The Next Big Short Isn't Water

  • My thoughts after watching 'The Big Short'
  • US equities still need to come off big
  • The market will do what it can to make you a doubter
  • US Dollar looking good despite dovish Fed

MOVIES AND MARKETS - Just settling back from my trip to London. Always a pleasure to be in London and I look forward to spending more time there going forward. On my trip over, I finally got to watch 'The Big Short.' I'm sure many of you have seen it by now, but I suppose I hadn't been too interested to see it given the fact that it was something that I lived through only a short while back. But I did enjoy it and it only made me think about the fact that we are right back at it again.

ANOTHER BUBBLE - It really is the same crisis as it was back then, but with monetary policy stepping in to intervene, the artificial support has delayed what could have been a more disastrous reaction back then, that should still play out going forward. When you look at the market today, you are just looking at another bubble about to burst. In 2007 it was the housing bubble and in 2016 its an equity market bubble.

THE SQUEEZE - I suppose we are now at that point in the movie where equity shorts are frustrated the market is still trying to go higher despite what appears to be added layers of uncertainty and fear of exhausted central bank policy. Everything adds up as it did with the credit default swap position, and yet the market is doing what it does best - making the bears sweat, unwilling to break. But if you think a drop isn't coming and that the bears are foolish, you need to think again. 

SIMPLE LOGIC - You can't have a global economy in desperate need of this type of accommodation that ultimately drives asset prices to record highs, without some form of intense correction, once the very policy that has been driving the price action is either exhausted or removed. So as far as stocks go, my recommendation is to keep looking for opportunities to sell into rallies. It may be frustrating for a bit, but it's the right play. 

THE TARGET - I think an SPX500 drop back into the 1500s is quite reasonable, and when you think about it, an SPX500 in the 1500s is a market that is still trading at levels that were record highs in 2013. So it isn't like this type of drop would even be that catastrophic. And when you look at a monthly chart, a drop into the 1500s would just be a corrective pullback in a very well defined uptrend. So don't think we can't see such a move play out in the months ahead. We should. 

If you think the bears are foolish, you need to think again. Via @joelkruger

THE DOLLAR - As far as currencies go, dovish or not, the Fed is still ahead of the other major central banks, and being ahead means yield differentials will still favor the Buck going forward. Moreover, the Dollar has the ability to attract plenty of attention in risk off settings and if I am right about this equity market pullback, it should translate into one more sizable US Dollar push before all is said and done. Right now I am playing this through NZDUSD. Let's see how it plays out.  

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