Of Escalators and Lift-shafts

Published on: January 14th, 2019

Bear markets are notoriously tricky to trade. Bull phases in bear markets and countertrend rallies can be bigger and longer than you expect. When the bear re-emerges, it is often fast and furious. In this piece, I take stock of where we are today and provide an update on the bellwether markets to set the groundwork for the next leg of the bear.

Comments

  • JC
    Jason C.
    15 March 2019 @ 17:49
    Julian, you mention: "As I’ve explained, when it comes to the long-term trend of the S&P, I use a simple metric and, with the 5- and 20-week moving averages below 50," Which Macro Insiders piece do you provide more detail on this? Like the simple metric just curious if i missed somewhere where you discusses more. Thanks
  • VD
    Viknesh D.
    20 January 2019 @ 00:41
    Hi Julian, thank you for the article. My question is on late-cycle inflation and the correlation with Crude Oil. With inflation pressures, how do you see that playing out on the performance of crude? My view is that in such a late phase and pre-recession, crude will rise and then fall in an actual recession whenever that may be, however it seems to have already made a high last year at around 76 for WTI. In spite of this, is there potentially yet another rally?
    • JB
      Julian B. | Contributor
      28 January 2019 @ 20:24
      Hi Viknesh. Re oil and inflation. My view is that oil generally leads inflation by about 6 months and not the other way around. Hence, why having seen the rate of change in crude prices peak at the start of 2018, CPI peaked in July. As for crude right here and now. I think we are essentially in the middle of a $45-65 range. Whether we can test that upper end depends heavily on whether the Fed is willing to step back from QT (see below).
    • VD
      Viknesh D.
      29 January 2019 @ 03:49
      That's clear. Thanks Julian!
  • DB
    Daniel B.
    17 January 2019 @ 02:26
    Hi Julian, this question is probably in a similar vein to Miguel G's question - I've been paying a lot of attention to volatility lately and Chris Cole's (Artemis Capital Mgmt) work titled "Volatility and the Alchemy of Risk" describing the events of 1987 where bonds and equities were correlated where the crash was triggered by the Fed's raising of rates into financial stress because of an inflationary spike. I've seen your call outs of wages data and compensation metrics in MI2 Thoughts from the Divide; is that enough to trigger an inflationary impulse that derails a long bond trade, or is that inflationary potential negated by other slow-downs in the economy (equities dropping, housing slowing, global growth slowing)? Or have I got my timeframes all confused and bonds are the "relatively" safe short-term trade?
    • JB
      Julian B. | Contributor
      28 January 2019 @ 19:35
      Daniel even thought our work suggests continued wage inflation. I think now that equities are faltering and the economic data is softening (tail wags the dog) we are past the point where stocks and bonds are likely to sell-off together in a fast 1987 type move.
  • AD
    Anthony D.
    17 January 2019 @ 16:39
    Julian, It appears the 354ish area is a good spot to reshort NFLX. There's a little gap just under the spike and reversal it did on its prior report date which began its descent to 240. NFLX reports today after the close. I've put my short chip on the table. I'm curious if you'd share your approach to this situation. Regards
    • JB
      Julian B. | Contributor
      28 January 2019 @ 19:30
      Anthony really sorry for the late response but congratulations on the level! Beyond that I'd just add that trading a bear is bloody hard so stick with the rules i.e. buy extreme weakness, be very disciplined with stops and take profits and don't forget to sell the rallies.
  • RM
    R M.
    18 January 2019 @ 19:03
    I have seen a chart (wish i could post it here) that central bankers of world are floating world with liquidity, mostly from China. If true, how will this impact assets? Understand China started about same time as Powell put in early Jan. Love to get your review of this, would be a big macro development.
    • RM
      R M.
      18 January 2019 @ 19:09
      Update: Danielle DiMartino tweeting about China flooding liquidity and @spiralcal has the chart.
    • JB
      Julian B. | Contributor
      28 January 2019 @ 19:26
      RM see my comments above re 2015-16 reflation scenario.
  • JS
    J S.
    18 January 2019 @ 22:11
    2015-2016 all over again?
    • RM
      R M.
      19 January 2019 @ 19:09
      Thats what I am hoping Julian and Raoul talk about. Have seen other reports of money supply injection as well. D’ont know the validity of the data or if the impact changes their assessment.....
    • JB
      Julian B. | Contributor
      28 January 2019 @ 19:25
      Hi JS...well my guess is that its still too soon for a formal shift on the balance sheet. However, judging from the recent stories on CNBC and in the WSJ they are getting nervous. Hence I do believe the 2015-16 scenario is a realistic one. In other words equity and real economy weakness = Fed pause (very slight chance of an ease) = reflation trade
  • DY
    Dmytro Y.
    19 January 2019 @ 16:19
