I bought the S&P 500 yesterday evening just before the close. I will send a full rationale in due course, but the basic argument is simple: US economic indicators point up; credit spreads have recently widened on Spain but the country is fundamentally solvent so a crisis episode is unlikely; therefore there is scope for equities to rally on a narrowing of credit spreads and little risk of a pullback based on economic concerns.
What I want to talk about here is how this feels. To go long equities after such a strong rally, and after two years of mid-year weakness in the market, is counterintuitive; further, I get the impression that it is also counter-consensus, inasmuch as many people see bogeymen around every corner or feel that a repeat of the past two years is likely. This makes me feel good. Taking market risk when there is plenty to worry about feels good, because it requires an exercise of strength and exercising one’s faculties feels good. Trading is a lonely, personal, unending battle with no army at your back, and that is an aspect that I very much enjoy. There is a real danger of this, of course: that one will trade purely for the pleasure of the fight, whether or not one is going to win. That is something to keep an eye on, but I think that my performance over the past three months demonstrates that I am a long way from overtrading.
This morning I have read an excellent scenario analysis from an investment bank on the subject of Spain’s finances. Spain’s relatively low debt/GDP ratio means that its debt dynamics are very different from those of Greece. Even if there is a sharp, two-year contraction in the economy in 2012 and 2013, Spain’s debt/GDP ratio stabilises below 100% as long as moderate growth returns and the government keeps to its fiscal plans. As long as Spain is solvent, the dangers faced by the market are the self-fulfilling panic and a deficiency of capital inflows such that the government is unable to fund its deficit. I think that the ECB will intervene to prevent either of these, because it has already done so repeatedly; and, given that, the market could well anticipate ECB action, thus rendering it unnecessary. That is the reason for buying equities today. If the market decides to test the ECB once again, it will take a while for it to be goaded into action — which is why I have bought SPX with a position size of half a risk unit. The stop could get hit if the ECB is tested, even though it ought not to be because the market ought not to need such a test at this stage of the crisis.
- Initial claims 386k d.e. Back to the levels of late 2012. However, the seasonal adjustment is having a big effect here. On an NSA basis, initial claims are at their lowest in the fifteenth week of the year since 2007. Compared to the same week last year, initial claims have been lower in three of the past four weeks. Initial claims have started falling below their 2008 levels on a weekly basis, on and off, this year.
- Eurozone consumer confidence fell back to -20, d.e.
- Existing home sales 4.48m d.e. Mar.
- Philly Fed manufacturing index 8.5 d.e. and fell.
- German Ifo business climate rose a little to 109.9, b.e., but has basically hit a plateau.
- UK retail sales 1.8% vs. 0.4%e., Mar.
No data over the weekend.