Diary of a Financier

SPX update: In the waiting line

In Capital Markets on Sun 23 Jun 2013 at 22:11

Wait in line
‘Till your time
Ticking clock
Everyone stop

Everyone’s saying different things to me
Different things to me
Everyone’s saying different things to me
Different things to me

Do you believe
In what you see
There doesn’t seem to be anybody else who agrees with me

–“In the Waiting Line,” by Zero7

~~~~

I’m flying a bit blind here now, as my $SPX analogue seems to have puked on itself due to the exogenous shock provided by [the market’s reaction to] Ben Bernanke’s post-FOMC meeting press conference. I had voiced concerns that the 2013 priceaction had irritatingly diverged from its 2007 analogue:

“…[The bottom of this pullback’s] shallowness and the brevity (compared to 2007) would force a terminal departure in the analogue’s weekly comparison–despite the concurrence with its daily precedent. Void of an unexpected recoupling, that means I’ll have to reassess the roadmap going forward.”

That being said, I can recalibrate and rewind the 2007 analogue by approximately one week, where I find a tidy, persistent likeness between the daily pricetrends and indicators:

SPY 2007 analogue (daily)

SPY 2007 analogue (daily)

Last week’s renewed selloff has actually allowed the weekly comparison to regroup. That “terminal departure” among indicators is only a bad/flat week away from fully recoupling:

SPY 2007 analogue (weekly)

SPY 2007 analogue (weekly)

I’d be lying if I said I were comfortable with this analogue still. Psychologically, I try to remain dispassionate about my theories. That’s why I’m truthfully relying on the pure technicals, combine with bullish intermediate macro and fundamental appraisals, to lead me forward. In isolation, those technicals are not necessarily bearish–though not bullish either. That’s as useless for today as it sounds, but it means we can buy this week’s reaction: either SPY moves sideways or [preferably] upwards to recapture the daily bull flag that had developed over the last 1½ months with bull divergence, or SPY slides to $156 support in a -7.7% total drawdown before a technical bounce. The former would of course be more sustainable and therefore bullish:

SPY daily

SPY daily

The fact of the matter is that exogenous irritants can disrupt the fundamentals or technicals at any point in time, and that’s what has occurred here, with carnage in the bond market coinciding with an equity pullback after Ben Bernanke’s FOMC press conference muddied the waters.

At the end of the day, I’ll reiterate that I’m happy to have the opportunity to buy risk assets 5-7% off their highs. I had built cash coming into this, which lowered our downside capture. Given today’s positioning, we’ve deployed half of that cash on equities. We have losses on all those buys, except for Japan ($DXJ). We’ve been lucky to meaningfully outperform in our bond allocation due to our low duration High Yield ($HYG) and Floating Rate Senior Bank Loans ($BKLN) amidst the high duration slaughtering.  We had also pared the $BKLN by 2% to under a 10% allocation with the expectation that we’d deploy toward equities.  That’s another 2% [luckily] sitting in cash waiting too.

This was/is 2013’s drawdown, as I had expected; it’s double-dipped, as I had not. My analyses suggest SPX will finish the year higher than where it sits today, which means this pullback/correction is only an opportunity to add alpha. Until I get a reliable signal, I’m just stuck in the waiting line.

–Romeo

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  1. […] where to from here?  Last night, I mentioned the binary outcome for […]

  2. […] bottomed, June 24, the analogue predicted bullishness, but I labeled it “unreliable,” due to a decoupling among the daily indicators.  Nevertheless, I was able to put the comparison on the backburner at […]

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