The level of bearishness in the markets is not something that we have seen for a long time. The selling last week on two consecutive days was the 5th highest and 4th highest that we have seen so far. Overall the selling so far is second to the selling after Lehman Brothers collapsed in September 2008. Many of the hedge funds went short after the Lehman collapse but mostly all of them had to take big losses in the subsequent rebound.
What is the primary impetus behind this selling? It is not that weak retail investors have got out of their positions but that many hedge funds have been short sellers. Most of these hedge funds are trend followers based on black-box algorithms. The more the price goes down, their trading algos will signal to sell more. I think they could be proven wrong soon. According to Goldman Sachs prime brokerage, the level of selling last Friday was one of the highest. Looks like the markets have very well absorbed this selling.
I think this is a time to be a contrarian. Yesterday Chairman Jerome Powell was grilled by the Senate Banking Committee for two hours and today he has to face the House Financial Service Committee. I don’t think he has got anything new to say.
It was only a week ago that the Fed made the biggest rate hike in 28 years, and raised interest rate and inflation projections. The Fed Chairman spent more than an hour answering questions from the media.
The various committees and the congress are losing confidence in the Chairman. So far the guidance on the rate path by the Fed looks more like lip service. So far we have a 1.5% Fed rate for an 8.6% inflation rate. What can the Fed do now?
On the day of the biggest Fed hike, the S&P 500 was 3740 and now it is at 3785. The ten-year yield on that day touched 3.5 % and today it is at 3.12%. So after the historic rate hike, as was communicated by the media, stocks are up and yields are down, not up.
What has been the situation in Europe?. Unusual movements in Spanish and Italian bonds are a proxy for the probability of a European sovereign debt crisis. Last week when the ECB made those bold statements on monetary policy and QT the pressure was showing up in Italian and Spanish yields. In six days the yields are down by 50 basis points. The ECB was very quick to fold on its policy plans when it announced an emergency meeting.
In the last letter, we already talked about the BOJ policy on their unlimited QE strategy meaning they can be the global asset buyers of last resort. So who could have arrested the rise in US treasuries? I think the markets are poised for a rise in equities too.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund. Currently, he is a co-founder of a new hedge fund where foreign citizens can invest in Indian growth stocks like Tanla operating in hyper-growth markets like CPaaS.