No Tapestries For This Market.

Boy, I’ve got to tell you folks something: Thursday doesn’t feel any different from Wednesday in terms of figuring out what narratives to latch onto or otherwise gleaning something about whether the laundry list of questions implicitly posed by rising yields, trade tensions, the resurgent dollar, and regulatory concerns have been “answered.”

I mean, it’s obviously not reasonable to expect that these type of big picture quandaries would be definitively addressed or resolved from one day to the next, but if you just scan the headlines on your favorite mainstream financial news site on Thursday, they’re the same as they were yesterday, with the exception of Facebook having seemingly assuaged some of the most acute jitters.

The long end selloff abated, but we’re still at 2.99 on 10s in the U.S. and the dollar is up again as the euro sank to a three- month low following large option expiries and on the heels of the Draghi presser.


To be sure, there’s nothing inherently wrong with having a day where everyone kind of muddles through with a bias towards higher equity prices, but it sure is a pain in the ass for those of us who have gotten used to bombastic headlines and constantly shifting dynamics.

As far as earnings go, we’re taking things day-by-day; at least in terms of how the markets are inclined to interpret things. One man’s Caterpillar is another man’s Boeing.

Wells Fargo is out with a little something from Chris Harvey who notes that stocks which have underperformed headed into earnings are outperforming post-results. To wit:

We think the recent equity market sell-off has recalibrated earnings expectations. As a result, we believe traders will be rewarded for buying weakness into earnings. Though we only have a small sample size (30 stocks), the initial results are encouraging. During the 1Q18 earnings season (S&P500), the weakest performing stocks heading into 1Q18 earnings (bottom quintile of underperformers) have provided some of the best 1-day relative returns post earnings.

  • In the 1-day post earnings release, EPS Beats for material underperformers have outpaced the market by an average of 2.1% (Exhibit 1).
  • In the 1-day post earnings release, EPS Misses for material underperformers have outperformed slightly. The average market outperformance for the group is 0.2% (Exhibit 1).


The takeaway for these underperforming stocks is bad news (a Miss) is, on average, already priced into the stock and good news (a Beat) is rewarded. The average 1-day outperformance for all 1Q18 EPS Beats is roughly 70bps. The average 1-day underperformance for all 1Q18 EPS Misses is roughly -150bps.

Whatever, right? At least it’s something.

Underscoring everything said above about the how difficult it is to reconcile the number of competing narratives into something that approximates a coherent world view is former trader turned Bloomberg columnist Richard Breslow.

I just got around to reading his latest and the following excerpts perfectly encapsulate everything I was trying to say here at the outset. I’ll leave you with a few key bullet points from Richard.

  • There are an inordinately large number of markets in play. And they all seem to be somehow at the same time interconnected but marching to their own drummers. It’s a very difficult time to weave a one-size fits all tapestry. And maybe, for the moment, it isn’t a great idea to try. Inspiration, or at least some clues, will come from the trees not the forest. Stay closer to the markets you know best
  • I was wondering why this should be. After all, what has been going on of late appears to make a lot of intuitive sense. I’m down with a higher dollar and bond yields. A somewhat steeper Treasury curve seems entirely appropriate after its massive flattening and nascent hints at inflation. Or, more meaningfully, inflationary expectations. And equities caught within powerful technical bands with very tradable and, to my mind, clear pivot levels
  • But the spanner in the works preventing me from having a story and sticking with it is that there are an inordinately large number of exogenous disconnects. Other global markets and economies most decidedly not playing along. Geopolitical risks in virtually all parts of the globe feel mispriced. These aren’t Black Swan events and the lurch back and forth between search for yield and panic liquidation risks becoming an increasingly untenable investing thesis. Algorithms still think bad news will ultimately be good news. And that’s wrong. Positioning has too large an influence in markets where at any time liquidity goes missing
  • And distortions built up over the last decade mean even large corrections that will play out over what feels like an eternity can happen without changing the really big picture. But it won’t feel like it. Despite best efforts to ground my ideas using long-term charts, the shorter ones keep pulling me back in. Maybe this is a sign of regime change toward greater market normality. But if it is, it’s only the earliest of days

And what good is a post about “tapestries” without Indiana Jones? I mean, “this is a castle isn’t it? There are tapestries?”

Speak your mind

This site uses Akismet to reduce spam. Learn how your comment data is processed.

NEWSROOM crewneck & prints