating. The collective wisdom of market participants is generally “right” during the middle of a market advance but “wrong” at market peaks and troughs. There are plenty of warning signals that suggest that investors should be getting more cautious with portfolio allocations. However, the “herd” is still supporting asset prices at current levels based primarily on the “fear” of missing out on further advances.
That dud landed with a thud. It fits the FOMC’s desired narrative to have the latest decision called a “hawkish hold.” That’s a very sympathetic description of the event. We’re supposed to take comfort that the economy really is (we promise) getting closer to meeting the necessary goals, all meetings are live and they’ve got December in their sights. I’m sure it is. But we’ve heard it all before, as well as the caveats.
Regardless of how many times we discuss these issues, quote successful investors, or warn of the dangers – the response from both individuals and investment professionals is always the same... “I am a long term, fundamental value, investor. So these rules don’t really apply to me.” No, you’re not. Yes, they do.Individuals are long term investors only as long as the markets are rising.
About one month ago we read that risk parity and volatility targeting funds had record exposure to US equities. It seems unlikely that this has changed – what is likely though is that the exposure of CTAs has in the meantime increased as well, as the recent breakout to new highs should be delivering the required technical signals. All these strategies are more or less automated (essentially they are simply quantitative and/or technical strategies relying on inter-market correlations, volatility measures, and/or momentum). We believe this is an inherently very dangerous situation.
Having tagged last Thursday's intraday highs, S&P futures are fading this morning (for now), as Bloomberg notes, U.S. stock-market internals are exhibiting conflicting signs as the rally in the S&P 500 Index approaches 10% from the low reached after Brexit.
The voting has begun to decide Britain’s EU referendum. It’s raining hard and it’s hot, which makes it fortunate that the British are a hardy lot. They’ve had to be to endure a campaign where the hyperbole has been worthy of a U.S. election. Banks left and right are warning their clients in advance that they may not have the liquidity or risk appetite to execute trades on their behalf tomorrow. I’m not sure why they’re also advising what trades to do on the outcome.
Goldman's internal economic tracker, the Current Acticity Indicator, just dropped for one more month, from May's 1.3% print, to 1.2%, and contrary to expectations of a GDP rebound in Q2, this is the lowest economic "expansion" print since 2009. Perhaps not surprising is that this series has been declining in virtually a straight line since the end of QE3.