14 febrero 2018

buy the dip

Ha funcionado durante varios años… Cada vez que había un recorte, lo mejor era comprar y subirse al carro alcista imparable. Ahora me temo que no, quien practique el “buy the dip” se pude llevar una chasco…
Echoing warnings from the world's largest hedge fund, Bridgewater, "a bigger shakeout is coming," and Europe's largest asset manager, Amundi, "let the dust settle," as well as a plethora of other industry experts with more 'skin in the game' than the usual commission-taker that confirms this as a "healthy correction," the CIO of Europe's largest publicly-traded hedge fund, is warning investors to resist the urge to 'buy the dip' or chase this rip.
But while CNBC "Markets In Turmoil" special was all-in promoting this as nothing but a "health pullback" and lone-wolf volatility event, Europe's largest asset manager is less optimistic.
Raphael Sobotka, who helps manage 45 billion euros ($56 billion) in invested assets at Amundi, warns that while the latest pullback should wipe off some of the recent exuberance in equity markets, investors need to let the dust settle first on this "volatility shock."
As Bloomberg reports, Sobotka, who heads the flexible, risk premia & retirement solutions unit at Amundi, said in an interview.
“Tactically, we had been reducing our exposure to equities since December, and we further sold stocks over the past week,”
The equity exposure of our flagship fund, Amundi Patrimoine, is now 26 percent, down from 35 percent at the market peak in late January, and 40 percent at the end of last year.”
U.S. stock valuations have fallen back, Sobotka said, but...
"...the market isn’t cheap yet, and given that rates will continue to rise, the pressure on equity valuation ratios can continue to increase from here.”
There is certainly a lot interest in "buying the dip"...
But as Bloomberg reports, Pierre-Henri Flamand, the chief investment officer of Man Group Plc’s GLG unit, said market swings could continue and warned:
“The instinctive inclination to ‘buy-the-dip’ may be strong,” said Flamand in an e-mailed response to questions from Bloomberg.
“As the past week has shown, this may not work so well. Indeed, I think what we have seen in the past week could continue for some time.”
Seeds were being sown for "a particularly vicious correction," Flamand said in a January commentary before the market rout.
At the time, he said the market appeared to be moving into the fifth stage of Ralph Nelson Elliott’s wave model of technical analysis of market trends, in which everyone stands firmly behind the positive news.
“The current period of stability has overtaken 1965, and only once since 1920-1995 has the market enjoyed a longer run without a 5 percent fall,” he wrote in the commentary.
“While the fifth wave can last for weeks, months or even years, it inevitably precludes a significant market correction, on average giving up between 38 percent and 50 percent of all gains.
Now that would be a dip some might consider buying?
PD1: La gran duda que tenemos todos, ¿ahora qué?

