From Bob Janjuah at Soc Gen:
Bob’s World – Stop loss triggered
This is an update to my last note released on 29 September (Bob’s World – Priced for recession?). As one of my (two) market stop losses has been triggered it is now necessary for me to reconsider the themes and recommendations set out in my last note.
Since I last wrote the market is now seems to agree with my long-standing concerns on global growth weakness, on the ongoing victory of disinflation/deflation over inflation, and on my long-held view that – globally – central bank policy will stay looser, and get looser, for longer. The last shoe to drop was around the FOMC, whereby after the recent payrolls data the market is now in line with my long-held view that the FOMC has no data-driven justification to hike rates anytime soon.
In fact the markets are so in line with my views that the expected Pavlovian reaction – that weaker data will lead to central bank action (balance sheet expansion), thus driving risk-on positioning – has led to my equity stop-loss trigger being activated. Even though I had expected Q4 to contain lots of two-way volatility my expectation was generally for another risk-off quarter, and I felt that my S&P stop loss (weekly close above 2020 on the cash index) would afford me a prudent degree of cushion and comfort to absorb this expected two-way volatility. I did not expect such a strong risk-on move in response to such bad data!
Where does that leave me?
First, I would point out that my other core market view – to be long core rates duration – has performed extremely well with my sub-2% yield target on UST 10s being hit. I have also highlighted how markets are seemingly in line with my fundamental views on weak global growth and strong disinflation/deflation.
Going forward from here I see no reason whatsoever to change my fundamental outlook. In terms of my core rates long duration call, I am persisting with this position, but am now going to move my stop loss, from a weekly closing cash yield on UST 10s of 2.4%, down to 2.2%. This move gives me protection while also crystallising some 20bp to 30bp of gains in terms of the yield move on UST 10s since my May recommendation.
In terms of equities, for as long as the S&P 500 cash index sustains a weekly close above 2020 then being positioned for risk-off no longer seems appropriate. Rather, I would not be surprised to see attempts to recapture the highs of the year over the next few months if the 2020 level holds. Weekly closes between 2020 and 1970 are in the neutral zone for me now where I’d recommend being flat/extremely close to home. Weekly closes in the S&P 500 cash index BELOW 1970 would get my bearishness reawakened, and put 1820 and the low-1700s back on the radar.
To wrap up my view here is that markets now think they are ahead of the curve with respect to fundamentals, and markets now also think that central bankers have caught up again with the curve and thus that they stand ready to act. I still fear that over Q4 2015 and into Q1 2016 both these twin pillars of consensus thinking will likely come unstuck, as the fundamental outlook deteriorates far more quickly and more deeply than the consensus can currently envisage, and as markets realise that the Fed put is far far away from here (in terms of the data, in terms of time, and in terms of asset (equity) prices). But until that happens, and for as long as the 2020 level holds on the S&P 500 (weekly close on the cash index) then it makes sense to further participate in this latest bout of Pavlovian antics.
