False Hope and Changing Times

  • Fed scaling back won't do much
  • New trend of risk off trade emerges
  • Looking to fade this market rally

FINAL STAMP - This rally in equities will be important as it will show the market that even accommodative gestures from the Fed will do nothing to prevent stocks from getting sold hard once again. Such gestures from other central banks in 2016 have already failed to offer stimulus, with risk assets tracking lower each time these efforts have been made. Look back at market reaction post China injections, ECB dovishness, the BOJ moving to negative rates and so on. So while, we may be seeing a bit of a bounce here on what has clearly been a coordinated effort from Fed officials to send a message of the Fed scaling back, this will only serve as that final signal that such policy gestures have reached their limit. Of course, with Fed policy the source and originator of this stimulatory strategy, and with the US economy at the center of everything, it makes perfect sense that we are seeing a bit of a bounce in risk assets on this latest wave of dovish Fed speak. But just as with the other rallies this year, the market will soon recognize it really can't get all that excited about exhausted monetary policy.

STRATEGY - So what's the strategy? Well, the strategy is to sit back for now and wait for an opportunity to take advantage of this fact. For so many years, any moves to risk off were supported at every turn. Now, it's going to be the opposite. Rallies in risk assets will be capped at every turn. So while the S&P500 has pushed up in recent trade, and while commodity bloc and emerging market FX are recovering, these recoveries are nothing more than moments of respite before the next big drop. I am watching the S&P500 as a gauge for risk. While I believe there is still room for a move towards 2000, I don't think we get much higher than that before quickly turning lower, eventually back below 1800 and down towards 1700. As far as FX goes, USDCAD is the one I'm watching at the moment as it closes in on some major rising trend-line support off the May 2015 low. That support comes in around 1.3560, and if tested in the sessions ahead, will be a good opportunity to build back into the more prominent uptrend. Generally speaking, the strategy is to be looking to sell into overdone rallies in risk. I believe this will be a profitable strategy in 2016.

Risk rallies are nothing more than fantastic opportunities to build into shorts. Via @joelkruger

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