Ok, the Dow was the laggard in US markets, and it went up 3% overnight! Gold tumbled 5% off its high! Wow, risk is back in fashion!
… or not. What caused the markets to rally? Housing starts across the US and business activity in some state was lower than forecast, by a lot. That was the exact cause of the rally, right? To know why the markets rallied, it takes some perverse leaps of logic to arrive at the link between that cause and effect.
1. Cause: Economic data is horrible, and things already look like the light at the end of the tunnel is hellfire.
2. Link. The reasoning goes that the Fed will figure out a way to do something magically to support the economy to prevent things from being bad.
3. Effect: Rally.
I would contest that going from 1 to 2, and then to 3, is like watching a boulder being thrown into a lake, comment on how it sends some drops of water flying through the air, and conclude that gravity doesn’t work. Not only are you missing the big picture, but you are also drawing the wrong conclusions from your limited set of data! I have mentioned this before but it takes repeating. The Fed has no mandate to support equity prices. Reiterate until you understand perfectly well what that means. On the rally itself: Tell me the last time central bank intervention measures was actually a real substitute for business activity. Tell me how well QE 1 and 2 worked. Tell me how happy someone should be after seeing a loved one in the ER because they know for a fact that this person will be better than ever after coming out.
You may contend “but P/E’s are low, you’ve said so yourself”. Indeed, but the way to bring them up is to overtrade real data, to see a true bull market and that there are clear skies and play catch-up from low valuations. We are far from there when the market takes hopes for good outcomes derived through perverting bad data with twisted logic as a reason to try to get in early on the first sustained rally that comes its way.
But you know what? That wasn’t the cause of the rally. The markets were up strongly worldwide long before that data seeped out. Hong Kong up 2% in total, Europe around there as well, and the US markets started at +2% to finish squeezing one more out off that data. I’d say a lot of asset managers saw support, a relative lack of news, and had waaayyy to much dry powder in the portfolio for their bosses’ liking. Get in early, hope things get better, justify later and say you “predicted” the bad news and the resulting increase from perverted logic, and hope you’ll still have a job to go to on Monday.
I’m sad to say that the rally surprised me and only benefitted my portfolio out of sheer luck – my overhedging on the downside was overextended, the market gave me a clear signal on Monday to exit it and take profit and wait for re-entry. Doing so brought me back to net long. However, being surprised is no excuse for being stunned by stupidity, and this is as good a time as any to refresh the safe plays. After all, the outlook is still as bad, and the price of insurance fell lower. Time to increase holdings of gold plays ($90 of falls in a day, and still has enough support to bounce $30 the day after? Nice!) and add some shorts while there’s still high time.