Obviously the big news of the morning is the fact that over the week-end the situation in Ukraine took a turn for the worse.
There are plenty of different analyses floating around, so I am not going to try to rehash what is obviously a very tense situation. I am much more interested in writing about how the market is interpreting these events.
Last night as I was waiting for the GLOBEX futures session to start, I was struck by the extremely cavalier attitude of most market participants.
When the market opened less negative than some might have feared, this attitude shone through with sarcastic tweets such as this one from Business Insider reporter Joseph Weisenthal:
As I was instant messaging my business partner, I noted that markets do not bottom with this sort of complacent attitude. Markets bottoms on rampant fear.
The prevailing attitude seems to be one of such extreme cockiness, that many market participants are hoping for the dip to be large so they can buy what they are convinced is just a small setback in the massive unrelenting 5 year old bull market.
Have a look at this tweet from a fairly well known financial blogger / newsletter writer:
I am glad that he has a sense of humour about this fairly serious geopolitical event. I am actually short and well on side this morning, but even though my P&L is solidly in the green, I am still nervous.
When I read in the NY Times about Merkel’s conversation with Putin, it just gets me more concerned:
Chancellor Angela Merkel of Germany told Mr. Obama by telephone on Sunday that after speaking with Mr. Putin she was not sure he was in touch with reality, people briefed on the call said. “In another world,” she said.
And then when you combine the fact that this morning the S&P’s are down only 19 handles, but have rallied more than 300 over the course of the last year, I worry that the market is definitely a little over confident.
But not our trusted blogger. For him, this is an easy call:
I think he might go hungry this morning as I see very few panic sellers. Yes, we are down 20 handles, but don’t forget that Friday afternoon they ramped up the market into the month end close:
E-Mini futures trading for Friday and this morning</a> </div>
This is actually quite a tame sell off considering that Red Dawn is playing out in Ukraine and that Patrick Swayze is no longer with us and Charlie Sheen is too coked up to save them (although I think the woman from Dirty Dancing is looking for work and might be available):
The cast from the “celebrated” 1984 movie – Red Dawn</a> </div>
So when our blogger friend compares this morning to the “panicking” of the 1987 crash, 9/11 and the Lehman crisis, I think he is being quite naive. Those were eventually great buying opportunities. But do you think those opportunities were only 1.8% off the all time highs? Not on your life! Comparing this tiny sell off to those events only demonstrates the arrogance of the bulls.
Let’s have a look at the charts of those three events. First up, let’s look at the 1987 crash:
Then let’s examine the market action surrounding the 9/11 tragedy:
And what about the Lehman crisis? What did that chart look like?
Finally, let’s compare today’s trading to these three events:
It sure looks to me like today’s environment is nothing like those other times.
The bulls are so confident and smug, all they can do is rub their hands with glee at this morning’s tiny little sell off.
I view the market’s reaction to Russia’s invasion of Ukraine as quite troublesome. Although I am not as smart as these financial bloggers types who eat panic sellers for breakfast, I would be hesitant to recommend that anyone continue to buy at these lofty levels.
Above all else, I believe that risks have increased. Although I have been fortunate to experience a big move upward in my portfolio on this morning’s action (I am fairly short the worlds’ stock markets while also long oil and precious metals), I am worried that volatility is going to increase.
Whenever I have a big move up or down in my portfolio, I find that the volatility only continues to increase in the coming days and weeks. Therefore even though the trades are all working for me, I am going to reduce my entire portfolio by about a quarter this morning. I am going to reduce all trades – wins and losses, in an attempt to adjust for the increased risk. I will leave my long volatility positions, but otherwise everything will be chopped.
Unlike these other financial gurus, I don’t know what is going to happen. All I know is that the risks have increased, and only fools claim they know with any certainty how this will play out. The fact that so many seem so certain, only scares me all the more…
UPDATE: All position sizes except for long volatility (and the two small stock positions) will be adjusted downward immediately by one quarter.
Long a tiny position of puts on TSLA and FB. Just for shits and giggles. Conviction 1. Stop – none: when they go to zero the market will do it for me.
Short US 5 Year Treasury Futures. I expect the Fed to continue to withdraw stimulus aggressively. Conviction 2
Short US 2 Year Treasury Futures. I think the downside is a move from 31 bps to 25 while the upside is a move up to 50 bps. Conviction 3
Short Euro. Added to this trade into the recent rally. Conviction 4
Short Nasdaq 100 futures, short Eurostoxx futures, and short Nikkei futures. I entered the trade last Wednesday with idea that the Fed is going to taper until something breaks and that the bulls are pushing their luck. Conviction 3. No stops for now
Short European stocks via ESTX50 index vs Long S&P 500. I continue to believe that the ECB is too tight relative to the Fed and the BoJ, and that this will translate into relative weakness of European equities. Conviction 4
Short Yen. Establish short Yen last week. Now I will sit tight and wait. Conviction 3
Short JGB futures. I can’t call myself a macro trader without this widow maker on the sheets. Small position for now, but will add aggressively at the first sign it is working. Conviction level: 1. No stop.
Long Yen volatility. I believe we are entering a period of increased volatility for the FX pair. Conviction: 3
Long 30 year US treasury volatility. Swapping half of this position into Yen volatility. Conviction 2
Long various deferred crude oil futures contracts. I own a variety of different expiries in years from December 2014 all the way to December 2020. Conviction level: 4. No hard stop.
Long precious metals smorgasbord. Long gold, silver and platinum futures. I also believe that the closed end ETFs (CEF.A CN Equity or PHYS US Equity) which are now trading at discounts versus years of trading at a premium are a good way to play this idea. Conviction level: 4. Using the year end lows as a stop for half the position.
Long grains. Long deferred corn, wheat and soybean futures. Although this trade has not worked at all, I really like it long term. Conviction level:5. No stop period.
Long Ithaca Energy IAE CN Equity. See previous posts. Conviction level: 5
Long Input Capital INP CN Equity. I have not yet written this up, but I really like this story. More to come in coming days. Conviction level: 5