Global Macro Notes: Completing The Wedge
Mercenary Trader | Aug 17, 2012 03:46AM ET
The major US indices resolved firmly to the upside on Thursday – finally doing something – following the narrowest trading range streak in 60 years. Transports and long bonds successfully telegraphed the move.
But what does it mean going forward, and what kind of positioning do long-only investors have? Is there real reason to be optimistic here?
This seems an environment for “rented longs” and nothing more.
To quickly recap the drivers of this rally:
- Positive perception shift on Europe (lowered risk)
- Faith in future stimulus (September QE3)
- Nowhere else to go but equities (zero return world)
Do we really have to go into detail why each of these drivers is more dubious than three-week-old egg salad?
The notion that Europe has been de-risked is laughable… September is fast approaching, with a lack of clarity as to which would be a worse outcome for markets, QE3 denied or QE3 delivered and falling flat… and finally, the “nowhere else to go” argument could (and will) be shredded like tissue paper in the event of falling corporate earnings.
Bears have been successfully vanquished – having already lost most of their fur in 2012 – but one wonders what exactly there is to celebrate from the long-term investment perspective.
Faith in further upside resolution is based on the thin reeds of hope that the global slowdown will not get too bad, that corporate profit margins will not contract, and that the ominous looking wedge patterns in the weekly Dow and S&P will not come to a bad end. That’s a lot of hope.
Someone recently made the argument that “there has never been a better time to be an investor.”
As traders we may be talking our book, but in our opinion now is an absolutely terrible time to be a long-only investor, and an even WORSE time to be without the tools and temperament for going short.
In secular bear markets, equities spend more time going down than they do going up. There are long stretches where shorting makes no sense at all, yes, but there are also stretches where it is the ONLY thing that makes sense!
For the long-only investor, perhaps even worse than the lack of ability to short are the following two handicaps:
A persistent psychological bias in one’s thinking, due to the natural orientation of only being able to go long. When one has the strategic flexibility to go long or short, it is easier to attain the objectivity ideal of not being subconsciously biased to one side of the market or the other. Those who can only go one way, in contrast, will always subtly favor market interpretations that favor their bias. (This same applies in reverse for perma-bears who, for some reason, cannot stomach the idea of being bullish at any point in time.)
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A persistent and glaring lack of risk management, due to lack of ability to “go to cash” (if not short), hedge a portfolio, or otherwise sidestep extremely hazardous market conditions. The great Fidelity bull Peter Lynch bragged about always being fully invested and liked to say that “10 minutes a year spent on macro is 10 minutes wasted.” Well, Peter Lynch also admitted later in life to being a congenital permabull, and he had the good fortune of starting his career at the beginning of the greatest secular bull market of all time, retiring before it finished. His astonishingly irresponsible attitude is a recipe for getting absolutely MURDERED today.
Don’t like the sound of that? Too bad. Look your weaknesses in the eye and deal with ‘em.
We saw the potential for this rally resolution – as telegraphed by transports and long bonds – and added to our roster of “rented longs” on Thursday.
In terms of what is next, one might reasonably expect a continuation of “grind-up” type conditions until either
- something else breaks in Europe or
- the QE3 catalyst is resolved one way or another…
The feeling at this juncture is conceding ground to the bulls for the next few weeks or so, as the wedge completions do their work – and then, frying pan to the face again.
NEWS FLOW
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Written By: Mercenary Trader
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