New Year Consensus Trades

While the new year begins for most of financial market players this week, Wall Street has been looking forward to 2017 trades since late November, when many investors starting penning their year ahead outlook reports. Indeed, financial markets are always forward looking, so really there is nothing new here, one could argue.

Nevertheless, the start of a new year does encompass some very real behaviors, some of which are listed below
  • Tax loss selling finished at the end of the year. Investors need to wait 30 days to buy back “substantially identical” securities (which is easily surmountable with ETF’s these days) to ensure “wash sales” tax treatments are not enforced. Along with this are notable seasonality trends in January, especially for small caps. 
  • Pension Funds and large allocators usually do substantial re balancing around month and quarter end.
  • Financial market employees who are compensated not only with a salary but also a bonus, often see their performance period reset to the calendar year. So a new year brings a clean slate.
  • I am sure there are others I have missed and encourage readers to post in the comments section.

The point about the new year is that your author (part of Team MM 2.0, more below) has learned the hard way that consensus new year trades are tricky beasts. Anyone who has been around financial markets long enough realizes there is a delicate balanced needed between following consensus ideas and having your own contrarian notions. Wall Street loves to sell consensus, and the “wisdom of the crowd” is a powerful concept, which the entire notion of market prices and the invisible hand of Adam Smith are based on.  However recent advances in behavioral finance, along with many clearly defined examples, point to evidence that markets are not 100% efficient.

Since the New Year presents a fertile ground for “consensus” trades I thought it would be interesting exercise to examine what is implied/appears to be the consensus trades for 2017. Not all consensus trades end up being wrong but they do seem to provide fertile ground for good contrarian trades, especially when they start to reverse.

US Equities
After a year which started with Energy and Financials as the two
worst performing sectors, 2016, ended with the two outperforming by over 10% vs the index, a massive out performance. Indeed the trade of the year can be easily summarized with the S&P 500 High Beta and Low Volatility Indexes. See for yourself below (click for larger image, my apologies)



For 2017, it appears that the high beta/cyclicality chase is still on, led by a strong belief in the Donald. Indeed AAII sentiment index is near the highs of the past few years. 

Currencies
As this isn’t your authors expertise, I would simply point to the charts below. Buy the USD and Sell EUR seem to be the consensus trades again.


and not to cherry pick on the Euro/Dollar exchange rate, we can look at the EURO index, which is based on 50% non USD currencies 


Interest Rates
While the 30 year down trend in interest rates looks far from broken, given the number of recent commentators chiming in on the end of the bond bull market, it would appear the consensus is for higher rates in 2017, at least in the US

Oil & Commodities
Given the recent out performance of almost anything commodity related (except Gold) and especially Oil’s >100% rise from the Feb/March low it would be hard to say that expectations are for anything but higher prices. Indeed looking at the CFTC positioning data we come to the same conclusion.


High Yield
While this is your author's favorite subject, gauging consensus is a bit harder. A quick and dirty way your author has used over the past few years, given the increasing use of ETFs, is to look at the shares outstanding and market cap of the two biggest ETFs in the space, HYG & JNK. Below is chart of their combined market cap. Given the chart and my reading from popular commentary I would say the outlook is relatively bullish as well.





So the question is, which one of these consensus trades will be right and which one will be horribly wrong? Your author thinks the headlong rush into beta has the potential to seriously upset many players in the year ahead and expects that as economic surprises start to tail off along with easy earnings comps in Q2, the market may once again pull the plug on the consensus sunbathers. While on the flip side, consensus US Dollar strength may be a good trade. 

Please note this is the first post from Team MM 2.0. While living up to the standards of MM or TMM will be a tough job, we hope to provide thoughtful posts and keep this blog alive and thriving. We are still working out the scheduling and writing assignments so bear with us as we might take a few weeks to get into a routine.
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amplitudeinthehouse
admin
January 4, 2017 at 1:36 PM ×

Welcome, Abbey. Good post. ah don't worry you'll get the hang of it. Just look at our pal Macro Man, he kicked on with his new new York boys on the Asian gambling sector desk and he had hands on him like monkey's feet. Don't tell'em FFs that I'll let him have those casino chips....all I ever wanted was the magic touch!

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Polemic
admin
January 4, 2017 at 1:41 PM ×

Congrats Abee on your first headlining post. Great job!

Look forward to seeing who else is going to be stepping out from behind the stage curtain behind you.

Long Live TMM2.0

Pol

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Anonymous
admin
January 4, 2017 at 1:56 PM ×

Welcome, Mystery Man/woMan. MM is a wonderful, modern-classic finance outlet which is an honor to read and, I'm sure, a greater honor for which to write. Looking forward to it.

-MM in training

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Anonymous
admin
January 4, 2017 at 2:02 PM ×

Nice post! Please keep at it, long live TMM 2.0!

