The Zigmont Report (Recap for 5/6/19)

Mike Zigmont

Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $10B AUM, offering volatility management solutions to its investor base worldwide.  Mike has been publishing his daily newsletter (Monday-Friday) privately for the firm’s investors and his personal contacts in the investment business since 2008, sending it daily shortly after the market close.

The opinions expressed below are my own and do not necessarily represent those of Harvest Volatility Management, LLC.

Dip-buyers’ party.  Over the weekend, President Trump tweeted that he was going to increase tariffs on China from 10% on $200 billion of imports to 25% on $325 billion, effective Friday.  Overseas markets took a big hit and our futures market sold off in sympathy.  The US/Chinese trade negotiations went backwards and the dreams of a deal were dashed.  Dashed for half a day.

Despite little reason to believe that this was empty bluster, investors rushed into the dip this morning.  The S&P was off about 50 handles (1.7%) at the open.  That was perceived as the juiciest of dips and the bulls had no fear.  They went to work and pushed the tape steadily higher over the course of the session.  By the end of the day, the S&P was off a trivial amount and the US/China trade news was essentially dismissed.

I don’t know why investors are so willing to ignore the negative to the trade talks but they are.  The narrative in the market is that the US/China talks will still probably conclude with a deal so this negative news is being discounted as a bluff or a scare tactic.

While that conclusion isn’t crazy, I find it very peculiar at how confident the market is in that particular outcome.  The market thinks the chance of a failed negotiation is essentially zero.

Maybe the market is right?  I think bulls are way too out over their skis on this but we’ll find out soon enough.

Today’s rally off the lows strikes me as reflexive behavior by the longs.  They have jumped into so many dips for so many years, I don’t think they *think* any more.  There’s a prevalent attitude (that has been wildly profitable over the last 10 years) that every down move is a market mistake, an overreaction because of fear, that doesn’t reflect the true state of the investment landscape.

That is poppycock.

But dip-buying is such a treasured investor behavior that I don’t think it will stop anytime soon.  We’ve mentioned this before, the widespread and unthinking adoption of the same trading strategy.  It should make us nervous.  I don’t know when it will break, but when it does it’s going to be nastier than usual.

The main takeaway from today has nothing to do with today’s headlines and news.

The takeaway is that investors are very synchronized in their trading behaviors and rationales.

This isn’t a run-of-the-mill coincidence of short-term investor behaviors either.  This thing has 10 years of positive reinforcement behind it.  It’s going to be stubborn.

See you tomorrow.