Betting on the Unexpected
Money is made by discounting the obvious
The Outlook for Global indices for 2019 is conditioned by what FITS both with the volatile but uncertain global economy and market that ended 2018 but also strong parallels to other periods in history where conditions were similar (notably 1929, 1987 and 2000).
After the 2017 rampant bull market, our projection for increasing two way volatility for 2018 following 1987 and 1929 templates was broadly accurate even if the market was much more erratic and the volatility of some indices did not reach the same levels. Certain stocks, notably the world’s largest (AAPL) rose and then fell by the same percentage in the same time as they did in 1987.
The underlying similar conditions of slowing economic growth combined with rising yields and a benign Dollar amidst a persistent if not complacent bullish sentiment grew throughout the year.
The underlying cause was primarily the Trade War (that also characterised 1929 and 1987) whose typically delayed impact on the global economy suggested the US and even other worse performing indices would withstand the continued imposition of tariffs and increasing international tension. We believe the same conditions will continue throughout 2019 leading to even greater two way volatility even if the Trade War is resolved. The damage has been done.
Indeed whether the bubble of the 2010s bull market has been burst typifies the debate that is raging amongst traders and investors globally. But, as is frequently the case, this debate is misplaced. To get the right answers, that is to make significant money in 2019, you have to ask the right questions. It is nevertheless worth asking.
Has the bubble been burst? Yes. The fundamental milestones that we followed throughout the 2010s bull market have all been reached. The intermarket requirement of a blowout in yields an upside correction only in USDJPY and a ramp and fade in commodities have similarly been met. Other indices notably DAX remained in bear markets for the entire year. The US index price action throughout the year followed 1987 crash price action until year end. Sentiment has been complacently and persistently bullish until the December risk aversion. Sentiment is now mixed. That important observation suggests the US markets are no longer following the technical template set by 1929 and 1987 even if it remains subject to the same Fundamentals and Intermarket relationships. They have started following other not dissimilar templates.
Will the Markets Crash from here? No. Just as Indices failed to sustain new highs early in 2018 so we believe the mini crash into year end is effectively a mirror image.
Will the Markets go to new highs from here?
No. Even if the initial January rally fades for a downside correction only we believe the ensuing rally in indices will give the impression of a bull market but increasingly lack the fundamental justification and therefore fade into year end. That doesn’t mean some instruments will not make new highs as such divergence is a common and important indicator of a top.
Will Markets Crash Later in the Year? Timing has proved difficult due, we believe the slowing impact of the VIX market in the US. However, at this point we strongly believe the answer is yes. In this respect, the end of the 1980s Japanese bull market is potentially very instructive. But the dot.com bubble of 2000 is as good as it gets from a historical template (fractal).
Will we see clean trending markets? Sometimes yes but mainly no.
Will we therefore see ranging markets? For much of the year yes but a 20% SPX range is plenty in which to make good money.
Which markets will be the best performing? The US. This is where the volatility exists and where the capacity or misplaced incentives to buy are greatest.
Which markets will be the worst performing? Depends at what point of the year you measure. Ultimately it could be the US but DAX and FTSE remain the underperforming indices in terms of both volatility and return. Some stocks will also surprise in over and underperformance – the subject of next week’s newsletter.
Which is the clearest market? An index we identified early within the bull market is again showing extreme clarity, to us at least.
What if a trade deal is reached? This is a very good question even if the reason for asking it is misplaced. Although we do not have a crystal ball we do suspect some sort of resolution has to be and will be found. But as the damage to the global economy has already been done, any such rapprochement risks producing the aggressive sell off that will prove an excellent longer term buying opportunity possibly not until 2020. Remember the delayed impact to the introduction of tariffs. So too constructive reaction to the end of a Trade War is also likely to be delayed.
Are there any other templates that show similar expansions in similar conditions? There are a surprising number of similar major corrections (the reaction from the 2018 top will ultimately prove corrective). And indeed many following similarly expansive bull markets. The Eisenhower era provides more than one excellent example.
So this is like 2018 then? Very much so. In fact early calendar matches for indices with 2018 are stunning. And why wouldn’t they be? 2019 FITS very well with 2018.
So how do we make decent money in 2019? By learning the lessons from 2018. That was not a market to hold positions too long. That is the symptom of a ranging market. Flexibility is important within an erratic market where drivers may change and price action gives early warning of alternative scenarios. Our outlook for 2019 highlights certain key drivers such as Earnings per Share and particularly a very exciting and clear Nasdaq template. Similarly, extreme cynicism particularly when associated with either anticipated news or complacent or extreme sentiment. Ignoring correlations to a large extent until at least later in the year. Many perma bulls on DAX suffered the fate of looking for a German catch up on the US. Similarly, following rotation (one index or stock versus another). An increasing number of funds have switched to this strategy to reduce risk but not necessarily return in a volatile but erratic market.
There are plenty of plenty of surprises in store for 2019.
Following a huge amount of research and reorganisation at Matrix so we can focus more on outcomes rather than inputs, we are confident we will exploit them—expected or not.
We are very excited about the prospect for index markets in 2019, and will be updating our subscriber Indices Analysis pages far more frequently in line with their periods. The three-monthly views will be updated every three months, the 10-day every two weeks and the 48-hour every two days. We will also be outlining our 8-hour outlooks as usual but looking to highlight more short-term opportunities. Even if swing trades became harder in 2018 there were and remain many excellent intraday trades we will be signalling more and hopefully, where volatility allows, every day.
Here’s to making the very best.
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