Eurostoxx closed down for the month of Jan. As things currently stand, SX5E is down 105 bps for the year. A mere one month statistic means absolutely nothing, but let’s try and put this number in some context. And to try and make a point, we reflect upon the wisdom of Howard Marks, the folly of trying to make sense of “guidance” about the state of the world from large companies and the effect that the Donald has had on everyone ranging from a first year sales/trader at an investment bank to a seasoned pro.

Howard is one of the true legends in this business and we take the liberty to quote him as under:

"We learn in Microeconomics 101 that the demand curve slopes downward to the right; as the price of something goes up, the quantity demanded goes down. In other words, people want less of something at higher prices and more of it at lower prices. Makes sense; that’s why stores do more business when goods go on sale. It works that way in most places, but far from always, it seems, in the world of investing. There, many people tend to fall further in love with the thing they’ve bought as its price rises, since they feel validated, and they like it less as the price falls, when they begin to doubt their decision to buy."

Now look at the chart on the left below. This is a real time reflection of what Howard was trying to say. In the summer of 2011, everything was bleak and the management of Siemens had “poor visibility of the future.” It was the worst possible time to be on that conference call because you came away despondent. Along with many others, you probably printed the low. Now that the stock has doubled, the company is “raising its full-year outlook.” The stock is making all-time highs today. How can you not be in love with it?

The point is not whether Siemens is going to go up or down from here. Siemens is an Outperformer in Europe, no question. The point is that with so much bullishness around, you have to temper your aggression. Same is true for the US. With trillions coming up in the Donald stimulus, reduced regulation and expansionary lending, there is no reason to be bearish. You’ve just got to love things here, right? Now is a good time to reflect upon what you own and see if you’re not getting blinkered.

What is likely to tell us whether or not this rally in European stocks is going to continue unabated or not?

To provide an answer to that, we present a simple chart on the right above. This is the long term weekly of the European Banks Index with a 200 Week Moving Average (in red) snaking on it. While this is merely a line in the sand, notice that price is perilously close to it. It is also a co-incidence that the long term downtrend from 2007 is hitting it at precisely the same level. Just to be sure, that level is around 129.00 (current price is 120). While this level is clearly some distance away, it’s important to prepare for what may happen if we get to that level. In our view, it will take a huge surge to penetrate this resistance. It can happen, but somehow we doubt it. Only a runaway move down in bonds globally will create this charge. This is a chart worth following.

A surge higher in yields is what the market needs next to produce the next leg up. Bunds need to race past 70bps, the US 10 year needs to close above the “Bill Gross start of a big bear market in bonds once the 10 year closes above 2.65%” level and Eurostoxx needs to close above 3325. All three things will happen at the same time if indeed they were to. Just don’t have a strong handle at the current level to make the call. We are more in the Howard Marks camp here, perhaps foolishly being contrarian and not getting sucked in.

Contacts:

Ashwani Mathur | ashwani@deydun.com | +44 (0) 207 725 1008

Kasim Ahmed | kasim@deydun.com | +44 (0) 207 725 1005

Sujit Kapur | sujit@deydun.com | +44 (0) 207 725 1009

Satwinder Sehmi | sat@deydun.com | +44 (0) 207 725 1004

We can also be found on Bloomberg at DEYD<GO> and via our website at www.deydun.com

Disclaimer

Important Notice: This report is independent and prepared by Deydun Markets Limited and is for information purposes only. This presentation has been produced or compiled for use by Eligible Counterparties and Professional Clients only and it is not intended for Retail Clients as defined by the rules of the United Kingdom’s Financial Conduct Authority. This presentation may not be reproduced, distributed or published for any purpose, unless with the prior written consent of Deydun Markets Limited. This report does not constitute an offer, invitation or inducement to invest in securities or other investments. This report does not make recommendations or give advice to potential investors in relation to buying, selling, subscribing for, underwriting or exercising any rights in relation to particular securities or other investments. Neither the information contained in this report nor any further information made available with the subject matter contained herein will form the basis of any contract. This report does not purport to be comprehensive or to contain all the information on which a prospective client may need in order to make a decision. The information is derived from sources, which we believe to be reliable, but we do not represent it is accurate or complete. The recipient of this report must make their own investigation and assessment of the information presented herein. No representation, warranty or undertaking, express or implied, is or will be made or given and no responsibility or liability is or will be accepted by Deydun Markets Limited or by any of its directors, officers, employees, agents or advisers, in relation to the accuracy or completeness of this presentation or any other written or oral information made available in connection with the information presented herein. Any responsibility or liability for any such information is expressly disclaimed. The information in this presentation is subject to change without notice. In providing this report, Deydun Markets Limited undertakes no obligation to provide the recipient with access to any additional information, or to update, or to correct any inaccuracies, which may become apparent in this presentation or any other information made available in connection with the information presented herein. Deydun Markets Limited is an Appointed Representative of Exotix Limited, which is authorised and regulated by the Financial Conduct Authority.

UNITED STATES OF AMERICA: Distribution of this Material in the United States or to US persons is intended to besolely to major institutional investors as defined in Rule 15a-6(a)(2) under the US Securities Act of 1934. All US persons that receive this document by their acceptance thereof represent and agree that they are a major institutional investor and understand the risks involved in executing transactions in securities. No representation, warranty or undertaking, express or implied, is or will be made or given and no responsibility or liability is or will be accepted by Deydun Markets Limited or by any of its directors, officers, employees, agents or advisers, in relation to the accuracy or completeness of this presentation or any other written or oral information made available in connection with the information presented herein. Any responsibility or liability for any such information is expressly disclaimed. The information in this presentation is subject to change without notice. In providing this report, Deydun Markets Limited undertakes no obligation to provide the recipient with access to any additional information, or to update, or to correct any inaccuracies, which may become apparent in this presentation or any other information made available in connection with the information presented herein. Deydun Markets Limited is an Appointed Representative of Exotix Limited, which is authorised and regulated by the Financial Conduct Authority.

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