Click Here for This Week's Full Letter - October 21, 2014

Greetings,

       You’re all wondering the same thing: should I being buying the dip or getting out while I can? I don’t claim to know the answer, but we were adding to long positions last Friday in our Marketfy portfolio that continues to rip higher. Since launching this fund on August 8, we’re now up more than 11%, versus a 4% decline in the S&P 500 (see chart below).

       Anybody can make money when the stock market glides higher, but the ability to generate alpha during panic is what makes macro investing so appealing. Periods of high volatility are when we expect to outperform.

       Last week’s plunge was certainly alarming, but was the QE4 talk from regional Fed president’s really necessary? The S&P 500 is still up on the year. QE3 is set to expire soon, but the global central bank balance sheet is projected to expand into year-end after the ECB kicked off its first asset-purchase program yesterday.

Cup & Handle (blue) – S&P 500 (green)

       In my mind, the biggest issue facing the market is the absence of liquidity. That’s what fueled the panic last week, especially in bonds. Traders calculate that less than 1% of corporate bonds trade more than $5 million a day. The Bank of Japan failed to meet its bond-buying target last week for the first time since May 2012, even though it was buying T-bills at negative nominal yields. There simply wasn’t enough supply. That’s a real problem.

       Europe is still a disaster area, but German Chancellor Angela Merkel could turn things around quickly by changing her tune on EU austerity. China doesn’t look great either, but falling swap rates indicate an interest rate cut could be coming soon.

       Don’t mistake this optimism for complacency though. We’re using this rally to rebuild long exposure to volatility just in case it’s a head-fake. Speaking of complacency, a Bloomberg poll of 100 economists showed that 100% predict US interest rates will rise soon. I’m not a statistician or economist, but that seems awfully high. Consensus predictions like that make me think bonds still have some life left. That’s the contrarian mentality that is driving these alpha-heavy returns.

       Our stock pick for September was down slightly last week, but some recent developments have increased our conviction. We’ve bought the dip and will patiently wait for more gains after an 18% rally over the past three weeks. Compared to the money you’d be making in these picks, a subscription for $8.25/month is a steal. If you’d like to get involved please click here for more info.

Today’s letter will cover several topics, including:

• Alarm in Athens
• Indonesian Cup & Handle
• Venezuela on the verge on bankruptcy
• Head Scratching Chart of the Week

With that, I give you this week's letter:

October 21, 2014

       As always, if you have any questions or comments or just want to vent, please send me an email at mike@cup-handle.com.

Until next time, tread lightly out there,

Michael Lingenheld

Managing Editor – Cup & Handle Macro