Hawkish, Dovish, Hawkish, Dovish……get ready people this is what is store for the next few months. A few weeks back I made the mistake of taking Fed Chairman Bernanke’s commentary about pulling back on bond buying at face value, and to be fair, many market participants much smarter, or “vigilant” than me did too, all you have to do is look at the move in the last month in U.S. Treasuries. I was wrong, and being wrong, even for the time being is just flat out wrong when it comes to ones PnL. Enis had a very nice post this morning in his MacroWrap (here) with my main take-away about sizing & risk management:
What makes trading so different from other professions is that you’re wrong so often. Accepting the inevitably of being mistaken is the first mandate of risk management. The real key is keeping your losses smaller than your profits. Many of the best traders I have known have only been right 30% of the time, but were consistently profitable nonetheless.
When I look at our positioning over the last few weeks, I can fairly say that we thought a bounce was inevitable after such a quick and dramatic reversal in the SPX off of the highs, and we chose to close some shorts for gains. I was also fairly confident that we were at the start of a corrective phase as the risk assets the world over became comfortable with the fact that Quantitative Easing in the U.S. would in fact be easing in the months to come and after we got the anticipated bounce we laid some shorts out a bit too early, and now here we are flirting once again with the all time highs. I still believe that the back and forth from the Fed Speak will likely keep volatility a bit elevated and I would still be fairly surprised if we see a runaway breakout above 1700.
If the Fed is pulling back on their initial inclination to scale back QE, then that means the U.S. economy is doing worse than the Fed’s forecast from their June FOMC meeting. SO if that is the case, why on earth would that be good for stocks. My sense would be that if the yield curve continues to flatten in the coming weeks/months, retracing the recent move in the yield of the 10 yr possibly back to 2%, than the economic backdrop has changed for the worse. Just one man’s opinion, but I remain cautious on putting new money to work in Equities as we once again flirt with the all time highs.
I will add one more thing, a post last night from Josh Brown, author of the Reformed Broker blog, titled “Double Top”:
“You better hope this market takes out these 1650 levels convincingly and makes a new high here.”
What happens if we don’t make a new high? Is this do or die, in your opinion?
“Yes. Needs to make a new high here or else it forms a double top.”
Oh. Well that doesn’t sound very good…
“It’s not good. It’s very bad.”
“Yeah. In fact – it could even be a triple top going back 13 years to the dot com bubble and the credit crisis.”
“Whoa is right.”
What are the ramifications? What if it doesn’t break out and makes a double top?
“Stocks go down.”
Oh. But then we can buy them?
“Yes, but they may keep going down for awhile.”
Gotcha. So we can keep buying them though? The ones we like? At lower prices and higher dividend yields?
So that’s the risk, then – if we don’t break out to new highs, the things we want to invest in will cost us less?
“Right, but you don’t understand…”
I hope this is a double top.
Dan here, Ok so my sense is that whether this was real convo or not, Josh is suggesting that all those peeps trying to call tops, or double tops, or triple tops for that matter are wasting their time, and if the market does come in it will be a good buying opportunity. As I have said in this space before, we are not your financial adviser, we are not the guys that are there to make sure you have an adequate nest-egg in place to send the kids to college or retire on, we are the guys who like to go against the grain a tad, with defined risk. But let me tell you this, most financial advisers in 2000 and 2007 missed the big ones, and this was a very uncomfortable situation as most Americans who were invested in equities saw their capital cut in half, despite the sound advice from their advisers to keep a cool head and buy or at least hold when everyone is fearful. From Mid 2000 to early 2003, and from Late 2007 to early 2009, most every major equity index in the world saw protracted bear markets. This is not fear-mongering, just a fact, another one is likely coming in the next year or so and in my mind if the FED does not Taper, if they do keep rates at ZERO forever that means that the world has gone to hell in a hand bag, and QE while useful to this point for equity investors, will likely become much less so in the future.