I am short on time this weekend, which is probably a good thing given that I have really struggled to share the excitement over last week's events. We had the swoon of the S&P 500 and its first 1% daily decline in more than <insert number here> days on Tuesday. Overall the index had temerity to post a 1.4% decline on the week, the biggest fall since the first week of November. It was with a tinge of embarrassment that I watched the overreaction of my fellow equity investors on both sides. For the bulls, this was the buy-the-dip of a lifetime and for the bears it was the signal that the bull market had come to an end. In truth of course, it was evidence of neither, although I suspect that the bulls will be the ones sleeping with most unease.
Weaker oil prices, a Fed rate hike, and Geert Wilders' anti-EU party swooping in as the second-biggest party in the Dutch parliamentary elections. You would have thought that these events last week would have been enough to scare investors. But headlines can be deceiving. Despite the weakness in oil, the price hit strong resistance at its 200dma, and snapped back in the latter part of last week. The tone of Mrs. Yellen's statement was just right to maintain markets' faith that the Fed will only gently push borrowing costs higher. In other words, risks assets wanted a dovish hike and decided that this is what they got. And finally, the key story in the Dutch elections was not that Mr. Wilders made headway.
The sharp fall in oil prices was the most interesting market news last week. It sends a signal that investors are waking up the fact that the brittle OPEC output deal always was going to be challenged by U.S. producers restarting their drills as prices rose. I am no expert, but this does not come as a surprise to me. OPEC is an unstable alliance, and U.S. producers are governed by one thing and one thing only, price. Whatever detente exists in the global oil market, I am pretty sure that it is a fragile one. A significant leg lower in oil could be significant for a number of reasons. It could herald the speedy end of the "reflation trade," which would suit me well. But if it morphs into something more dramatic, we're back to the story of stress in energy high yield debt, default risks, and perhaps liquidity/fund closure risk in the broader corporate bond market. I am not sure that would suit the portfolio one bit.
The uproar over the Snap IPO is a good metaphor for the growing disdain in some parts of the market towards the ever-rising stock market. I explored the uber-bearish meme here, and it remains strong as ever. The bears have thrown everything at the market; extended valuations, stretched technicals, a looming "Trump disappointment", a hard landing in China, or a breakup of the Eurozone. The louder their objections, though, the stronger the rally has become. I have found myself in a similar trap since Q4, when my models started to suggest that I should fade the rally in equities. It has been a costly position in terms of relative performance, but at least I haven't suffered the slings and arrows of those who have been short outright.