Market Hits Correction Levels

It seems like it was just last week, that I discussed the risk of a bigger corrective action in the market.
Because it was.
“This past week, the market tripped ‘over its own feet’ after prices had created a massive extension above the 50-dma as shown below.  As I have previously warned, since that extension was so large, a correction just back to the moving average at this point will require nearly a -6% decline.”
“But more importantly, as I have repeatedly written over the last year:
‘The problem is that it has been so long since investors have even seen a 2-3% correction, a correction of 5%, or more, will ‘feel’ much worse than it actually is which will lead to ’emotionally driven’ mistakes.’
The question now, of course, is do you ‘buy the dip’ or ‘run for the hills?’
Don’t do either one, yet.”
I know, it “feels” like we should be doing something…anything.  Right?
Here is the issue.
The markets have not done anything WRONG…just yet.
Yes, corrections do not “feel” good. But they are part of a “healthy” market cycle. In more normal, healthy, correction to bullish trends should be used as buying opportunities to increase exposure to equity risk in portfolios. As shown in the chart below, that may be what is occurring now.
Currently, we do not know whether the current corrective action is JUST a normal, healthy correction, or the beginning of something bigger.
BUT – this is the expected correction we have been discussing over the last several weeks.It is also something we had planned for by reducing overweight positions and adding a short-hedge to portfolios. 
With the markets on a short-term sell signal (noted by black vertical dashed lines in the chart above,) the current correctional process is underway. But, with the market now oversold on a VERY short-term basis a counter-trend rally over the next week, or two, should be expected. 
Furthermore, as noted above, and below, the market held support at the 200-dma and the bullish trend line which goes back to the beginning of 2016.
In other words, the market has not violated any important trend lines that would suggest the current sell-off is anything more than just an ordinary “garden variety” correction. 
It is what happens NEXT that will be most important.
The larger concern currently, is the “sell signal” which has been triggered at abnormally high levels and remains in extremely overbought territory. Such suggests there remains “fuel” for either a “deeper correction” or a “consolidation” of the markets in the weeks ahead to “work off” that “overbought” condition. Historically, markets don’t resolve such conditions by trading “sideways.” 
That is the longer-term risk at the moment and something we will discuss more in a moment.
In the VERY short-term the market did attempt to rally mid-week and failed at the 50-dmawhere we added to our existing short-hedge. The breakdown on Friday led to a successful test of the 200-dma, where we reduced some of our short-hedge, as the market rebounded above the previous lows.
Technically speaking, this is not a good sign and suggests the market could be in for more selling to test the 200-dma as stated. 
As stated, with the market very oversold on a short-term basis, the most probable outcome following a test of the 200-dma is a fairly strong counter-trend rally.
But should you buy it?
It depends.
+If you are a fairly adept trader, and can enter and exit trades easily, there is a decent setup here for a “trading opportunity.”
+If you are longer-term investor, like us, just be patient and wait for a confirmation the market has regained its “bullish bias.” 
If you like us, then “YES” you will “miss” the bottom of the market, if this is indeed “THE”bottom. However, without waiting for a confirmation the bullish trend remains intact, you risk buying into the potential start of a deeper correction which puts more capital at “risk.”

The Rate “Bang” Point

The mystery has been solved.
We now know the point where interest rates implode the market – 2.9%
With interest rates now 4-standard deviations above the 1-year moving average there are several things which likely happen in relatively short order:
1.The Fed will quickly back off from hiking rates
2.The Fed will likely slow or curtail their balance sheet reduction program.
3.Economic growth will slow.
4.Earnings will come under pressure
5.Treasuries are likely to become a “safe haven” of choice is the current “market correction” continues in the weeks ahead. 
This will be particularly the case as the recent spate of economic growth from 3-hurricanes, 2-massive wildfires, a surge in oil prices and an extremely cold winter which boosted economic activity temporarily begins to fade. In fact, over the next three-quarters we are likely going to see lower inflationary numbers, weaker economic growth and weaker than expected earnings.
If I am right, you are looking at substantially lower interest rates and higher Treasury bond prices.
As I stated last week, the next bull market will most likely be in bonds, not stocks.
We remain long-biased to bonds. 

Has The Oil Bust Began?

Back in September, I asked the question whether the run-up in oil prices was sustainable. Given that oil prices have been a huge contributor to both earnings and economic growth in recent quarters, and the expectation that inflation was surging back, this has been a crucial commodity to pay close attention to.
RIA analyst, Jesse Colombo, recently updated his analysis on this topic and the continued imbalance of non-commercial traders which suggests the correction in oil prices has now started.
As noted above, if our analysis proves correct, and oil prices do decline further, the negative impact to economic growth combined with fading support from natural disasters will push inflation and interest rates lower. 

What Next?

