Entering November, we’re facing a two-week slump that has the S&P 500 about -6% off its immediate high. Anecdotally, bearish sentiment and calls for a top seem rampant amongst observers in the blogging & Twitter community. Without taking a sentiment poll, and measuring the correlation with future returns, it’s tough to say what that means – if anything.
There is certainly no shortage of reasons to be pessimistic. Last month’s cooked non-farm payroll surprised most people by reversing the trend of slowing job losses. The deflationists ask themselves: if a $1.4T government deficit can’t create a single net job, what kind of future do we have?
Our future is likely one with increased volatility, growing currency imbalances, and a weakening American gravity, allowing the rest of the world to slip farther out of orbit.
These macro political & economic themes will dominate at least the next decade. The effects of each impulse from each force have on global prices is far more difficult to understand and predict. The highly leveraged structure of the dollar coupled with the USD being the most popular base for currency, commodity, bond & equity transactions make reading momentum an able forecasting mechanism.
Despite the weakness in US equities over the past several weeks, I don’t see the panic in global markets that I’m hearing from observers. The NZX-50 & Shanghai have actually gained since the S&P 500 peaked. Commodities are still strong. The 10y yield gained (relatively) about 7.5% – from 3.16% to 3.39% in October.
Could we see some more weakness? Sure. Could this really be the top? Also possible. However, I look for outperformance in momentum because of the self-feeding nature of money creation and destruction. I remain long in my equity holdings, and I’m using this opportunity to buy a few calls for a quick trade.
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