Something changed.
2018 is “different this time.”
Not only did we see the death of ‘buy the dip’ – a negative return strategy for the first time in 13 years…
As we noted previously, it has been replaced with an even more troubling trend for market bulls: Selling The Fucking Rip, or as it is also known, STFR.
Nomura’s Charlie McElligott had some thoughts on why, highlighting a similar potential observation YTD between the inverse relationship of UST stripping activity (buying US fixed-income) and the SMART index (end of day US Equities flows being sold) – which indicates a similar trend with pension fund de-risking throughout 2018, as their funding ratios sit at post GFC highs.
In other words, one possible culprit is pension funds who have decided that the market may have peaked, and are taking advantage of the recent selldown in fixed income, to reallocate back from stocks and into bonds, locking in less risky funding ratios.
And that is making traders increasingly antsy that life is about to get a little harder than it has been under the sponsorship of the world’s central banks…
As former fund manager and FX trader Richard Breslow notes, during a period known for investors doing their best to disengage to as much an extent as they can, this year feels different.
via Bloomberg,
Amid the obligatory revelry, there is a real sense that traders are actually using this as a welcome respite for much needed introspection. And to re-evaluate the expected themes for the new year that seemed so obvious just a few weeks ago. The issues up in the air are big, one and all. And I’ve never witnessed another episode when, at this time of year, the conversations were so serious.
To make matters even more complicated, many traders are talking about tinkering with their trading style. So many strategies have underperformed and investors are getting antsy. I’ve heard a lot of, “Maybe my style just doesn’t work anymore” rather than, “I’m confident this will be my time to shine.” You have to trade in a fashion that fits your personality as well your skill set. Beware of any signs of unannounced style drift by your portfolio managers. History is replete with examples of ex-hedge funds that indulged in it.
Traders are grasping for something that really looks appealing for inclusion in a 2019 portfolio and that just might have some staying power. It has been a tough year for a lot of people and there is just no appetite to get off to a bad start in January. Which is sure to make for a skittish environment for price action. Discipline will be especially rewarded, and patience will be a virtue. You don’t need to be the first trader on your row to be fully invested.
Brexit is at a very serious crossroads. With a lot of digital risks.
The euro zone’s coming out party with the end of new net asset purchases by the ECB was accompanied by dovish messaging and unsettling economic news. And the realization that the much promised, and needed, reforms within the euro bloc are still an elusive dream makes it hard to be long-term bullish.
China continues to issue economic warnings despite a year of liquidity infusions.
Geopolitics is messy, to say the least.
The list of known unknowns is a long one.
Further suppressing early activity is that the FOMC meeting is coming up mid-week. In many ways it should be a fairly benign event. But what it could mean for the dollar and rates will impact all of the above.
People are expecting a dovish tilt-pretty much across the spectrum of issues including neutral rates, rate-hike glide path and economic projections. And that makes sense. But how much it is already firmly embedded in market pricing is something to consider. Markets don’t always respond to news as if they are in a vacuum.
And while “optionality” is a word of the moment, don’t confuse it with a policy stance. The meaning of data-dependence is being, thankfully, changed from the ability to deviate from a prescribed path to actually watching the numbers with a certain amount of dispassion.
As Breslow concludes, “it’s the holiday season. Time for parties and vacations. But I get the vibe that this year, some reflection will be required…” We agree.
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