THE MELT UP - So what will it take to trigger this seemingly impossible correction in equities? Well, I think the trigger will come by way of another solid monthly employment report in the US, and another pick up in inflation, which I am anticipating in the weeks ahead. However, we may start to see some movement even before these events, as market participants position for the risk. I think one key takeaway right now is the difference between market reaction to US economic data today versus how it has been up until this point, through the entire period of ultra accommodative Fed monetary policy. Up until today (last few months), the market reaction to positive US economic data has been overwhelmingly equity market bullish, on the expectation the Fed would still leave policy at emergency levels despite signs of recovery. Good data + Ultra Accommodation = Free Money To Buy Stocks. But now that unemployment has dropped back below 6.5% and inflation is very close to the 2.0% Fed target , we have officially reached the threshold (not trigger of course) for policy reversal. This means the Fed will have less excuse to avoid policy reversal and positive economic data will now only accelerate the tightening process. This is a big development in my view and a healthy one that signals an end to this market melt-up.
THE CATCH DOWN - And what if we see bad economic data? Well, I don't think this will be viewed as market positive at this point in time either anymore (it had been in the past because it only ensured the Fed would leave emergency policy in place). The Fed is still fixated on employment and inflation, and once these two indicators have confirmed their thresholds, irrespective of where economic data is, the Fed will still need to move or risk severe longer-term consequences of major asset price bubbles. I know a lot of people have been hurt positioning short equities over the past year in anticipation of these events, but that doesn't change the fundamental outlook (and technical), and the higher we go, the stronger the conviction. The bottom line is you just have to be careful taking your shots. There is no such thing as being wrong in markets. There is only worse than this. The curse of bad timing. The best way to mitigate this impossible variable, is to become a friend of time and give yourself plenty of room to finally be right (this does not mean your entire account!). Moving on, a quick portfolio update for you all. Speaking of "plenty of room," it was a pleasure to finally see the breakdown in Kiwi on Tuesday. I had been waiting a good while for this, and I believe the door is now open for relative underperformance in the currency. I booked some profit on the trade and will look to sell again (NZD/USD) into a rally. I suspect the RBNZ will produce a less hawkish than expected tone at the June meeting and this will accelerate declines. The New Zealand Dollar is still so close to longer-term cyclical highs against the US Dollar, while its cousins (Aussie and Cad) have fallen off a good deal from their respective highs over the past several months. So plenty of catching down to do for the New Zealand Dollar. Funny I was able to use "melt-up" and "catch down" in one report.