>>> The Crash
Since Sept highs global stock market cap off $4.85 trillion. S&P500 peaked roughly 8 minutes after 9/19 Alibaba IPO launch. Crash driven by end of QE, “growth shock” (Chart 1) & big position unwinds in energy, merger arbitrage & Europe.
>>> The Capitulation
Cash, flows, volatility, climactic selling of winners = short-term trading low for risk assets. BofAML Breadth Rule trading “buy signal” was triggered intra-day. Note rally in “meltdown leaders”…small cap energy stocks up 8% from lows after 40% sell-off in 7 weeks.
>>> The 3P’s
Classic cyclical lows triggered by Positioning, Profits & Policy. An October low requires EPS resilience and/or US consumer data that cause rates to rise. Global policy coordination and/or German ECB panic also required for investors to reduce
cash. In contrast, bear market risk comes from an LTCM-event and/or policy conflict (the End of QE = Start of a Currency War).
>>> The Trades
Investor conviction is low. Nonetheless, the contrarian should soon buy Pain, and sell Pleasure. Our Oct’14 FMS shows that the assets most vulnerable to a trading rally are EM, commodities, resources, small-cap and European cyclicals. Absent a
recession, the USD, real estate and stocks over bonds remain our favored asset allocation for 2014/2015.