    Julian, thanks for this comprehensive report. Really nice.
  • MG
    Miguel G.
    15 January 2019 @ 12:27
    Julian, in the past you've made the argument that if Powell pivots too soon he runs the risk of running inflation hot. I couldn't agree more and since the Dec. fall we had in equities its become quite clear Powell low risk tolerance to lower equity prices. My question is if they are already pivoting on the margin after only a 20% drop in equities why even recommend buying any bonds at this point. To me it seems like the risk/reward is terrible from these levels and are better left alone. Wouldn't a fed pivot smoke the long bond as forward inflation is a huge component of where rates are headed? Its actually scary how addicted we have become to a stock market that can't ever fall and now that were beginning to see Powell's pain tolerance, unfortunately low, Id be more in the camp that bonds are far too risky when weighing all the potential things that could go wrong.
    • JB
      Julian B. | Contributor
      16 January 2019 @ 22:09
      Hi Miguel, you raise an interesting point "why even recommend buying any bonds at this point". Well the main reason is clients have different needs and time horizons. To which I will add that frankly I was a little surprised how quickly Powell blinked (I don't think he's folded fully just yet). However, if as it seems you are focused on the bigger picture, yes I'd avoid Treasuries. While we may see lower yields for the next few months, as Powell sits on the side lines and the data weakens the big picture as you point out is horrible.
    • MG
      Miguel G.
      18 January 2019 @ 11:32
      Spot on Julian, I am focused on bigger picture and see other places to park my money that are far less risky. Love your work and what you do keep helping this macro insiders community win.
  • JC
    Jason C.
    18 January 2019 @ 02:10
    this level of tactical, actionable game planning content is excellent! love it, please keep it up as things progress and u see the turns. many thanks
  • jm
    joeri m.
    14 January 2019 @ 18:31
    Hello Julian, I have a question regarding your silver chart. In previous posts where you used this chart, the long term trend line you used was the upward sloping red line. Why is the long term trendline now suddenly a flat line? It seems to me that the long term trendline is still the red line and that we saw a (probably) false breakdown below it and are now close to coming back above it. To me it seems that silver bottomed exactly where it should bottom by retesting the january 2016 low and gold also bottomed at a very interesting place. for gold see the following chart: https://twitter.com/BruniCharting/status/1077963254746529792 for silver see this: https://twitter.com/BruniCharting/status/1077962412668735488 I would love to hear your opinion. Thanks in advance!
    • RM
      Richard M.
      15 January 2019 @ 16:29
      Question: on p. 13 Julian references a silver chart but there is no silver chart (just the EEM chart). Am I looking at an "updated" In Focus that cut that chart out???? Thanks for any clarification!
    • RM
      Richard M.
      15 January 2019 @ 16:39
      Oops, I see the silver chart in the Appendix on p. 15! Ignore my previous comment!!!
    • JB
      Julian B. | Contributor
      16 January 2019 @ 22:16
      Hi Joeri At least when I like to look at bubbles the "long term" trend line really has to go back decades and in silver's case that's the blue one. That said at this point, its academic because right here and now its the line just above $16 that counts and that's what I'd trade off if and when it breaks. PS. thanks for charts
    • BC
      Brent C.
      17 January 2019 @ 14:05
      Joeri, That tag of the downtrend line for gold in late 2018 also coincides with uptrend in place created from 08 & 16. I agree, a very interesting place. Coincidentally, (or not), gold bottomed in 1999, not in 2002 when the dollar finally peaked. Coincidentally, (or not), I've kept the chart from Greg Weldon in my book since last year where he noted CRB underperformance to SPX was the 2nd lowest on record at the time - it proceeded to match lowest ever later in the year. The previous low was June 1999.
  • HO
    H2 O.
    16 January 2019 @ 16:26
    Gents what do you make of the dynamics with the US Treasury balance, as in the government department? Pretty significant over-issuance last year, which will get spent down in Q1, assuming the government reopens. This should feel like a couple of months of QE in the financial system (say 200-300 billion), followed by another smack of QT when this adrenaline wears off. This should be mid-Mar as debt ceiling politics kick in again. This shortage of funds has been driving the dollar recently, and the ebb and flow should make the dollar index, USTs and risk assets a bit of a roller coaster coming up.
    • JB
      Julian B. | Contributor
      16 January 2019 @ 22:16
      Interesting let me chew on that thought
  • JW
    Joel W.
    14 January 2019 @ 22:58
    Thanks Julian. This is just what I needed right now.
  • NO
    Neil O.
    14 January 2019 @ 22:15
    Really helpful, actionable piece, Julian. Very well argued and put together. Thank you.