Authored by Peter Tchir via Brean Capital,
I wish it was Sunday‘Cause that’s my fun dayIt’s just another melt-up Monday
The S&P 500 has rallied 1% or more four times this year – three of those have been on Mondays (4 out of the 7 largest upside moves this year in the S&P 500 have been Monday’s).
Unlike in the good old days where Merger Monday mania drove Wall Street, it has been – take your hedges off Monday that has driven the returns.
The ‘best’ Monday was April 24th after the French Election run-off where the worst candidates, from a market perspective, were effectively eliminated. That was followed by a nice gain on Tuesday as the melt-up continued, but even then the rest of the week ‘only’ gained 0.42%.
The most recent Monday Melt-up was on August 14th. The market rebounded just over 1% that day and then proceeded to fall 1.6% for the remainder of the week.
Yesterday’s melt-up was completely natural as Hurricane Irma, as bad as it was, didn’t seem to hit areas the market was most focused on, as hard as it was predicted to as late as last Friday. Also, apparently North Korea’s alleged plans to fire a missile not occurring also caused some relief and was another reason to remove hedges.So, after yesterday’s melt-up, the big question remains the same - ‘Is this an inflection point’?
The Bull Case
We hit new highs on the S&P 500 and are a few buy orders on AAPL away from new highs on the Nasdaq Composite index. It certainly plays well in the media, though the days of new highs bringing out retail buyers in droves seem well behind us.
The bull case seems simple to me
- A rejuvenated (and possibly less juvenile) White House is re-organized and re-energized and is getting back on track with the Trump agenda
- Washington is morphing in such a way that a market friendly ‘compromise’ will be reached – by ‘compromise’ I mean a lot of spending and little haggling over debt
- China seems on board with pushing back on North Korea which should reduce the threat posed by North Korea and reduce any concerns about souring relations with China
- Sentiment is not particularly bullish, with surveys like the AAII Sentiment survey showing more bears than bulls yet again last week (though there was a shift towards bullishness). As a contrarian, that should support the market as in theory it represents some money on the sidelines (though I’m less convinced that is the case in this day of passive and robo investing which seems to encourage positioning segregated from market view)
- A Fed that is unlikely to raise rates and you have a recipe for further support from the bond and credit markets for really breaking through to new highs.
The bull case seems to have a lot going for it at the moment, but this Monday Melt-Up has been consistently bullish and I am still somewhat perplexed why markets couldn’t rally last week when the bulk of the political news came out.
The Bear Case
The bear case might be redefined as the ‘but’ case.
- Trump may be trying a new game plan to get his policy objectives done, but Washington is hard. The ‘swamp’ is long, wide and deep. Getting anything done, even when it seems to make sense to non-politicians, is no guarantee of success. The ongoing investigation is not done and it has shifted to focus on long term financial dealings of the President, his collection of companies and closely associated people – I don’t think we have heard the last on this subject.
- China is taking the right steps, but very few are actually concerned about geopolitical events on the market and even fewer believed that deteriorating trade relationships with China were likely.
- The Fed will be slow to raise rates, but yields are already very low, limiting how much more support from they can provide to the market. In all likelihood, Central Banks will be buying fewer bonds in the coming months as well – which should force yields and credit spreads slightly higher at the margin.
- Overall sentiment readings are low, but the inclination to sell volatility remains very high and showed no signs of relenting last week even as headline risk seemed to increase.
Much of the bear case is a simple rebuttal of the bull case – and each ‘but’ seems like a very plausible rebuttal.
There are some real economic concerns too – auto sales (albeit pre-Hurricane replacement auto sales), credit card delinquency, lack of loan growth, etc., but ultimately those concerns would be overwhelmed by policy from D.C. which is why I have chosen not to list them.
A Couple Of Quirky Charts
I certainly see parallels to 2007 – particularly in the way risk and hedging are discussed. I also keep harping back to the similarities of financial engineering between then and now – primarily a shift towards correlation and volatility trading – away from ‘directional’ trading and the advent of ‘low vol products’ designed to be leveraged. Yes, 2007 was credit and this is more equities and second derivatives of equities, but the similarities are there.
In any case, Philip Dauber over at Piper Jaffray pointed out this chart to me courtesy of @SentimenTrader on twitter – which is at least mildly interesting.
Yesterday was a once in a decade sort of day for the S&P 500
This chart seems far too bearish to me and is a stretch compared to current conditions – but I like quirky and this is certainly quirky and fits well with my thoughts on not being overly excited about a Melt-up Monday.
If that chart wasn’t quirky enough I feel the need to bring out the Bitcoin versus NVDA chart.
Spurious But Interesting Bitcoin vs NVDIA Chart for 2017
Clearly Bitcoin does not drive NVDA or the Nasdaq but to say that it has no impact is also likely incorrect – there is a correlation between the cryptocurrencies and some big tech companies.
When I think of the big tech move – three things come to the forefront for me in terms of easy themes on why they are doing so well – and in each case, they seem to be getting played out (at least for now)
- Self-driving cars. Let’s launch these already, I hate driving and I’m getting older – can’t wait til I never have to drive myself again (or worry about my teenagers driving), but as an investment theory it seems possible the concept has gotten ahead of the reality and possibly valuations
- The ‘Amazoning’ of everything retail. While Amazon is immensely powerful and benefits from a love affair by Wall Street without a profit requirement (I admit that is a flippant comment, but what the heck), it is hard to completely ignore the ability of traditional retailers to restructure, adapt and maybe even compete. XRT, a retailer ETF I have written about in the past, is off its lows which were hit in August of this year and April of next year. Will Amazon win? Probably. Will any really good strategy by traditional retailers require heavy investment in on-line? Yes. But is that all priced in? I’m not sure, but that is often the case once ‘everyone’ knows the story.
- Cryptocurrencies. You don’t get to $100 billion market caps without influencing the ‘supply’ chain – which in this case is the bitcoin (and other crypto) miners. There is a link between some big tech and these tech stocks. It might not even be direct. It might be as simple as those that like Bitcoin also like the stocks involved in the process (hence the proliferation of ETFs and Indices designed to be ETFs that are centered around crypto and blockchain and even autonomous vehicles – I’m hoping we can call this sector the ‘Millennial Investing for Dummies’ sector it seems geared to appeal to those who can’t figure out what millennials are buying so need it spoon fed to them through an easily digestible ETF designed to capture something that it #trending.
The Bottom Line
I think it is too early to call an inflection point in equity markets. Yes, futures are up, but the bull case seems too dependent on changing the rules in Washington and I don’t think that occurs without some bumps along the way.
Having said that, the bull case for stocks also supports the bear case for treasuries. I am much more inclined to be short treasuries, partly based on relative value, than I am to be long equities.
On the volatility side, I am torn. Too many sellers of volatility. It still hasn’t been thoroughly tested, but at the same time – the VIX futures curve has steepened a lot, making some of the VIX ETF and ETN strategies compelling – I have to admit, that I am close to pulling the trigger on that, but just can’t bring myself to do it.