Halfway home

Well, we got the rally, and it was a doozy. Macro Man was impressed by the strength of the rebound, but it’s important to keep things in perspective. A correction was inevitable and now appears to be upon us.

While Macro Man was perhaps a touch early in applying his SPM7 calendar put spread yesterday, he may not have been as early as you think. By his reckoning, the S&P 500 is already halfway through its bounce, if his reading of the charts is correct. He views the ultimate corrective target as just shy of the 55 day moving average; call it 1425 on the cash index for choice. That would represent a 3.7% rally from the 1374 cash-index low. Yesterday’s rally to 1395 was 1.8% from the trough- we’re almost halfway home!

Volume in the SPY, though quite large, would also argue in favour of a correction, as it was the lowest since February 26. Large reversal price moves on (relatively) low volume are virtually the definition of a correction. It looks like the gameplan remains in force.

Elsewhere, markets were unfazed by extremely high unit labour cost data in the US, and rightly so. These figures are becoming the biggest joke short of Argentina’s inflation numbers. There is a problem with seasonal adjustment vis-à-vis bonuses, which makes incomes look stronger than they actually are. Recall that last year’s ‘horrible’ ULC data were subsequently revised lower. It’s nice to see that the market can ignore the noise in an important data series. Will the same discipline hold for Friday’s US payroll data? Macro Man has his doubts. In any event, we’ll get a “hint” about Friday’s data with the release of the “new and improved” ADP figure today.

Elsewhere, the risk-loving trade caught a further respite from a super-strong Aussie Q4 GDP figure, which at 1% doubled the consensus expectation. Further high-yielding joy might result from tonight’s RBNZ announcement, where the good doctor Bollard is expected to raise rates and retain a hawkish bent. Now, one might argue that all the good news is in the price, and that the only way for the flightless bird is to go down. Indeed, Macro Man is tempted to make that very argument. However, discipline is paramount in these difficult trading conditions.

The key to success is to wait until corrective bounce matures before setting fresh risky asset shorts. Macro Man will be a better seller of NZD this evening with the SPX at 1410 than he would be if it were at 1385.

Stay tuned. The rest of the week should be interesting.