Monday, May 22, 2017

Chopping like Spring of 2015

The big rally on Thursday and Friday after Wednesday's big drop has proven that this market is committed to trading sideways.  And just like you had the Fast Money traders nervous on Wednesday, they are back to praising this market's resilience on Friday.  All it has proven to me is that its likely to chop around until a nasty fall later this year like 2015.

As the equity market has gone sideways, the bond market has been going up.  The bond market isn't buying the market consensus view that we will be having a lasting economic recovery or a big fiscal stimulus.  Usually the bond market is right.

The big inflows into Europe and emerging markets is a warning sign that risk taking is back in style among asset managers.  Almost all of them who come on TV are pumping European stocks.  That usually happens when the primary driver of the global equity boom, the US, is viewed as overvalued, so the "clever" fund managers are buying "cheap" European stocks to get better returns.  It is working this year, but will it keep working?  I have my doubts.  The ECB is likely going to be tapering asset purchases soon, and the European economy is just not that strong, and the European stocks aren't that cheap, being priced at 15 times forward earnings, compared to 19 times for the US.  I would rather pay 19 times forward P/E for US than 15 times forward P/E for mediocre Europe.

It feels like a safe market to sell rips now, with 2400 looking to be solid resistance, and seasonal factors favoring selling here.  True, there is not that great enthusiasm for stocks, but there wasn't that enthusiasm at the 2007 and 2015 tops either.  I assumed that the lack of bullish sentiment in the 2015 summer period meant that equities could keep grinding higher but I was completely wrong then, underestimating the weakening fundamentals and the high complacency amidst a market that didn't have a sustained correction for quite a long time.  That is where we are at right now, although the late 2015 early 2016 selloffs did a lot to reset positioning to more cash heavy levels.  That has been completely reversed and we're back closer to 2015 type of positioning, with lots of interest in European and emerging market equities, and heavy ETF inflows.

I would be a seller here near 2400, to cover on dips back down towards 2350.  Play the range, we're probably going to be chopping for a while.

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