9/12/2016 1 Comment A near perfect reversalAfter Friday's sell-off in an "all down" day we look to have our confirmation continued by the opposite occurring. By having a down day and an up day in your portfolio you can better see what asset classes, and what market factors, are moving your portfolio. Looking at what moved the markets up and how that resulted in gainers in your portfolio (and then again in the opposite direction) to see if the market is confirming your theory or there are other factors at play outside your current understanding.
Friday was a near perfect up day for the US Divergence play in the Inflation space. The dollar rose to the yen while bonds, commodities, and stocks declined. Today started off mixed with the yen up, bond yields up (prices down) and stocks up. Brainard then spoke and came out dovish which the market (at least half of it) didn't expect. Markets quickly came back into line with stocks continuing the rally, the dollar continuing the weakening and a sharp reversal in the short end of the bond curve. Commodities also came back from their lows making the latter half of the day a 'perfect up' day in terms of the Divergence theory. No one likes red in their account (unless you are trading in China) but having a good confirmation of being perfectly right and perfectly wrong lets you know that the theory and your asset selection is in line with the events you are looking to play. If you do not have perfect up and down days it helps you look at how you can adjust. For example if you were short 30yr treasuries Friday you made money along side the rest of the market but you would have been slightly up as well today. This could be from the inflation expectations that lower rates for longer will have in the future. Either way this play might not be the best for the US divergence trade as other factors are affecting the price movement (inflation expectations in the longer run).
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Nothing unusual about the dollar rising in the wake of a market sell-off, today should be no exception. But looking at asset classes across the board it seem cash will be the winner for the day. The stock markets are down substantially, given recent low volatility and the Yen is selling off to the dollar as well. Taking a look at yields, the US Treasuries are up the same percentage across the curve. The move of all asset classes lower is interesting because it shows a smaller version of what could come from a Fed becoming less accomodative. The increase in yields on us treasuries will force all other asset classes to be re calculated, including the equity markets. The dollar increases as a result and hits commodities as well. This divergence in policy (which is just being priced into the markets as of recently) could make allocating between asset classes more difficult and the costs of holding cash much lower in the near term. there will no doubt be more 'all down' days ahead and having the cash on had to take advantage of mis-pricing seems to be a smart bet.
Russia and Saudi Arabia spiked oil up over the weekend with talks of a production freeze. The news has initially spiked the price of oil, but has since seen the price come back down. the oil production freeze talk has lost its potency in the markets since the start of the year as many of the smaller fracking companies have proven more resilient and ramped up production in light of the spring price spike. While not near last years levels the rig count shows that some producers have the ability to increase production in the face of overall lower prices, if they see a rise to the upper 40s in price. What Saudi Arabia and Russia should really look at in order to raise prices and keep them that way, is the ability for these smaller fracking companies to borrow at attractive rates, making $50 a barrel oil a possibility. So long as frackers can access cheap funds at lower rates the most a production freeze will accomplish is raise the price to start the us shale boom back up.
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