Earlier today, former FX trader Richard Breslow explained that traders are suffering from a lack of confidence. Here’s what he said:
Watching things trade on Friday afternoon baldly made the point that traders have lost confidence in their ability to interpret what’s plainly market-moving news. Far from hoping to be the first to trade, they need someone else to commit and help create the narrative.
In short: markets have lost the narrative.
And traders will be forgiven, because let’s face it: the narrative died on Friday after suffering a stroke last Tuesday.
As it turns out, just about the best thing you can do now in terms of strategy is sell what worked last month and buy what didn’t. Here’s more from SocGen (do note the similarities in the first paragraph to what we said earlier about running out of ways to paraphrase ourselves).
Equities experienced a bit of a speed bump last week when the S&P 500 fell by more than 1% for the first time since September. The language accompanying this “steep sell-off” was really quite over-the-top, but given that the S&P 500 has declined by 1% or more on just seven occasions over the past year (versus an average of 25 per year historically), perhaps there was a pent-up desire to open the bear’s dictionary, particularly with commentators now having long exhausted the thesaurus for variations on the word “complacent”.
There is plenty to be bearish about. Equity valuations are tortuously high, with median valuations in the US and Europe near or at record highs, particularly once debt is included (i.e. on a EV/EBITDA basis). We estimate the US to be 25-30% over-valued if we compare today’s EV/EBITDA of 13 times to the 20-year average of 10 times.
Expensive valuations coupled with no meaningful pick-up so far in US EPS momentum (quite the contrary for US smallcaps in fact) – and the market is struggling to make headway.
This directional doubt is also visible across our factor indices, with this year’s lack of performance dispersion across styles a complete contrast with last year’s volatility. Indeed the only strategy to stand out this year is short-term (1 month) price reversal, which involves selling last month’s winner and buying the losers.