The most important words for any investor to learn is “I don’t know.” 
Currently, “I don’t know” what will happen next with any degree of certainty. 
Nor does anyone else.
The “odds” favor the “bulls” currently because:
1.Bull markets last longer than bear markets
2.Bull markets are hard to break
3.Bull markets can defy logic longer than most anticipate
But bulls, like bears, are only right half the time.
Unfortunately, when the “bulls” are wrong – they are “really wrong,” and the long-term damage to capital is irreparable.
This is why we maintain a focus on the “trend” of the market for maintaining portfolio allocations. When markets begin to break down, or change trend, and the risk of loss outweighs the potential for reward, we become aggressively defensive.
Currently, such is NOT the case, as the bullish trend remains intact. 
The chart below shows the weekly view of the S&P 500 index going back to 2014.
Don’t get wrapped up in the technical specifics of the indicators, but instead focus on what they indicate.
(We will provide all our specific indicators to subscribers at RIA Pro, click here to get on our list for pre-subscription information)
The market has clearly remained in a bullish trend since the lows in 2009. The vertical black lines mark the points where the lower two indicators BOTH registered a sell signal.
+The first of the two is simply an “ALERT” signal which suggests investors should “pay attention” to their risk related allocations and rebalance those risks accordingly. 
+When both lower signals are triggered, a confirming signal, such has generally been a good indication to more proactively reduce allocations, raise SOME cash, and further reduce risk related exposure.
Notice – I did not say “sell everything” and bury your cash in the backyard. 
Currently, the market has not violated the accelerated bullish trend nor the bullish trend support levels from the pre-2016 correction advance.
It doesn’t mean it won’t happen. It just hasn’t happened yet.
We are not trying to “guess” at what the market “will do,” we are simply “reacting” to what it “does do. “
So, while we have taken profits in some positions and added short-market hedges, there is no reason at the moment to become extremely risk averse.
The trend is still bullish. For now. 
That could change, and, as indicated by the green boxes, if it does we will act accordingly reducing risk, raising cash and hedging further as we have done previously during those specific periods.
We are certainly on high alert as there are many reasons to be cautious from internal deterioration, to rising rates and liquidity concerns.
But up to this point, this has currently been nothing more than a correction within a very extended bullish trend.
Just be patient.
We will know in a few days rather we need to sell more, or start buying. 
PD2: Ray Dalio está muy pesimista:
It's becoming difficult to keep track of Ray Dalio's flipflopping in the past few weeks.
As we reported yesterday, in an interview with the FT, Bridgewater's co-chief investment officer, Bob Prince, echoed Goldman's co-head of equity sales, warning that "there had been a lot of complacency built up in markets over a long time, so we don't think this shakeout will be over in a matter of days" and added that "We'll probably have a much bigger shakeout coming."
Surprisingly, Bridgewater's bearish reversal followed just two weeks after Ray Dalio mocked market skeptics, telling his Davos audience anyone holding cash will "feel pretty stupid".
"We are in this Goldilocks period right now. Inflation isn’t a problem. Growth is good, everything is pretty good with a big jolt of stimulation coming from changes in tax laws. If you’re holding cash, you’re going to feel pretty stupid."
Fast forward to this weekend, when B-water's co-CIO Prince was no longer mocking cash holders, and instead predicted that "the broader economic backdrop was setting the stage for more turbulence later this year."
To this we responded that "we are curious just which principle of Ray Dalio it was to recommend one thing and just a few days later to turn around and pitch the exact opposite."
To our surprise, Dalio actually decided to address precisely this, and in a LinkedIn post this morning, he explained not only "what’s happening within the context of the classic short-term debt/business cycle", and where we are in it, but why Dalio changed his mind so abruptly in the span of 2 weeks, or as he put it "about 10 days ago", which changed his entire outlook on the US economy.
Dalio begins, as he usually does, by providing the following idealized snapshot of the business cycle:
In the “late-cycle” phase of the short-term debt/business cycle, when a) an economy’s demand is increasing at a rate that is faster than the capacity for it to produce is increasing and b) the capacity to produce is near its limits, prices of those items that are constrained (like workers and constrained capital goods) go up. At that time, profits also rise for those who own the capacities to produce those items that are in short supply. Then the acceleration of demand into capacity constraints and rise in prices and profits causes interest rates to rise and central banks to tighten monetary policy, which causes stock and other asset prices to fall because all assets are priced as the present value of their future cash flows and interest rates are the discount rate used to calculate present values. That is why it is not unusual to see strong economies accompanied by falling stock and other asset prices, which is curious to people who wonder why stocks go down when the economy is strong and don’t understand how this dynamic works. If the prices for stocks and other assets that do well when growth is strong continue to decline (which is typical), that and the credit market tightening leads demand to fall until demand is significantly less than the capacity to produce, which leads interest rates to fall and central banks to ease as their concerns about economic weakness supersede their concerns about inflation; that causes stock and other asset prices to rise. Such is the nature of the “short-term market and business cycle.” That is why it is classically best to buy stocks when the economy is very weak, there is a lot of excess capacity in the economy, and interest rates are falling (and to sell stocks when the reverse is the case).       
