Greg Tolpigin

It’s time for a potential bounce after the worst start for equity markets in history. Am I turning bullish? No way. We may see a very short-term tradeable bounce but on this rally I am adding to the vast array of short positions we have been accumulating as part of our bearish strategy for the first quarter of 2016, since late last year.

That’s right. Just me. Happy to be corrected but I sifted through all the research that comes across my desk and found almost nobody warning about the impending implosion in equities at the start of 2016. Not only that nobody had the foresight to tell readers what risks would be present for any potential sell off let alone tell you there would be a sell off. A major one. Worst start to the year for equities in history. C’mon fellas you can do better than that.

After calling for an early Xmas rally to come in October following the August correction, we have been highlighting the extensive risks that have been building across financial markets. Some of these risks have been apparent all year long – such as our long-held view that a GFC-style collapse emerging in junk bonds and emerging markets – but now, we see more and more reasons for investors to turn cautious and in reality, bearish.

For the past few months I have been warning about the next upcoming GFC-style collapse that will occur within the high yield corporate bond market (junk bonds) and emerging markets. It feels like I have written about nothing else.

After calling for a short covering rally in October – the best gains of the year – a few weeks ago we suggested the market rally was fizzling and that it was time to return to being cautious. As of last night that view still remains and we continue to see some significant changes in global financial markets that are worrisome for equity markets. As we noted in that column, equities have cornered themselves to a point where under a normal distribution of outcomes are at a high probability of falling.

I might ruffle a few feathers with today’s column but in all seriousness readers need to know why 95% of traders lose money. I witnessed it time and time again in the past few weeks and I think it’s time to tackle these issues head on. You could call it tough love.

It is always good to have a break from trading for a couple of weeks and return with a clear mind to be able to reassess the position and direction of financial markets. It is even better to take a break having been on the right side of market direction rather than take a break to nurse losses.

As investors and traders our goal is to profit from future moves in prices of the assets we buy or sell. We obviously all use different techniques to try and predict what these future moves will be which includes anything from astronomy to economics to cash flow to technical anlaysis and everything inbetween. Some like myself like to use a combination of few different techniques and placing greater or less emphasis on any one method, depends on what my actual investment goal is – short-term, long-term or even which asset class I am trading.

Since 2009 I have been an equity market bull and since the start of 2013 when the S&P 500 broke to a fresh record high, my bullishness was turned up to “11”. That also translated to being one of the biggest haters of gold, a useless commodity during times of intense asset price inflation. Asset price inflation and normal goods inflation are entirely different concepts and one doesn’t not necessarily lead to the other. Hence, we have seen the gold market littered with the corpses of gold bugs over the past 3 years. Their view of central bank stimulus eventually leading to an asset market collapse as rampant inflation drive gold into a major boom. They may be eventually correct but being right and making money are very separate things, and one doesn’t guarantee the other. Timing is everything.

The past few weeks we have been highlighting the similarities between 2011 and 2015 and those that have followed my column will be aware that with a slice of good luck (or do you make your own luck?) our predictions have been on the money.

Last week we highlighted the similarities between the performance of equity markets in 2011 with that of 2015 and it seems others this week have followed suit as I have read several articles comparing the two periods. Interestingly not all conclusions drawn were the same as mine with some chartists literally trying to follow the performance of 2015 to the day with that of 2011. Sorry guys it won’t work like that for reasons I gave in the article last week.

Last week we highlighted the ramifications of no Fed rate hike which would be further weakness in equity markets and all week markets have been on the decline. The price action reminded me very much of what occurred back then during the European debt crisis and the S&P 500 downgrading US debt causing an aggressive correction in global markets.

Overnight the Federal Reserve kept interest rates unchanged in one of the most anticipated and closely watched meetings in some time. While the fact a change in rates was a 50:50 proposition the tone of the Fed statement accompanying the rate decision certainly was a surprise. A big surprise and a dangerous one in my opinion.

We have been discussing in recent weeks and months different market thematics, trends and flows that have been underway in an attempt to better understand and predict where financial markets are headed. One of our key points had been that in a late stage bull market we always see dispersion. That is, a breakdown in the bullish correlations that most sectors and asset classes have.

While the broader ASX 200 index has produced very little return over the past two years as miners have offset the gains seen in US dollar earners – even bank share prices are no better than two years ago – there is one area of the market that is beginning to froth. Micro-caps and in particular small miners, that are turning to buying technology companies in a bid to divert their business away from the resources collapse.

We have been discussing some global macro themes in recent months and what we are likely to see as a result of the Fed tightening rates. Obviously one major thematic which has been a firm trend over the past 18 months is the strength of the US dollar. The repercussions of this strength falls heavily on emerging market economies – Latin America, Asia and the Middle East.

Trading – particularly for a living – is without doubt one of the toughest occupations but also the most rewarding. Just look at the wealth of the top traders in the business! As a result of the sheer number of traders wanting to build their wealth consistently over time I am often asked what it takes to be a successful trader?

Gold has been on the back foot for several years now despite goldbugs consistently telling us to buy the precious metal as it is important hedge against inflation and the eventual demise in asset prices around the world. Both of these upcoming events were apparently meant to have occurred already due to the money printing of global central banks and as we have seen none of this has occurred.

Back on 26 June I wrote about the euphoric rally that is still to come that will be the cherry on the top of this global equity bull market, a bull market that has existed for virtually everyone except Australian ASX investors. Following the expected short-term weakness surrounding Greece and the realization that the Fed will raise rates in September, conditions are near perfect for an enormous rally – particularly in some key sectors – over the course of the next six to nine months.

Recently I discussed one of the important markets that will be important in highlighting when serious downside risks will emerge for global equity market – namely, the high yield corporate debt market. Otherwise known as “junk” and can be monitored by the US-listed High Yield Corporate Bond ETF (HYG.ARC).

The title may be controversial but it’s time to sack the Reserve Bank board and replace it with the members of Federal Reserve. I said it, I mean it and I need to get it off my chest. 2015 has been a complete circus performance by the RBA – a comical event that has global investors laughing at Australia as they continue to pull their money out and invest it in places with real growth and opportunity.

Whenever, I am asked by someone looking to start investing in the stock market and what should they buy I very rarely give them an actual investment. The basis for this is that everybody’s risk tolerance and investment horizon are different and simply giving them a trade idea is of no benefit. In fact it only puts my reputation at risk because inevitably even if the stock does appreciate I am unlikely to be around to tell them when to sell. I would giving them only half the trade.

Last week we discussed the complacency financial markets have been taking with respect to a first Federal Reserve interest rate increase and as a result markets were vulnerable to surprises both for the bond market and equity markets.

Markets are absolutely focused on when the Federal Reserve will hike rates. And it seems most are expecting that this will be the start of a market correction. The reality is the exact opposite is likely to happen with the first rate hike likely to be a take off point for equity markets on a case of “sell the rumor and buy the fact”.

As we noted last week, the ASX 2000 has experienced severe underperformance to the US not only in the past two years, but since the GFC lows in March 2009. Fresh record highs across virtually all sectors in the US has made the last 5 years one of the most lucrative in history. Unfortunately one that the local market has not participated in.

Whenever, I have asked many of my successful trading peers – hedge fund managers, proprietary traders and wealth managers – what is the most common mistake traders make the most common response I receive is they are unaware of type of market environment they are trading in.