Wednesday, August 29, 2018

Trader Taunts Market's "Conscious Willing Suspension Of Disbelief"


With Nasdaq now set for its best Augusts since the year 2000 (the dead cat bounce peak right before the 74% plunge to 2002) and stocks soaring in the face of dismal macro data, slumping housing, a collapsing yield curve, lower bond yields, and now a rising VIX, one wonders - aside from the ubiquitous corporate buybacks - is driving this hysteria at the vinegar strokes of the longest bull run ever.

Former fund manager and FX trader Richard Breslow explains it simply - in a word, nothing.

Via Bloomberg,

I was sent a technical piece yesterday from someone who doesn’t believe news should figure at all into the analysis. It’s an approach I have an enormous amount of sympathy with. This is a rare time that it’s questionable to stick with that view. As I read it, all I could think of was Samuel Taylor Coleridge. Because the only way to navigate these markets is to engage in a conscious willing suspension of disbelief. You read the news and have to accept the surreal to have any hope of understanding what is going on.

Even the news-oblivious charts have figured out that normal rules don’t apply. And that’s why they have been working so well.

The gist of the piece was that just about every asset it looked at was doing one of two things. Approaching resistance where it was expected to fail or had failed at resistance and was headed the other way where it would do the same. The world is in a state of flux and the last word that should be found in any piece of market analysis is "definitive."

Beware the person telling you something has bottomed or peaked unless it includes the “for now” tag line. Ten-year U.S. Treasuries once again got close to their recent extreme at 2.8% and failed. But does anyone think this means the path of least resistance is the moon?

Remember how excited everyone was yesterday when the euro “decisively” retook 1.17 versus the dollar? That was meant to be the signal that an assault upon the elusive 1.18 level was on the cards. I’ve yet to talk to a buyer this morning. Even with the pair down only small.

My working theory is that the confusion sown by the ebullient stock market has every other asset uncertain and conflicted. That’s a danger. Sometimes certain sectors just have to go their own way. And while models take a long time to figure this out, we carbon entities can sometimes out-think them. We should take advantage of it while it lasts.

Emerging market currencies have had a nice two-week recovery. They are failing at the first line of defense. Emerging market equities look better but only if they can motor further from here. Weaker currencies as a reason to buy equities doesn’t apply in this instance. EUR/CHF is down after spending all of one day above its first significant retracement level. The dollar versus the Mexican peso is back above 19. Wasn’t the big Nafta non-announcement meant to put 18.5 in the rear view mirror? What were people thinking when they bought rand on a 13-handle yesterday morning?

That old game where you play which of these don’t belong with the others is a lot of fun. Sometimes, however, being able to choose correctly is a very valuable tool. Spoiler alert: it’s the stocks.

Aside from them we are in a risk-off environment. And must play things from that perspective. We all just get repeatedly confused because we’ve been trained to think the world lives or dies based on how much trickle down we are led to expect from a rising S&P 500.