While Nomura's Bob Janjuah remains 100% correct in his diagnosis and prognosis of the current 'grossest misallocation and mispricing of capital in the history of mankind', his tactical short was stopped out last week. The modest loss on the position though provided clarity on the importance of the 1450 level for the S&P 500 and he remains confident that on a multi-month timeframe he expects 800 to be hit with only a muted 10% possible upside in global equities due to underlying growth, debt and policy-maker concerns. Critically, he suggests it is premature to go aggressively short risk at this precise moment, urges traders to stay nimble, and warns "...risk assets are in a bubble which of course can extend, but which can reverse sharply and suddenly. Up here, 'valuation metrics' are not going to help much... this bubble could extend for maybe a few months and by up to 10%, ...but that we could see global equity markets 10/15% lower in virtually a 'heartbeat'."
Bob Janjuah, Nomura: Bob's World
I refer to my most recent note 'Bob's World: When Money Dies', released on 18 September. As discussed in that note, based on weekly closing levels at the end of last week, my stop loss on my risk-off 'short S&P500' trade, initiated last month on 21 August at an S&P500 level of 1425, has been triggered.
Notwithstanding the triggering of the stop loss, which has resulted in a very minor 35 point 'loss' (relative to the 300 point gain we have enjoyed since early April), the stop loss was only just triggered, with upside/bullish price action and momentum at surprisingly soft levels over the last 5/10 days. It was extremely informative to see that post the QEinfinity announcement, which drove the S&P above 1450 on the day of the Fed action on 13 September, and after an opening high of 1475 on 14 September, the S&P sold-off and got down to a 1450 low last week! And then – confirming that 1450 was an important level, and is now a critical pivot point for the S&P – mutedly bullish price action on last Friday activated the stop loss.
From here, I would currently be flat or neutrally positioned. On a multi-month timeframe – and before the next major multi-quarter bear market phase starts and which I still expect to result in an 800 S&P - the upside in global equities is in my view pretty modest, around 10 %, based on underlying growth, debt and policymaker credibility concerns. However, until and unless the S&P index demonstrates a weekly close below 1450, I believe it is premature to go aggressively short risk – tactically at least – at this precise moment. That opportunity is unlikely to be more than a few months away, and could even present itself in the next fortnight or so. Data, news flow, price action/volumes/market leadership and abrupt changes in market sentiment and belief in policy/policymakers will be the drivers.
For readers able to be very tactical I would recommend a flat/neutral position in risk between 1450 and 1475 on the S&P500. A single weekly close above 1475 would suggest more short-term upside momentum is possible, and as mentioned above a weekly close below 1450 would suggest more bearish price action. In any case, the important message now is to accept that, in my view, risk assets are in a bubble which of course can extend, but which can reverse sharply and suddenly. Up here, 'valuation metrics' are not going to help much.
So stay nimble, focus on tactical trading, and for now be as flat or as close to benchmark as possible. Readers need to be open to the idea that this bubble could extend for maybe a few months and by up to 10%, and to the idea that we could see global equity markets 10/15% lower in virtually a 'heartbeat'. Also of course we could well see both outcomes, where we end up with the market in a (wide) trading range with numerous mini risk-on/risk-off phases that result in no overall directional move. The next few weeks and months are going to be challenging for tactical trading, but we will endeavour to do our best to provide forward-looking guidance as themes and trends become clear.