Zombie Rally

As January ends indexes are at record highs and a new euphoria has hit the general market as well as the hedge industry as even their legions have entered into long only strategies in an effort to hopefully undo year after year on dismal returns. But it has to be an uneasy long for all who dare since it rests on a mad man's actions and a public so easily duped and already holding record amounts of passive ETF's which have never been tested by potential nuclear volatility.  But as indicated in the last post, this is a time for selling nearly all assets into the welcome arms of the zombie rally. The likes of Warren Buffett have dismissed the current executive new comer and has proclaimed that regardless of who is in charge, America works. Well America may want to work but market history is filled with times where the only thing that works is down. The market is so uniformly in tune with the notion of upside opportunity that prospects of a cascade of systematic selling in an arbitrage adjusting, AI and Machine Learning, high frequency front running, Fintech application trapped into buying but can't get out selling, kind of disaster.

Cubs, Trump, and the big payoff

2016 sees the Cubs win the World Series and Trump elected. The two do not seem to have much in common but both represent brand economics. The Cubs finally make it to the big event just at a time when almost all sports salaries are rewarding water down talent and feeding a wider spread between their fan base and player incomes. Cable sports has helped generate huge revenues to push player contracts to a level where there is no way an average fan can possible relate. The election too also represents brand economics where high wealth performers soon to be in power seemingly will be basing their economic vision on ensuring greater gains for an elite class well above what might be called their own fan base, a group seemingly willing to vote against their own interests. Both the economy and sports may have entered an era where the product is just not going to get any better.

The the new stewards of the nation believe the markets will decide what is good or bad, unencumbered by regulations and fueled with promises of lower taxes. But be careful what you wish for. The economy has had a huge run and notions of extending equity gains on lower corporate taxes is a stretch. The rally since the election displays a confidence which appears to be based on all the economic benefits of looting. The hard parts lie just ahead and waiting for what may be an inevitable government shutdown in March will be a challenge for the confidence boys. Markets don't play fair and certainly rarely accept a quid quo pro reasoning that things will be ok because billionaires are in charge. What market participants may be asking at some point is,  " If you are so rich, how come you're not smart?"

Stocks In Beginning 2017 Have Rich Premiums

Looking for opportunities in the Q8 looks a bit daunting relative to where these stocks were when Obama took office in January 2009.  CoverRisk calculates the value of a stock, futures, whatever based solely on price and the performance of long/short models.  Discounts in 2009 reflected near panic liquidations leading into the March 2009 lows.  Today, premiums reflect a complete reversal from the 2009 discounts as large premiums have developed to accommodate the reach for price in thin declining volume markets.

Fat Shares and Donald

S&P 500 sits with the bulk of equities still maintaining what appears to be the premium created by share over subscription while in search of returns, all under the protection of Fed accommodation. A few stocks stand out as fat, Google and Microsoft are two, while Ford appears to be the only gift out there of the Q8 (AAPL, BAC, GOOG, GS, IBM, MSFT, F, PHE). Long only metrics favor point to F and PFE.   AAPL seems a bit tired as it has been nearly 1900 trading days since it has traded down to to what CoverRisk considers trailing value.

So the world equity markets are fat and now enter a period in sharp contrast to those started in 2008 which necessitated lower rates and steady leadership. Now, numerous rate hikes are forecast along with what looks like might be an unsteady, unpredictable national steward. Remember, equities can act happy, such as in the current rally, but they are not always so smart. One only has to think back the subprime disaster whose warnings had been telegraphed for years leading up to a point where the equities gave it all up quickly. Premiums created to accommodate share over participation since 2008 have been ringing alarm bells for the last two and a half years and may finally catch fire with the Donald tweeting all the way down.

Markets Nervous

Right now the markets are slowly heading into the final turn of the year, but spinning into the final turn is still possible.  If in the coming days it looks slightly more likely the Democrats will win both the House and Senate as Hillary wins the White House, then look for a sharp sell off into the end of the year.   Most major investment banks are looking for a bear market to begin but to date equities have remained stubbornly just off their highs.  Big overplayed stocks such as Google and undervalued stocks like AAPL represent a market divided.  Calls for a recession beginning next year are being pushed.

What still remains in question is how will the years of accommodation play out.  Bears believe the clock has run out on fixes and unprecedented stimulation has brought only temped growth.  There are many examples in the economy of odd weakness in real estate after such a long period of low rates and there are on the other hand signs of broad growth in jobs as represented by the current employment numbers.
 
The pros seem to be a bit short the markets and the general institutional players seem to be cautiously nervous.  Look for volatility to pick up either way as we end the year.

Hillary's 75% Retracement

CoverRisk's model of aggregate tracking polls has Hillary experiencing a 75% Fibonacci retracement event. After climbing dramatically after her convention a retracement was inevitable when considering the polar opposite political divisions in the United States. The polling should trend up for the Democrat from here till the debates at a minimum if not for the remaining election cycle. Models still shows Hillary's probability of winning greater than the Republican candidate.

Stock indexes and their underlying components of stocks have played with large value premiums over the last few years. These premiums are presumed to be from accommodations on a global scale by central banks. For example, CoverRisk calculates the trailing value for the S&P 500 is around 1500 or around 30% lower than the close on September 16th, 2016. A Republican presidential victory in November might begin the decline which would test these trailing values. This type of macro move is always unpredictable since all successful macro predictions are based purely on luck. However, if such a decline were to take place one could image the demagoguery blame from which would spew into an even greater unfriendly and declining investment environment. The I, me, mine make up of the traditional Republican base could see a devastating blow to their financial conditions should all the index premiums disappear.

Markets as September Begins

Equity markets remained quiet in August with the Fed engineered intervention butterfly spread of long equities, short volatility, and short fixed income continuing to work. Despite the bearish calls on equities from Bank of America, Goldman Sachs, and Merrill stock indices keeping making all time highs.

National election data has had little impact though the bid under the market continues to point to the belief that Hillary will win. But in trading and politics one should never forget the "now I've seen everything" events which appear from time to time. A loony vote could put U.S. international companies and their shares in the dinger as attempts to implement trade and immigration promises are endeavored.

CoverRisk's Q8 shows GOOG and MSFT as the most overvalued.

Pres Race Over / How About Rally ?

Presidential Race for 2016 is about as interesting as it gets but the bid underneath the market has already figured it out and clearly sees the Democrats winning and extending the pro Wall Street tilt. The plans are already being set for a Ryan vs Hillary in 2020 but Republicans may have trouble putting the blood back in the bottle.

The S&P 500 and Nasdaq made record highs this week. AAPL is beginning its run to test all time highs while GOOG's rally is a bull trap. Relative to the rest of the market, BAC and GS have room to run while MSFT is a bad bet. As CoverRisk claimed in its last BaseOp2 post of 2015 "IBM has cleared the worst of the riskvalue issues and has the best relative outlook. " The stock is up 19% so far this year, the best of CoverRisk's Q8.

Market Rally Prefers Clinton

July was marked by low volatility and evaluated equity prices. This buy stock/sell volatility trend has worked since the first quarter . Markets will be sensitive now to presidential election polling. Up for a Democratic gain, down for a Republican. The election itself will probably not be as close as some polls currently indicate. CoverRisk believes it will be a Democratic victory. If it is not however, equity markets will enter a downside testing phase with negative rates presenting new challenges for quantitative easing.

GOOG All In

GOOG is at the top end of its riskvalue and continues to reflect a safe herd bias.   Much like AAPL when it was on or near its highs last year, GOOG has managers believing in price while underlying analytics show significant vulnerability.   AAPL holds a much better profile.