Where are we now? While Dalio admits it is unclear "precisely where we are", it is "clear that we are past the top in the bond market."
We know that we are in the “late-cycle” part of the short-term debt/business cycle with the conditions I described at the beginning now existing, but we don’t know precisely where we are—i.e., we don’t know exactly how far we are from the top in the stock market and then the economy, though it is clear that we are past the top in the bond market. While squinting and doing calculations to try to figure that out, we know that we won’t get it precisely right, but we hope to get it as by-and-large right as we have in past times.
What are the key corporate considerations in a late cycle economy? For one, whether profits are rising faster than rates:
As for the calculations we are doing, classically, if the spurt in growth in profits (which is good for equities) is faster than the rise in interest rates (which is bad for asset prices) that will be marginally bullish, and if there is a lot of cash still on the sidelines (which there is) that causes one last spurt in equities prices, which is also bad for bonds (raising interest rates) and leads to Fed tightening, which makes the classic top. For the most part, that will be the most important determinant of the exact timing of the top in stocks.    
And here, a surprising mea culpa from the billionaire founder of the world's biggest hedge fund:
"About 10 days ago, that’s where I thought we wereHowever, recent spurts in stimulations, growth, and wage numbers signaled that the cycle is a bit ahead of where I thought it was."
Dalio is of course referring to the February 2 payrolls report, and specifically the jump in hourly earnings, which rose the most since 2009. That was just the beginning as he explains next:
These reports understandably led to the reactions in bonds, which affected stocks as they did. Then on Friday, we heard the announced budget deal that will produce both more fiscal stimulation and more T-bond selling by the Treasury, which is more bearish for bonds. And soon ahead, we will hear about a big (and needed) infrastructure plan and the larger deficits and more Treasury bond selling that will be needed to fund them. In other words, there is a whole lot of hitting the gas into capacity constraints that will lead to nominal rate rises driven by the markets. The Fed’s reactions to them and the amount of real (inflation-adjusted) rate rises that will result will be very important, so we will be monitoring this closely.
The Fed's reaction will also be to the market, which took one look at these rapidly changing events and suffered a historic move, entering a correction from all time highs in the short period on record.
But wait, there's more: in this case a recession scheduled to hit some time in 2019/2020:
What we do know is that we are in the part of the cycle in which the central banks’ getting monetary policy right is difficult and that this time around the balancing act will be especially difficult (given all the stimulation into capacity constraints and given the long durations of assets and a number of other factors) so that the risks of a recession in the next 18-24 months are rising. While most market players are focusing on the strong 2018, we are focusing more on 2019 and 2020 (which is the next presidential election year). Frankly, it seems to be inappropriate oversight to not be talking about the chances of a recession and what that recession might look like prior to the next election.
Finally, here is what according to Dalio is different in this business cycle, and why he is especially nervous this time round. As the billionaire writes,"there are two important differences that concern him:
1.there is such a big gap between the haves and the have-nots (which creates social and political sensitivities) and
2.the powers of central banks to reverse contractions are more limited than they have ever been (because interest rates are so low and QE is less effective).
"For these reasons" Dalio concludes, "I worry about what the next economic downturn will be like, though it is unlikely to come soon."
Of course, if it comes soon, Bridgewater is getting ready: as we reported on Friday, the hedge fund has been quietly building its biggest short position ever, which as of last week had grown to over $13 billion in European corporate shorts.  It's not done: this morning Bloomberg added that Bridgewater added to the basket by shorting $1 billion shares of Europea's largest manufacturing company, Siemens. It will hardly stop here.
And just like that, the world's biggest hedge fund, and biggest risk-parity fund, just turned incrementally more bearish.
PD3: Hoy tendrás miles de cosas por hacer, cosas importantes, muchos agobios, exámenes, trabajos, niños… ¿Por qué no coges una cruz antes de salir de casa y la metas en el bolsillo? Cada vez que te agobies, que te desesperes, mete la mano en el bolsillo y pídele paz. La puedes dejar toda la Cuaresma, así tendrás muchos motivos para acordarte del Señor estos días…