"Happy Days are here again," is the clear message from asset-gatherers and commission-rakers across the financial media space (as well as President Trump) as shocktober ends with a flourish of rebalancing exuberance prompting the goldfish-like memories of the trading community to forget the carnage of the last 20 trading days.
Former fund manager and FX trader Richard Breslow remarks that "I couldn’t help giggling on my way to work this morning," as he reflects on the market and the media's reaction to this dead cat bounce...
...not because global equity markets were all up. It was after reading reports from a number of commentators, who spent a good portion of the last few weeks asking what is going on with asset prices and settling on no definitive reason, that the worst is over and this time we should be looking for the moment to buy.
Brave words with 'other peoples money' as there were the obligatory hedges that the exact timing is left to the reader. Just in case there may be more bad news first. I couldn’t quite wade through the “logic” but it seemed to be some amalgamation of, all the bad news is priced in using a misreading of the Efficient Markets Hypothesis, a desire to make a random call based on the calendar turning in the hope of being a punditariat hero, or, more likely, a continuing belief that monetary policy makers can and will provide.
Whether they’re proven right remains to be seen, but it’s too early to make that call with any credibility. Especially given the obvious effects of month-end rebalancing and the upcoming midterm elections. The way traders have been faring over the last month makes it feel like the coin flips being made have a payout less than 50/50. Which probably means the statistical theories of Thomas Bayes is an invaluable read when trying to rebuild portfolios for the coming month.
I remember an amusing conversation with someone when thinking about whether to embrace the bad things are over declarations. It went, “Why are you following the advice of someone who has been consistently wrong? Because he is a smart guy who is due for a winner.” Many a hedge fund limited partner has regretted adopting that attitude when investing in a relaunch.
The economic news in Asia presented one disappointment after another. China’s manufacturing PMI fell to almost a two-year low. And the sub-indices offered no relief. South Korea’s industrial production was downright ugly as was that of Japan. And the equity markets didn’t care a whit. That might tell you something when deciding how definitively the all-clear has been signaled. At his post-policy meeting press conference BOJ Governor Haruhiko Kuroda talked about downside risks. Japanese CPI forecasts were lowered, consumer confidence was a miss and inflationary expectations rose thanks to the coming consumption tax hike.
In Europe, the theme of the day has been all of our problems have been solved. I’ve heard that one before.
Equities bouncing is a good thing, even if it won’t salvage anyone’s October. I still maintain that 2720 in the SPX is a very interesting technical pivot to watch. Of more interest to me, rather than debating whether or not to catch the falling equity knife, is contemplating what the dollar touching a new year-to-date high and sings of life in Treasury yields mean.
Especially for emerging markets. And then ask yourself why their stocks are rising so much on the day.