The collision of global markets and social mood

Wednesday, February 8, 2017

Wednesday -- Circular Arguments, Quants On Models, Madison Avenue Anti-Social

S&P E-mini Futures:
ES 2279.75 would need to break to warn bears.

Circular arguments abound like a katzenjammer -- German, meaning "a whaling of cats." (Also slang for a hangover.)

Hearing over and over that "bonds, gold, and the dollar are suggesting a big move lower in equities."

I'll be the first to admit that I think equities are on borrowed time. But it feels like many are viewing recent price action through a flawed set of assumptions. . . from the 1970s.

Bond prices have been going up since 1981, yet their recent bounce suggests equities are going to tank?

Again, price history since the credit expansion shows otherwise.

For several years, the dollar traded almost completely inverse to equities, and suddenly a dollar correction is bearish for equities?

Gold and the S&P rallied together from the 2003 lows to 2011 and from 2016 lows too. Suddenly a gold rally will cause an equity correction?

Wall Streeters should listen to two well-respected quants who warn against treating markets like machines.

Models are prone to fail because models can't model psychology.

Paul Wilmott:
"Banks and hedge funds employ mathematicians with no financial-market experience to build models that no one is testing scientifically for use in situations where they were not intended by traders who don’t understand them.

"People make finance too mathematical . . . so mathematical that many people who have to implement the models don't understand what's going on."

Emanuel Derman:
"I don't think you can use quantitative methods to explain markets . . . I sort of think it's an illusion."

Writes Derman, "When you do physics you’re playing against God; in finance, you’re playing against God’s creatures."

"Is it reasonable to treat the economy and its markets as a complex machine? Or is quantitative finance merely flawed thinking masquerading as science, a brave whistling in the dark?"

Elsewhere, Bloomberg just added fuel to the fire:

This article is a Hot Mess of Bullishness. A grab bag of the usual suspects. It's all here . . .

Animal spirits. Cash on the sidelines. Buybacks reducing supply. The Great Rotation. Support for valuations. Corporate bond issuance. Emerging market redemptions.

And the grand finale? Excess savings.

Finally, been harping about the potential for a huge shift in the social media landscape. It may be starting.

"Marketing Land’s sixth annual Hashtag Bowl revealed that out of the total 66 ads that aired during Super Bowl LI, just five mentioned a Twitter handle, and four a Facebook page."

To repeat: Madison Avenue media buyers are as fickle as they come. If they sour on the Facebook for any reason, it's over.

Socionomics has warned for several years: social media will end up as anti-social media.

Risk On: AUD, CAD, EUR, GBP stronger. Risk Off: CHF & JPY weaker.

Weaker USD. One group says this is bullish. Another group says bearish. Circular arguments (referenced above).

Prices higher with a tilt toward yield steepening -- short-end prices showing relative strength vs long end. Volume still not showing up.

Circular arguments here too.

WTI crude needs below 50.71 to break the "hanging at highs" phenomenon of late. Another object of circular theories lately.

All the usual suspects higher today, especially copper.

Gold is not showing the volume signature that one would expect if it's ready to blast to the moon as so many are suddenly saying.

S&P Outlook:
Anything above 2294.59 today could signal new highs in the offing sooner or later.

As noted at the top, ES 2279.75 is a particularly clear stop for e-mini futures.

Below, the 2277-2282 area has volume support. Further down is the 2238.83 gap. (Cash prices always bolded.)

If the 38.83 gap is filled, it would likely argue for a retest of the lower trend line seen here:

As a side note, last night I went for a walk in the moonlight. Ended up in a new area and suddenly looked up. Was standing in front of a doorway.


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