Why Markets Will Stabilize This Week

Why Markets Will Stabilize This Week

No matter how convinced we are about the upcoming global recession, a strong bounce in capital markets in almost all markets is coming. I hereby declare that we will have a notable bounce in Equities this week (Jan 12th).  I am talking about a tactical bounce.

The goal of the market correction is to dislodge complacency and, yes, we had a lot of it. Strong selloffs are purely function of market imbalances cascading into risk limits violation and emotions kicking in. We are there. On Friday I hear the sound of a strong sense of panic that perpetrated global finance. When prices decline, there is usually a rationale trotted out by experts and the media. Talking heads on Financial channels predictable played up the dramatic simplifications:

  • Worst start to the year since 1938
  • >80% stocks below their 10 day Moving Average
  • Most cyclical stocks are getting crushed
  • All leveraged Energy stocks are getting torched like the world will switch completely to Solar and Wind power generation. Not gonna happen!
  • Crude oil is down 6% today
  • Market strategists becoming cautious
  • Last few days, energy experts lower forecasts for crude oil down to $20-25!

Such dramatic crescendos are not sustainable and tend to reverse.  There are clear positives for the market turn that are currently developing:

  • S&P500 closed slightly up on Monday
  • VIX (the volatility indicator) has turned down on Monday too
  • Long term Bond yields – US10Y are turning up – even safety bid has the price!

Even carnage in crude oil has run its course!   Speaking of crude oil – look at the Chart below.

Global demand tends to grow fairly steadily as fuel consumption is NOT that cyclical.  You can also see very clearly that the consumption of crude oil rarely deeps by more than 3-4% even in the brutal recession of 2008. No matter how severe the upcoming recession in 2016 would be, global demand for crude oil would not dip by more than 7-8%.  The price drop from $100 to $31 more than cushioned for that.  We have studied crude oil cost curves and one conclusion is obvious – although, oil is plentiful, it is fairly expensive to produce. Therefore, the current price is unsustainable.  I am highly aware of the overbuilt situation in crude oil but the marginal cost of production is about $45-55 and the current pricing of $31 per barrel is not sustainable.  It is a sing of short term imbalances which will go away.

In my company, we systematically track  more than 200 global macro indicators from G30 countries.  Last few days, correlations among global indices, markets and commodities reached conclusively high levels – another sign of an upcoming turn.   Markets don’t make bottoms on good news –  I am buying this week (started last Friday).  Plenty of ideas to choose from.

Today is the right day to use the quote from David Bowie, who despised conformity, herd mentality and dared us to act boldly:

“Tomorrow belongs to those who can hear it coming.”

Do you hear the Tomorrow coming? Because it is coming…

Why Markets Will Stabilize This Week

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