Sell In May and...Play It Safe?

Sell In May & Play It Safe?

We are not usually pessimists but when we see the writing on the wall getting bold redder each week that passes, we can't help but to take serious note.

Just last week, we warned readers that markets might be about to get nastily volatile during the summer. So far so bad. May hasn't started well at all. The S&P 500, as of the week ending this past Friday, posted its first 3-week losing streak since January. The VIX has finally gone above 15, and the U.S. dollar index has been breaking the chain of shorts in the past 2 weeks, wiping out many bears in the process.

As portfolio managers, we have been flipping from short to long repeatedly in 2016. The environment remains markedly difficult to navigate and although the markets are aware of the many known unknowns, the sheer diversity and quantity of these unknowns have led to nervousness in the markets, and that has been reflected in abnormally non-directional price action in various asset classes. Volatility is a given.

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"Is the Fed right to say that markets have misjudged its ability to raise interest rates both higher and quicker than expected? Well, the markets say the Fed is wrong on that. The gap between the market implied FF rate and that implied by the FOMC's "dot plot" is widening. For instance, the dots say FOMC officials see on average 2 more rate hikes this year while the market only expects 1. This discrepancy only widens the farther out we go.

Also, stocks have deviated far away from GDP growth expectations, likely because the transmission that are interest rates and monetary policy have become so broken, the market refuses to trade on fundamentals and are rather technical driven.
Lastly, whatever happened in March threw the balance between yields, stocks, and macro data totally off. All 3 have been divergent since and only one will ultimately be proven correct. So which is it?"

The BIGGEST Event Risks In June

We have been away from this thread awhile now, busy with new material, content and of course, trading signals.

So far, all so good. The first half of 2016 has sailed on by, and the markets remain generally trendless, yet dangerously volatile. To combat this, we have had to switch strategies to ensure that we are not exposed on any particular trade for too long. Long-term trades are simply not worth the drawdown in markets like this.

Near the end of the month, the UK will decide whether she remains a part of the European Union (UK). In other words, Brexit, or Bremain?

This is just one of many crucial, key market events that will take place in June. Given that this month concludes the first half of the year, we thought it'd be fitting we bring you some of the biggest event risks June will bring.

Get ready and mark your calendars.

From the article:

'The biggest risks in June (in our opinion) will be the EU referendum by the UK in the later part of the month, the June ECB monetary policy decision and press conference, the June FOMC statement and interest rate decision, and lastly the BoJ's monetary policy decision.'

We do the analysis and commentary for you, all in today's Daily Grail.
The Biggest Event Risks In June

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Image captions:

New opinion poll results surfaced in Britain Tuesday showing a 47% vote for leaving the EU (Brexit), and a 44% vote for remaining in the EU (Bremain). The news sent GBP crashing 130 pips against the USD and shockwaves across risk markets will global indices all down on the day and for the week. While such poll results are questionable, the consensus is that the Brexit vote is quickly catching up to the conservative.

Regardless of results, the UK referendum is surely one of (if not the most) the nuggets event risks in June and markets will likely continue to trade wildly on every ebb on this event."

Business Of Finance on Facebook, 1 June 2016


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Caption 2:

"The best and worst performing global financial assets in May and YTD (in both local currency and USD terms) as analyzed by DB:

May was a month of decoupling: oil decoupled from the dollar, and global risk decoupled from the once again sharply devaluing Yuan, but most notably May was a month where Fed rate hike expectations repriced midway through the month.
Markets largely took the move in their stride and reversed a difficult start to the month. Having said that we saw evidence of the repricing with dollar strength and EM/Gold weakness a theme. In fact for equity markets in particular the old adage sell in May and go away was looking relatively apt for the first week or so into the month before sentiment turned positive, seemingly supported by a combination of increasing comfort that the market can accommodate Fed tightening, higher oil prices, positive news from Greece and another decent performance for European Banks.

Looking at the winners and losers for the month one thing which stands out is the relative performance between local currency performance and US Dollar hedged performance during the month such was the strength of the Greenback. That was certainly the case with equity markets where in Europe in particular markets were generally up between 1-3% in local terms with banks in the middle of that range. With the Euro weakening 3% during the month however, on a USD return basis we see most European equity markets finish flat to slightly negative. It was a similar story in credit markets too where following two decent months of performance (on the back of the ECB CSPP announcement) May saw Euro indices eking out more modest gains of less than a percent in local terms in May with financials the relative outperformer. Looking at these in USD terms though results in most European credit indices down 2-3%. Performance was more impressive then for the S&P 500 (+2%) and higher beta US credit indices (+0.5%).

Further afield the top of our May leaderboard is headed by the performance for Greek equities (+11% local, +8% in USD terms) which rallied following the latest positive developments with regards to the bailout. Thereafter its WTI (+7%) and Brent (+5%) which rank second and third, extending what has essentially being an ongoing rally since mid-February now. Corn (+6%) also had a strong month. Developed sovereign bond markets sit in the middle of the pack although with concerns about Brexit starting to abate, it was Gilts (+2% local, +1% in USD terms) which outperformed. Finally the bottom of the leaderboard sees Brazilian equities (-10% local, -15% USD terms) prop up the rest as the political situation came to a head. Elsewhere Gold (-6%), Silver (-10%) and Copper (-8%) all suffered with the Fed repricing. EM equities and bonds (-4% and -5% respectively) also succumbed for the same reason.

Taking a look at year-to-date performance, its still commodity markets which are dominating the top of the leaderboard. Indeed in local currency terms the top five has WTI (+33%), Brent (+19%), Silver (+15%), Gold (+15%) and Corn (+13%) hogging the limelight, although if we flip to USD terms then Brazilian equities (+23%) and Russian equities (+19%) jump to second and fourth respectively. The impressive rally for the Yen (+9%) is still a standout while the overall performance for credit continues to be strong. Indeed in local currency terms we see US indices up between 3-7% this year, led by HY while European indices are up between 2-4%. Theres a familiar look to the bottom of the leaderboard with the Shanghai Comp (-17% local, -19% USD terms) the biggest outlier. Italian equities (-14% local, -12% USD terms) and European banks (-14% local, -12% USD terms) are still down double digits although have bounced back from how they ended Q1."

Business Of Finance on Facebook, 1 June 2016

Largest NFP Miss Ever Kills June Fed Hike

When we first saw the 38,000 print, we thought it was an error with our news feed. But no, the U.S. economy added only 38,000 non-farm jobs in May, the lowest since September 2010, and the biggest miss on record. It's really hard to overstate how morbidly bad May's payrolls were. It is, however, commensurately easy to kiss a June rate hike by the Fed a sweet goodbye.

Everyone was shocked. We were definitely shell shocked, because we couldn't believe just how bad the numbers were. Neither could the markets.

Flash crashes and surges sprouted the instant the first HFT algos recognized that it was really an epic disaster. Yes, here we are 5 days late to reporting on this monumental event; but you see, we have more to bring to the table, now that 3 trading days have already passed for the dust to settle.

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