Im very bearish and was up until a month ago 100% in cash. I’m now 90% because you have to trade what you see not what you think. What we see if a massive recovery in the stock market of weak economy countries like the UK and France and a strong but stilted one in the strong ones: US and Germany. Japan’s is similar to the US but perhaps a leading indicator with its similar recovery to the US then halt then further rally.
This all seems to be pivoting around the Fed’s reverse-QE. Hewre is a little chart of Dow moves and weekly Fed balance sheet action. The Fed publishes the numbers for anyone that wants to deep dive.
The market bulls seem to have got over their jitters and think its business as usual. They are buying the dip.
To me the drumbeat of reverse-QE will continue for years. This volatility has occurred over $90 billion of reverse QE, so if there is a link, $3000 billion more reverse QE is going to produce a bumpy ride and the $80 billion a month rate targeted for autumn is going to be challenging.
The counterbalance is fiscal stimulus, US corporate profit repatriation and GDP growth.
As such reverse-QE will need to be managed as we already see in the flow above. There is actual positive QE in the figure for some weeks. That inflow of QE drives carry-trades which supports markets and asset prices.
So to trade what you see, you have to think thagt the Fed has a grip on reverse-QE and not crashing the markets.
So what do we do?
I’m going from 100% risk off to 90% and the 10% in the markets will grow and enter into risk off stocks.
So lets say the thesis is:
Reverse QE kill the bull market and puts the stock market into a holding pattern.
Fed ‘stock saves’ the market when it slumps by QE’ing when necessary, easing their balance sheet down with reverse-QE when the market is on an even keel.
This support QE goes into carry trades. Eg: big, safe, dividend paying stocks.
This is where safety lies.
So lets change the subject:
Isn’t oil strong. That’s not surprising with Trump caning the nuclear deal. We can toy with other bullish factors for oil.
This is what the market thinks of Shell and this oil market:
Exxon? Here is their performance.
Lets put them together:
By the way Shell is a dollar denominated corporation.
So it would seem that Exxon is lagging which gets my value investment juices flowing, but there is more…
Exxon pays a huge 4% dividend.
So to tiptoe back in the market buying a blue chip giant, with a fat dividend in a recovering market, that is lagging a very similar peer, looks good.
Then there is the question of will the US markets bounce back to highs like the UK/France, or follow Japan on the next leg up?
If so Exxon will soon be back to $90.
If the Fed is going to mediate its QE by holding the market in a range, then obvious carry trades like Exxon should be bought at the bottom of the range and sold at the top.
As Exxon has a fat dividend, it is tied to QE and what is looking like a tidal process.
As such, for those starting to take on more risk, this is a good place to start and if nothing much happens a 4% dividend is going to drop into the account.