Last week, as the S&P 500 touched 2950 to make new all-time highs, trading floors and high net worth investors were cheering the mantra "It never pays to be short, as the market can never go down." It is incredible how investors have the memory of a gold fish.
Less than five months ago, everyone became Nostradamus, predicting the end of the world and licking their wounds after 30%+ losses. Today, these same investors are all drunk on the central bank Kool-aid. The irony is most investors did not believe the market bottom in January and only started getting sucked in last month, when they feared the cash burning a hole in their pocket.
The market had been given one-line teasers literally every day over the past four months saying "talks are going very very well," like two-year belligerent toddlers been given candy to quiet down. Great strategy, as Trump and U.S. officials sucked everyone in to believe that all is well.
Last fall, when markets were down on their knees, it was interesting to see both sides be humble and come to the negotiating table. Amazing what a 25% rally does to financial muscle. Now, U.S. markets have soared, with a robust economy, and so too is China in much better shape as its markets recovered all of the losses of the second half of 2018.
The talks concluded on Friday. With no tweets or grand TV appearances, it almost seemed as though something was amiss. Yesterday afternoon, Trump tweeted saying that he would increase the 10% tariffs on $200 billion worth of goods to 25% starting from Friday and $325 billion of additional goods will be added to the list, as well. Basically, it seemed that China was slowly backing away from the soft agreements they made earlier, and Trump either wanted all or none.
The market refused to accept it, but the key structural issues such as intellectual property theft and transfer of foreign policy ownership had always been sticking points, and China would never be man-handled into accepting U.S. demands on their domestic and foreign policy.
Trump wants to be the King of the Jungle. And so in his typical bullying way, he is now threatening the Chinese delegation, hoping to scare them enough to concede. China's state-owned Global Times reported back "China has long ago prepared for the worst. We won't buy this trick." Besides, China can just print trillions of dollars of more yuan to support economy if needed. What is another 100% of GDP really, as debt does not seem to be a problem this decade.
The Dow is down more than 500 points and the Nasdaq down about 2%. The S&P 500 June futures are showing 2894. There is a significant amount of negative gamma at those levels. In layman's terms, the Street starts getting very long the market below 2894, meaning they need to sell even more to be hedged according to their risk mandate.
Following the last March expiration, no one bothered to buy any put options to protect their portfolios as the "the market never goes down" rationale took over. Volatility indices have been trading at all-time lows, as everyone was short volatility as a no-brainer trade. All this extreme positioning can see a massive unwind as investors will want to lock in any profit earned year to date before the summer lull starts.
The Chinese yuan has fallen aggressively, down to 6.80 vs. the dollar; devaluing. This is very bearish for commodities and Chinese exposed cyclicals. Copper, base metals and oil -- all linked to the global growth cycle -- will be sold off.
It is important to note that prior to the trade deal being resolved or not, the market had been showing signs of exhaustion. Earnings were beating lowered estimates, but the outlook was not compelling for Q2 onwards. Valuations were stretched and bond and rate markets had been showing signs of distress that were being ignored by equities.
The oil market had been capped at $70/bbl Brent, as U.S. production kept growing and OPEC was slowly going to offset the 1.2 million bpd of cuts from last December. Whether it was iron-ore, steel, copper or oil, fundamentals were looking stretched warranting money to be taken off the table.
Trump has just one agenda, to get the S&P 500 markets higher into 2020 re-election -- and get re-elected. Tax cut benefits are done and dusted. He is running out of ways to prop the market higher. Easier monetary policy can certainly help, but the Fed is not playing ball as it is impossible to justify rate cuts at these levels and state of the economy.
The cynic in me cannot help but think Trump wants to crash the market to stronghold the Fed to keep rates low and cut aggressively. If the U.S. is seen to enter a recession now, with the market to recover healthily by 2020, job done. He is a hero for the American people. Ashamed to say it, but theatrics tend to work -- especially when the public is clueless.
Investing is about risk-reward, but there is no cure for greed and FOMO taking over. Fundamentals always come back to haunt investors.