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washedup
admin
January 4, 2017 at 2:10 PM ×

@abee - really happy to see you accept the baton - nice post!
I am a bit confused with the HYG and JNK chart - I see them as having topped in May 14 and trading roughly at 10% below ATH - is your chart showing total dollar value in the ETFs?

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January 4, 2017 at 2:15 PM ×

Chinese forex market has been interesting these few days. Please comment on it in the next post as it was something MM did on a consistent basis.

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Polemic
admin
January 4, 2017 at 2:18 PM ×

Abee- and don't take any shit from a demanding comment section.
You can write what you like. If they ask reeeeally nicely you may wish to indulge them, but you have no obligation to do what MM did just to keep an audience who pay nothing happy.

empowerment!
Pol

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washedup
admin
January 4, 2017 at 2:19 PM ×

Really Raumil? You do realize he is doing us a favor by keeping the dream alive don't you? How about you google 'chinese forex market interesting' and see what comes up instead.

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Anonymous
admin
January 4, 2017 at 2:40 PM ×

Team TMM assemble !

Good stuff abee I think most peeps here treat comments by the "regulars" (like yourself) as must reads anyway, so nothing much has changed except you get inline images now.

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January 4, 2017 at 3:18 PM ×

Thanks Abee for your first post. I notice that BBG TV has been carrying the headline "Making Macro Great Again" :)

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johno
admin
January 4, 2017 at 3:47 PM ×

Nicely done, Abee. I'm keeping an open mind on this year.

Past 12 hours or so, I've taken off the -EURCHF. I thought maybe SNB would allow it to breach 1.068-1.070 level, but no. Meanwhile, strong European PMIs and improving inflation (German #s yesterday, translating to today's EC print) work for the bull case, i.e. that money flows out of Switzerland as economic conditions improve. I still don't see that happening given the heavy political calendar, but thought I'd mention.

USDMXN extending its move. Beginning of something?

Yesterday I commented on IPA's post re copper, remarking that 2.49 had been support. After it sold off and then snapped right back, I bought HGH7. Small, because I don't rate myself in commodities (or much else for that matter). I thought the test and quick rejection was bullish. The fundamental case is made by GS who write interesting notes on copper. Some notes from their Dec note:

GS now sees small deficit (180kt vs surplus of 360kt before) in ’17 from roughly balanced in ’16, 2/3 from supply-side and 1/3 from demand-side. Saw much larger increases in net spec positioning as proportion of open interest at beginning of ‘02/’03 and ’09 bull markets, so maybe positioning not so scary. Chinese crack-down on property may push money into copper, i.e. long option on Chinese frenzy? 9% of supply has associated labor contract negotiations in Q1’17. Miners ex-Chile tend to lower grades at higher-prices, lowering production. Exchange stocks very low and non-SRB stocks (incl. China bonded and Chile implied) are lowest since mid-’10. Cost deflation now turned to some cost inflation (acc. Wood Mackenzie). Thought I'd share since IPA got me thinking about it (no critique of IPA, by the way, as I get things wrong and stop out in my trades all the time).

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Anonymous
admin
January 4, 2017 at 3:49 PM ×

Getting long equities, which are all pushing higher again. Once Nico gets short in size I know it's time to buy, buy, buy...

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Polemic
admin
January 4, 2017 at 3:50 PM ×

So if EU inflation ticks up to the point where there is absolutely no excuse whatsoever for the ECB to be buying assets what happens to Periphery debt when ECB no longer underwrites the risk? ECB peripheral rescuing has been camouflaged in necessary monetary policy. CB bids go and we have to readjust to something we haven't seen for years. True risk premia.

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Skr
admin
January 4, 2017 at 3:51 PM ×

Have yet to don the macro hat for this year, still keeping it tight and scalping for a few %.
I suppose the obvious - is that everyone is watching the jobs numbers on Friday and waiting for Trumps inauguration.

Until then I'll leave the macro hat on the door and keep it tight.

Good post.

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Anonymous
admin
January 4, 2017 at 4:06 PM ×

Pol has spent too much time over Xmas with Nico. What if the ECB increases QE and ignores inflation? What if bonds fall further and everyone rotates into equities. What if economic figures improve and banks are further re-capped? Equities will rise on all those scenarios.

Get long or stay wrong.

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Anonymous
admin
January 4, 2017 at 4:43 PM ×

Spent some time looking at long-term equity charts. Have never seen such bullish patterns as this. We will see all time highs in every equity index over coming weeks/months. We're going to look back in a few years and realize this is the biggest equity bull market of our lives.

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Anonymous
admin
January 4, 2017 at 5:00 PM ×

Exclude energy and inflation is going nowhere.

