The Title should have Been: All In or All Wrong?
The headlines read that the Smart money is All Short. The commitment of Traders (COT) shows that the Speculators are Long. Record, All Time High Longs.The Commercial speculators are at All Time High Short positions. Who's going to be right? Most expect the "Smart Money" to win out.
The optimism from February has lessened. Sentiment has gone from very bullish to almost Neutral. There are stirrings in the VIX. We think that its level is too low to really be a reliable signal. Interestingly, when a year starts off with a bang, it keeps going. 9 out of 11 times. The exceptions were 1987 and 2007. Some therefore, point to 2017.
Yesterday the markets were rolling nicely. The FED minutes derailed the Rally. The view was that stocks were"highly Valued". In our view the surest way to go broke in the Stock market is to listen to Central bankers. Guys like Trump give their opinion about stock prices. The FED is going to let their Balance Sheet run off. That's the only reasonable course of action. If the FED is ever going to get rates back to Normal they have to shrink the Balance sheet. If the FED is going to be able to act on the next down turn they need a smaller balance Sheet. What we didn't see anyone mention is that the Fed has been a major contributor to Treasury. The coupon income is forwarded directly to Treasury. From memory that's in the order of $600B.
The Jobless claims fell by 25K to 234K. We are rolling along. Draghi said it was too early to dial back on Stimulus.The Global recovery is finally rolling along.
Merrill has some insights. The Sharpe ratio for the Last 12 months is 3.8 for their universe of Hedge Funds. The S&P is 1.3. They think we saw the Biggest Short squeeze in Q4 since we had 2the biggie in 2009.There's been a record swing into ETF's The Hedgies added $17.4B for a total of $45.0B They had the lowest net Short positions. That speaks to a mammoth Short Squeeze. Choose your sides. The "Smart money"? The "Dumb" money that's long?
Invest the Money.
Edward Pennock CFA, Founding Partner
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