View from Toronto: Traders Remain Nimble with Short-Term Shifts

12/05/2017 1:40 pm EST

Focus: STRATEGIES

Ziad Jasani

Managing Director and Partner, Independent Investor Institute

Has Mr. Market (S&P 500/Equities) priced into too much positivity, while inflation remains at bay? Does history repeat itself? What about greed? Does that mean a crash is ahead? Answers to these tough questions fromZiad Jasani of the Independent Investor Institute. 

We are in risk-reduction mode, awaiting a test of the bottom of up-trend channels that started Nov.  2016.

Trump’s “exonerated.”

U.S. tax reform is 90% “in-market.”

Mr. Market (S&P 500) is at all-time-highs, up 27% since election week Nov. 2016.

U.S. economic data is largely tilting up. And… as a globe we’ve added ~$5 trillion in fake-money liquidity, to top off the ~$25 trillion+ over the last decade.

Where do we go from here? The back-drop is positive, along with the structural buyer-strength and seller-absence. Institutional investors continue to hunt for yield buying every dip in high yield bond markets while suppressing (and even selling/shorting) volatility.

Sovereign Wealth Funds (SWF) gobble up equities on auto-pilot. Central banks are the “whale” (big-buyer) in most capital markets. Active managers operate on the FOMO principle (fear of missing out), chasing all moves,  but Hedgies have lost their shirts trying to out-smart the whale.

OPEC continues to manage the supply-side of Oil allowing the U.S. to frack-away, as long as Oil remains above $50.

Corporations continue to leverage the biblically-low interest rate environment, churning out earnings-per-share at faster growth rates than consumption (demand) would indicate. And at the first sign that one trading bloc (US, EFA, EEM) is suffering, we get a concerted effort from central bankers to weaken a currency that will help the cause.

So everything is awesome, right? We must ask ourselves two important long-term questions:

Has Mr. Market (S&P 500/Equities) priced into too much positivity, while inflation remains at bay, implying central bankers’ concern about inflated asset prices along with their plans to tighten policy are benign?

If demand is strong, pricing power would lead to inflation rising faster. Can the Westernized world afford rising-payments (mortgage, credit card, business loans, etc…)?

Does history repeat itself? Has the nature of greed changed? Do we see similar signs that were present before Dot.bomb and the ATM housing bubble?

Yes. No. And Yes! Does that mean a crash is ahead? Yes. But not until inflation picks up, or the central-banker tap turns off, or when the next production line building the next greatest widget (that was financed on crisis low-level interest rates) sees consumers changing their mind, forcing a debt-defaults to rise.

Obviously, many other catalysts could present themselves, but when Equities ignore the threat of nuclear war, and bitcoin (BTC) traders become market gurus, and when we find equities stretched to all-time-highs we know one thing for sure – everyone will rush to exit at the same time.

This makes it paramount for our Trader community to remain nimble and sharpen our short-term trading knives.

In the short-to-mid-term, we’re happy to trade while shifting allocation of our longer-term holdings as warranted.

To that end what’s in-store for this week? We ended last week with most equity markets rattled by the now non-event of Mike Flynn’s guilty plea. The S&P 500 (SPX) closed the week at the top end of its trend channel, 2 standard deviations away on the expensive side. While the Nasdaq suffered a wreck earlier in the week which statistically is more likely to resolve in a continued unwind to the bottom of its uptrend channel.

And an expected “sell-the-news” on Oil (post-OPEC meeting) is still to play out.

But with the congressional conference committees working to make tax reform a reality, a risk-on start to the week in North America is expected. Will it last? Should we be buying or sharpening our “shorting/selling-knives”?

Here are thoughts on Tuesday, Dec. 5: Now that tax reform is a reality, are markets over-priced?
• S&P 500 ↔
• NASDAQ ↔ to ↓
• DOW ↔
• RUSSELL ↔ to ↓
• TSX ↔ to ↓
• VIX ↑
• USD ↔ (UUP) | $CAD (FXC) ↔↓ | YEN (FXY) ↔↑ | EUR (FXE) ↔↑ | GBP (FXB) ↔ | SWISSY (FXF) ↔↑
• US Treasury Yields ↔
• Bonds ↔ • Oil ↓
• NatGas ↔ to ↑
• Gold ↔ to ↑
• Sentiment: indecision.

Thoughts on Wednesday, Dec. 6:  Strong U.S. jobs can keep the equity party going? Right? Well, at least Canada won’t have another rate hike.
• S&P 500 ↔ to ↓
• NASDAQ ↔ to ↓
• DOW ↔ to ↓
• RUSSELL ↔ to ↓
• TSX ↔ to ↓
• VIX ↔↑
• USD ↔ (UUP) | $CAD (FXC) ↓ | YEN (FXY) ↔↑ | EUR (FXE) ↔ | GBP (FXB) ↔↑ | SWISSY (FXF) ↔↑
• U.S. Treasury Yields ↔ to ↓
• Bonds ↔ to ↑
• Oil ↓
• NatGas ↔ to ↑
• Gold ↔ to ↑
• Sentiment: indecision to weak form, risk-off.

View the Independent Investor Institute trading ideas and strategies videos here.

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