Close to the Edge, an album by Yes, 1972
In this issue
PMIs
Liquidity
Patience
I almost didn’t chime in this week as nothing has changed in the Risk Index.
However, I’ve seen a few people already trying to fade this equity rally and wanted to fire out a word of caution.
Is the setup there? If it isn’t, you must respect the momentum and stay out of the way.
Enjoy the waiting game - or enjoy the ride if you’re still in on a long!
Risk Index
Under 50 = accumulate, over 70 = defensive, over 90 = distribute
The Risk Index is a combined read of the trends of 68 intermarket spreads and indicators, from credit spreads in the US to car sales in Spain.
Same old: highly likely that there will be a 20% correction within the next 6 months, but shorter-term indicators are still failing to show extremes.
Any key inputs?
Thursday - BoE Rate Decision
The BoE has been one of the most hawkish CBs this year due to the UK’s high inflation. We managed to give ourselves an extra inflation boost by cutting off easy trade with our neighbours.
I suspect more of the same this week, and the bond market agrees.
No surprise.
YoY inflation in the US is now under 5% and falling rapidly. YoY inflation in the UK is still above 8.5%! It’s all going to come to a horrible end as Central Banks will ensure they hammer inflation lower before they start paying attention to the rest of the economy. It’s what they are there to do.
Last week the Fed remained hawkish and, though there was no hike, signalled that there would be one next time around. Indeed, Powell called it a ‘skip’ (before correcting himself), showing how, in their minds, the next hike is already written in.
This is data-dependent, as always. That means one of two things:
data remains strong enough for them to raise again.
data weakens so much that they about-turn.
Both scenarios don’t bode well for the economy over the next 12 months. The market may also read the second option as a positive: no more hikes!
Quite the opposite.
It will show that the economy is slowing at a faster pace than the Fed expected. This would indicate that keeping rates where they are is effectively a hike as inflation is crashing lower.
Sorry, folks, I know there are an increasing number of Bulls out there.
I don’t buy it.
As a reminder of where the real economy is at present…
US & German PMIs at the top, China at the bottom. That little ‘re-opening’ bump for China has faded. No pass-through to Western countries. GDP has yet to reflect this data. It always does in the end.
I know, the real economy is not the stock market. But when the real economy is showing strain due to tight monetary policy and the central banks are continuing to jawbone inflation, this drains liquidity from the system. And the stock market is a reflection of that liquidity.
No end-of-the-world scenarios here. I’m very bullish over the next decade as humanity shows how dumb we are and gears up for global conflict yet again. That’s when governments spend real money and technology makes significant advances. Hello, new space race!
However, for now, I’m happy to sit on the sidelines until animal spirits are washed away. I don’t think there will be an opportunity to take a good short until the end of summer now, but things do tend to change quickly in these markets.
If I decide to pull the trigger, I’ll pop a Trader Diary post up.
Quote to Self
"Hope begins in the dark, the stubborn hope that if you just show up and try to do the right thing, the dawn will come. You wait and watch and work: you don’t give up."
~ Anne Lamott ~
That quote is from a great book called Bird by Bird. It is often referenced as a good read for writers. As with all wise books, it has lessons applicable to many of life’s pursuits, including trading.
I have come to enjoy being patient. Waiting for the dawn to come while I see people jumping on trades too early. Or the frantic reporting on Forexlive as if every headline creates meaningful moves in the markets.
However, I may miss the trade.
Or, I may take a trade and be stopped out as I am still too early. Even with the edge of patience on your side, it’s not a game of perfect.
The greatest edge?
Wait and watch and work.
Have a great week.