What people forget there's 2 years worth unemployed to shave at current hiring pace before Eurozone is where US is now approximately. My guess is inflation in US won't shoot up much either until cheaper goods/services from Europe become costlier.

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JohnL
admin
January 4, 2017 at 5:08 PM ×

Adee, fantastic post.

Chris T. here's a link to a great bit on BBGTV on making macro great again. ;)

Best line, WWDD, What Will Donald Do, also touchs on SKR's comment.

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Mr. T
admin
January 4, 2017 at 6:05 PM ×

Polemic - you are really nailing some key thoughts.

ECB peripheral rescuing has been camouflaged in necessary monetary policy. - This is an interesting idea. My gut tells me the goalposts will change from fighting deflation to fighting instability and noone will blink. But its still a good read.

Regarding F news: Does $700m invested in Michegan really buy you the same output as $1.6bln invested in Mexico? If not then the announcement is more like a reining in of future overall production, cloaked under a patriotic statement (from your blog) - this!


often see their performance period reset to the calendar year. So a new year brings a clean slate. as one of those teams - this in no way makes me want to go headlong into what worked last Q. Now that I'm without a drawdown buffer of any sort Q1/Q2 is all about base hits. As of right now, thats looking like mean reversion trades.

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forgot2hedge
admin
January 4, 2017 at 6:57 PM ×

thx abee. good stuff.

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Leftback
admin
January 4, 2017 at 8:13 PM ×

Top stuff abee… we note you don't indicate agreement with the consensus and we'll see how many survive Q1, or January even!

LB began the year's punting this week with a long TLT calls trade, essentially front-running the 401k fund flows that must enter the market during these early trading days of the year. No-one ever said we were clever… although they did say rude things.

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Anonymous
admin
January 4, 2017 at 8:15 PM ×

Since we're not long out of the festive season, with 'peace & goodwill' to all, I'd like to propose we have a quick whip-around and see if we can't all collectively raise $2m or so to cover Nico's loses on his shorts. Look forward to your responses.

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Leftback
admin
January 4, 2017 at 8:22 PM ×

Yawn… if MM were here, he'd say something like this:

"look - get some better quality banter, sonny, or spare us your stunning witticisms, eh?"

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Nico G
admin
January 4, 2017 at 8:42 PM ×

congrats Abee !

do you remember what we discussed regarding anonymous? MM did not want to force people to choose an identity as it would reduce traffic but really the quality of the comments section would shoot up once everyone takes a name especially to mock another member (ho ho you've been so wicked)

can you ask MM if he wouldn't mind aligning with most other comments sections (worldpress) on the web in terms of identity, he might not care as much now and can easily revert when he chooses to

meanwhile let's all enjoy equity markets with current -0.20%/+0.20% bandwidth that seems to steer passions. You enjoyed 6 years of bull market with a dovish Fed, let's expect another 6 years of uptick with the hawkish Fed too, thank you anons for making the job of investing sound so retarded.

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Anonymous
admin
January 4, 2017 at 9:41 PM ×

Did I miss the post where MM said how to find him on Bbg?

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nicololz
admin
January 4, 2017 at 10:46 PM ×

nico, is that the "hawkish fed" that has only managed two 25bps hikes in 2 years?? Srsly you need to get out of your mom's basement and learn something about finance, rather than regurgitating these strange delusions where you pretend you actually know about markets & trading.

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IPA
admin
January 4, 2017 at 10:53 PM ×

abee,

Great post! I remember how about this time last year everyone and their brother was looking for a death of HYG and JNK vis-a-vis oil defaults scare. Poof... Where are all those folks now? Monthly charts put in two long tails and off we went from there on a tear.

johno,

Thanks for sharing GS copper notes. Interesting take on the supply-demand. Smart folks and I feel stupid going against them and you ;) That being said, producers are now at their largest net short position in a decade and specs are totally on the other side.

Today's copper move may be a byproduct of a tail wagging the dog though. Someone bought shitload (pardon my French) of weekly calls on FCX and everything copper went nuts thinking they'll preannounce the beat. The cheerleader alphabet network (not to be ever named by me here again) trumpeted it via one of its cronies who is allowed to peddle his own trades on national TV to the idiots who worship his lips. I do feel a bit stupid, again, on the timing and certainly not happy about being upside down on my last entry by five pennies. I am a big boy and will stop myself out on two consecutive daily closes above 2.60. My first entry was north of that, albeit much smaller than yesterday's.

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Nico G
admin
January 4, 2017 at 11:17 PM ×

nicololz

the hawkish Fed to come, as announced, but noone seems to care.

it might not be a good idea for me to continue posting here mostly to get insulted by people who just have no respect and clearly no balls. Are you really proud of yourself mocking people behind your screen?

i made $35 million in 20 years of trading PA, mostly contrarian. I wish you the same success and more importantly the same lifestyle since i either trade from a Hawaiian beachhouse or a yacht in Greece. Tax free. Now fuck off.

i wish MM 2.0 good luck i won't participate in the effort.

