We believe that the behavior of the market yesterday told us so much about the current “psychology” of the market. In essence this is what happened:
The Chinese stock market fell some 7%
Typically we were expecting the following in response:
- The USD (UUP) to rise at least by 1%
- The Aussie Dollar to fall by more than 2%
- The Dow (DIA) to fall in excess of 1%
- Emerging markets (EEM) to fall by more than 2.5%
- Emerging market bonds and US Junk Grade bonds (PCY and JNK) to fall sharply, like in excess of 2%
- US Treasuries (TLT) to rise significantly, at least greater than 1.5%
- Commodities (CRB Index) to fall reasonably significantly, greater than 2% down.
However, reality was somewhat different:
- The USD and US Treasuries didn’t budge
- The Dow finished a mere 48pts (0.50%) down
- Emerging mkts did fall but at 2% down it wasn’t what one would have expected
- Emerging mkt bonds and Junk Grade corporate bonds actually closed higher
- The Aussie closed higher by 0.40%
- Commodities did fall by more than 2%
So yes we were surprised particularly with the behavior in highly risky emerging market bonds, junk grade corporate bonds and the Aussie Dollar. It was only the movement in commodities that did not surprise us!
This behavior suggests to us that the underlying tone of financial markets is bullish and that one could do a lot worse than continue to position from stronger equity markets (and all things high yield).
Take careful note of the behaviour of the two charts above, whilst they continue to make new highs equities will very reluctant to move lower.
Our wealth creation portfolio is up 14.6% since the beginning of the year with approximately 40% of the volatility of the S&P 500. This portfolio is not leveraged.
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