Traders and strategists on Bloomberg TV had one overarching message last week. It's boring out there, too boring. John C. Bogle's Vanguard and Larry Fink's Blackrock have turned passive investing into a volatility crushing monster. Indexation is an immovable force, which takes no prisoners, evidenced by the fact that the return on the main U.S. stock indices is driven almost exclusively by five major names. Trying to beat the tide by picking stocks—both long and short—is proving nigh-on impossible for active managers. Adding insult to injury, the bond market is a snoozer too. The curve can't figure out whether to steepen or flatten in response to the Fed' slow hiking cycle—I am betting on the latter—and yields have been range bound as a result. Clearly, investors aren't easy to please. When volatility is soaring, they assume foetus positions and cry for central banks to rescue them, and when low volatility finally arrives they deplore the lack of opportunities. Maybe it is just a question of the porridge being neither too hot nor too cold, but when punters start complaining about low volatility my spider sense goes off.
Read MoreMarkets raised a lot of interesting questions last week, and most of them had nothing to do with the French presidential elections. The main talking points were the stumble in oil prices—and other industrial commodities—and the growing anxiety that the stop-go cycle in China is edging towards the former rather than the latter. The main question everyone is asking when the market breaks key levels is whether it is the beginning of a more prolonged move. I am no expert, but if pressed I think oil and commodities will snap back. The chart below shows trailing flows of the DBC commodity ETF, which have been depressed recently. This doesn't preclude a further rout, but it suggests that investors' positioning and sentiment don't favour it. This story is corroborated by CFTC data, which shows that spec positioning in oil have been reduced significantly. This doesn't look like a market which is being caught out complacently long as was the case last time oil was routed.
Read MoreGoogle informs me that the advice to "sell in May, and go away" comes from the tradition of British merchant bankers—I presume in the 19th century—to leave London for the country side in May and come back on St Leger's Day in September. I am partial to a good anecdote, but does it work? In order to check, I ran a little study using the S&P 500 going back to 1991. The first chart below shows the returns you would have foregone by selling in May and waiting 35 weeks and 17 weeks, respectively, before buying back. I have included both mean and median returns, because the outliers can skew the former when your sample size is not large. The second chart shows the results of a strategy which shorts the S&P 500 in May, buys the first week of October, and holds until year end.
Read MoreInvestors have found it difficult to resist the temptation to become armchair generals in response to the recent flurry of geopolitical volatility. I have some sympathy for that. Political experts told us that Mr. Trump would mark the beginning of a new U.S. isolationism, and even speculated about the emergence of a new Monroe doctrine. The president's "America First" discourse, the statement that NATO is obsolete, and the rapprochement to Russia were all pivots watched ominously by other world leaders, especially in continental Europe.
This story, however, increasingly feels like ancient history.
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