Smart money sees ‘dead cat bounce’
The smart money wants more before it’s happy.
As the U.S. appears to step back from an all- out trade war, credit investors are staying away from the relief rally that’s stoked Asian and European stocks and spurred the biggest one-day jump in the S&P 500 Index since August 2015. That came after U. S. President Donald Trump tweeted “all will be happy!” with the results of the ongoing trade talks.
Corporate bonds, often seen as a leading indicator for the direction of stocks, suggest skepticism of the equity rally. So too do a handful of other indicators, raising the prospect that investors may be buying into a temporary rebound rather than a durable recovery.
“We do think that the relief rally in the equity market is purely due to the heavy selloff,” wrote Naeem Aslam at TF Global Markets in London. “It is more of a dead cat bounce than anything else; if the underlying fundamentals aren’t addressed, we could see the sell triggered again.”
Reports late on Monday said the U. S. was urging China to lower tariffs on cars and open financial services as part of talks to resolve tensions — steps that would help it avoid tariffs on US$50 billion of exports to America. That gave a boost to the current equity rebound.
Yet short interest on the iShares iBoxx Investment Grade Corporate Bond ETF, ticker LQD, relative to its U. S. equity ETF counterpart is near its highest on record. The bearish measure on the junk bond ETF equivalent also sits just below its all- time high. Meanwhile, gauges of both volatility and corporate default risk re- main elevated, while yesterday’s sharp jump in stocks hasn’ t convinced equity bears to capitulate.
In credit, “the market is taking its time to make sure everything is fine,” said Juan Esteban Valencia at Société Générale SA in Paris. “If things seem to be cooling down on the trade front then credit spreads should follow equity markets in the coming days.”
Meanwhile, even as the Cboe Volatility Index begins to retreat, derivatives on the anxiety gauge show concern has hardly abated. The futures curve for the VIX, whose contracts track the implied volatility of the S& P 500 index over time, is in backwardation. In other words, March contracts are more expensive than those expiring in April, May, and so on out. Backwardation is a telltale sign that stress is still built into the market.
Professional money managers were leery about buying stocks during the rebound Monday, judging from the Smart Money Flow Index, which tracks Dow Jones Industrial Average moves in the first and final 30 minutes of trading. The thinking is that smart money will test the market and wait until the end of the day before committing to large moves. The index is near a two- year low and only advanced 1.2 per cent Monday, compared to a 2.8- per- cent advance in the Dow.