What if I were to tell you I was turning more bullish? Is that something you might be interested in?
We are macro investors. That means that we are constantly exposed to the shifting sands that the world's increasingly powerful gaggle of central bankers — and the capital flows they encourage — impose on global financial markets. However we tend to stick to our big (and often bearish) views, something that means our performance comes with hot and cold spells. The most recent one — and it doesn't take a genius to see this — has been cold. It hasn't been as bad as it could have been for the simple reason that we make big bets when we are doing well and small bets when we aren't. We allocate increasing amounts of capital to winning trades and cut losing trades rapidly.
We've been cutting a lot recently.
The good news is that this has minimised our drawdown. The even better news is that our returns have improved lately; it looks as if we are entering a hot spell, and we have begun to re-allocate significantly more risk capital to our endeavours.
But I think it is a little more complicated. We, and I accept we aren't the first here, sense that US monetary officials may now be willing to subordinate the demands of their own economy to the perils confronting emerging market economies. If that is the case, the great peril is not that the Fed finally tightens monetary policy and US stock prices suddenly tumble from what are very obviously overpriced levels.
Would that it were — our curmudgeonly portfolio structure (think dynamic volatility targeting and stop losses) works well with big stock market reversals. Instead the greater peril is that the current backdrop will turn out to mark a rapid acceleration in the ongoing move to the upside.
A hint that this might be the case comes from looking back through the 113 years of price data for the Dow Jones Industrial Average. We have done this (so you don't have to), searching along the way for the comparable periods that fit most tightly to the last 500 trading days. What is clear is that periods of trading similar to the one we have seen over the last two years don't often seem to end quietly: they boom big time or they crash.
Which is it to be this time?
Looking at the markets of 1928, 1982 or even 1998, all of which have scarily similar looking historical charts to today's, we wonder if it won't be both.
Good Morning and Welcome to the XJO Wednesday Thread
News for Today (AEDST)
I had some trouble tonight with my data download, so I'll make do with an experimental chart of the Twenty Leaders Equal Price Weighted Index (as opposed to the 'normal' Market Cap Weighted Index).
As can be seen there was some demand present early on, however that demand was sold into creating another widespread downbar.
The steepness of the current fall is of interest, it looks somewhat climactic, however, although volume is increased over the average, it doesn't appear climactic so far.
(20min delay)