As the calendar struck a new month -- yet another marked-to-market opportunity for hedge funds and institutions to show progress to their investors -- the market experienced a vicious rally in all the laggards of October and an underperformance of all the winners of October. It was as though portfolio managers stood on the trading floor in front of the traders holding a mirror in front of their portfolio holdings.
Industrials, materials, financials, emerging markets, China, copper -- all cyclical sectors and asset classes that had been beaten down in October on worries of economic slowdown and liquidations, outperformed the defensive sectors like utilities, consumers and oil that had all outperformed rather well in October. Even stocks in the respective sectors showed such characteristics. A great example is the performance of stocks like Micron Technology (MU) , and Alibaba Group (BABA) -- stocks exposed to China that were literally hammered over the past few months, outperformed likes of Amazon (AMZN) and Microsoft (MSFT) -- quality names that had fared much better in October despite the selloff. There was a clear rotation across the board. Now, the big question is whether this is the start of a new trend, or just a dead cat bounce from extreme oversold levels. (AMZN and FB Action Alerts Plus holdings.)
November 1 is not really like January 1, when traders and funds actually start the year with a 0 on their risk management sheets, so the enthusiasm of this move is surprising. After all, did the worries over economic recession on China slowing down -- the colossal mountain of debt China holds now spiralling out of control, and being unable to protect their FX reserves at a time when dollar is rising with higher interest rates, killing economies as their debt service costs sky rocket -- just vanish?
Showing just how fickle the market is, it all started with the Politburo in China stating on Thursday that they "were looking into measures to support the economy," followed by President Trump claiming that he and President Xi Jinping "had a great conversation and discussed many things, with a heavy emphasis on trade and discussions moving along nicely with meetings being scheduled at the G-20 summit in Argentina."
Voila! That's all it took for traders to scramble over their shorts and chase to buy China-exposed names and sectors. The yuan rallied from 6.97 up to 6.91, as fears of it breaking the 7-level dispersed. It is astonishing how the words of one President can move trillions of dollars more than actual Fed policy makers and central banks. One wonders if the President is running a hedge fund of his own.
There is no doubt that some of these oversold mining/copper and China-exposed names and sectors have been disastrously beaten up over the past few months, but question abound as to what a settlement might look like. Will China readily meet all the demands of the U.S. and succumb to U.S. imperialism? It sounds like a rather tall order, especially given that U.S. debt and corporate profit margin outlook and trade is suffering too. In October, the S&P 500 fell 8% alone! The fact of the matter is that it won't just be "everything is fine, business is normal" agreement. In addition, we still have another week for U.S. mid-term election results, where if the GOP loses their majority, China may not need to give in that much. We have another month before the actual G-20 summit. The data in between will not be getting any prettier until the underlying economy improves.
U.S. nonfarm payrolls will be reported today. Market expects consensus of 190,000 growth in the October jobs report, with the unemployment rate holding at 3.7%. Another nail in the coffin for markets is the U.S. dollar. If this number comes out stronger than expected, rest assure, the dollar will rally, as the Fed will have zero justification to hold back on raising rates, other than to appease Trump and stop his ridiculing on Twitter.
It is tempting to call a bottom to markets day on day, but it takes more than just a day's bounce to call it a trend. The market is torn right now on "buy the dip" or "we are at the start of a new crisis". I personally am in the former camp, but it will not be an easy one-way path. One has to be nimble and survive the day on day volatility to live to fight another day. Fundamentals, fundamentals, fundamentals - this is the only thing that keeps one sane. After these chauvinistic national games end, perhaps we can go back to looking at company balance sheets and investing.