Our Discretionary Thesis

Posted on May 17 2016 - 4:05pm by Sharpe Trade

As we have said for over a year, albeit at times with a bit of … metaphor … we have expected stock markets to trade in a very choppy, range-bound manner.  While specifically stating that we do not believe a recession would occur, we have correctly stated in many of our weekly podcasts that the economy of the United States is slowing and languishing.

US GDP Growth Rate
Source:  tradingeconomics.com / U.S. Bureau of Economic Analysis


While it can prove challenging to make individual moves within this larger context; this ‘meat-grinder’ of a market has proven the correct discretionary thesis from which to work. For over a year aggressive stock bears have been getting shot to pieces; and overt long-term bulls have been equally gutted.

The Federal Reserve had been pouring over $80 Billion … per month into various markets while the last round of Quantitative Easing was ongoing.  They did so without receiving the same sort of cooperation we saw in 2002 from Fiscal Policy makers.  In fact, it was viewed that the entire outcome of the economy would be placed on the shoulders of Monetary operations.  In order to attain some amount of normalization, the Fed has been guiding to not only raise the Fed Funds target rate but also normalize their balance sheet.

No easy task.

Our point however, is that the markets grew quite accustomed to front-running that $80 Billion each and every month.  And that sort of liquidity is no longer present.  Instead, there is an increasing focus on tightening.  Not for the sake of robust, expansive economic activity.  

But simply to normalize

We could not see how stocks would continue their stupendous rally in such an environment.

When will this change?  Quite simply … when it changes.  There is no way to predict when we will see this larger context morph into something else.  Until such time that it does, operate accordingly … 

2 Comments so far. Feel free to join this conversation.

  1. mappy May 18, 2016 at 10:23 am - Reply

    This is a fun market………

    Too bad I can’t short. My fault for being impatient. I’m not a fan of this chop. I’ll give it a few more weeks and see what happens. I may just sit out the summer and wait for the election to pass.

    Money Monster was a total waste of time. See something else this weekend!

  2. mappy May 19, 2016 at 9:00 am - Reply

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