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Anonymous
admin
January 4, 2017 at 11:19 PM ×

nicololz @10.46: with this debt level born from years of dovish DM CBs panicking most of all to cyclical oil price changes, the relative hawkish comes a lot sooner in terms of rate hikes than it used. Besides when 2017 broad inflation indices will again "surprise" everyone (potentially stagflation) CBs will turn from leaders of the pack into survival mode, trying to desperately keep up with the trampling pack of elephants, and they will have absolutely no control over what they used to in the years of dead volume zombie markets and relative calm.

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Polemic
admin
January 4, 2017 at 11:57 PM ×

Nico. You're welcome over at my place, though it isn't immune from SGUFers (stocks go up forever)

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Polemic
admin
January 5, 2017 at 12:03 AM ×

The real point to this is that az long as everyone thinks stocks will go up forever they will until everyone has stretched every credit facility they have to leverage into it and only then will they do a March 2000.

Real money hasn t come to play yet and they could take out both sides of the argument in the cheap seats from which we all in the comments sectionthriw our peanuts. Whether you are Nico, me or mr SGUFanon(and on and on).. a couple of allocations either way from the dinosaur real money pack and we can be swept aside.

Now I am not stupid enough to think I know what will happen, only what I hope will happen, and that hope is still that 5 min macro is going to once again get taken out even if this is a general long term macro theme.

Pol

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nicololz
admin
January 5, 2017 at 12:05 AM × This comment has been removed by a blog administrator.
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Macro Man
admin
January 5, 2017 at 12:33 AM ×

Someone mistyped "yahoo message boards" into Google and ended up here...

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Nicololz
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January 5, 2017 at 12:41 AM × This comment has been removed by a blog administrator.
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abee crombie
admin
January 5, 2017 at 2:23 AM ×

Thanks for the comments guys.

Washed, re the high yield chart, yes its just the combined market cap. So it incorporates both price and flows (shares outstanding)

Nico, MM is still the admin of the blog. I cant block anons, i just have permission to post.

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abee crombie
admin
January 5, 2017 at 2:23 AM ×

Thanks for the comments guys.

Washed, re the high yield chart, yes its just the combined market cap. So it incorporates both price and flows (shares outstanding)

Nico, MM is still the admin of the blog. I cant block anons, i just have permission to post.

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Anonymous
admin
January 5, 2017 at 5:38 AM ×

@Abee --Great Post! The first of many, we hope...

Thanks for your efforts in giving TeamMM 2.0 a good push down the hill.


@Nico - Ignore the trolls and please hang around. Your posts are always interesting and I value them.

Wishing all the regulars here a good 2017 - we thank you all for your posts...

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Anonymous
admin
January 5, 2017 at 6:28 AM ×

Nico mate - chill :) there is a silent majority here that appreciate your input even though we may not fully agree (or even disagree).

remember its darkest before the Don - err i mean Dawn - you may take the frequency of the incoming tomatoes as validation of "sooon....."

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Whammer
admin
January 5, 2017 at 6:53 AM ×

@Nico, agree -- there are morons on the Internets, it can't be stopped. Please don't let them get to you.

There are, I think, a decent amount of us "of a certain age" who like to hear what you have to say. I'm a 58 year old Retail Johnny -- Leftback era, I think ;-)

- Whammer

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Anonymous
admin
January 5, 2017 at 8:23 AM ×

Honestly nico, im going to give it to you straight. Grow up and stop being a cry baby and honestly stop talking about making gazzillons over the past X number of years - frankly for me it doesnt add any weight to what you say. Like others here, i do appreciate what you post and what others post for that matter (whether i agree with the post is irrelevant) but if you cant handle a few anon that throws a few virtual tomotoes at u then i got some bad news for u buddy - given your emotional character, u probably shouldnt be trading because one of these days i can almost guarantee you will get run over by the market. No one is bigger than the market and anyone who remotely thinks they are have all ended up in the morgue.

Hope you can get over it and back to posting again in the near future

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Anonymous
admin
January 5, 2017 at 9:03 AM ×

Anon 8:23 +1

V well said.

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northshore
admin
January 5, 2017 at 9:29 AM ×

Good stuff Abee/James.

@ Anon 9:41 https://www.bloomberg.com/news/articles/2016-12-29/ten-macro-issues-for-investors-to-mull-in-2017-cameron-crise I guess.

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Maverick
admin
January 5, 2017 at 6:29 PM ×

Well done Abee Crombie - great post!
Good to see TMM 2.0 carry on the good work...

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