Thursday, May 24, 2007

Calling Joe Friday!

The signature tune of the old television series “Dragnet” will be familiar to most people, even those that have never even heard of the show. It is the ultimate musical conveyance of suspense: DUN da-dun dun.....Dun da-dun dun DUNNNNNNN. Macro Man wishes he could call on the services of the show’s detective, Sergeant Joe Friday, because a financial market mystery has got the Dragnet tune running through his head.

Specifically, what the heck is going on with US equities late in the day? In each of this week’s trading sessions, the S&P 500 has been poised to close at a record high (1527.46 if you care.) Yet sellers have emerged late in the session to push the index sharply lower back towards unchanged on Monday.....
Tuesday.....
and Wednesday.....


Just as opening session price action is often thought to reflect retail “dumb money”, price moves towards the close are thought to represent the activity of institutional “smart money”. Indeed, the late session swoons remind Macro Man of the hedge fund margin call hell last May and June, where the index repeatedly imploded late in the session. Margin calls wouldn’t appear to be an issue this time around (other than from some of the record number of shorts on the NYSE), but someone is clearly lightening up.

Combined with the familiar litany of reasons to be worried, a sudden emergence of EM profit-taking (even the lowly Taiwan dollar, one of the world’s most populated funding currencies, rallied sharply today courtesy of CBC intervention), and policy concerns (Capital controls announced by Colombia), it’s all the more reason to be worried and nimble.





7 comments:

Charles Butler said...

We can also recall last autumn the conspiracy crowd waxing delirious over the opposite - every cathartic drop in the market being picked up by about three pm (courtesy of GS, according to many). But it is notable.

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"Cassandra" said...

An observation: depending on whether liquidity is expanding or contracting, a "reversion orientation" can either be a route to the acquisition of beachfront real estate (maybe even a large olive grove in Andalusia) or a path to perdition and a job pushing paper in the corporate travel office.

Liquidity itself is correlated to, and dependent upon, amongst other things "real interest rates", and perhaps more importantly for the markets, its first derivative, or the change thereof.

As an unabashed ideological skeptic of "momentum", one thing I DO have my pulse upon, and understand is reversion within equity markets. And these are often telltales of liquidity flows, just as MM observes the vicissitudes of of flows into and out of EM carry trades etc.

Over the past three weeks my daily STD of P&L has ballooned, with a decidely positive bias reflecting speculative liquidation (reduced leverage, stops-losses, whatever) by those against who I am positioned in the market) despite no fundamental change my portfolio risk and construction. This is a tell-tale of tug-o-war that one often see at intermediate-and long-term changes in market direction and meaningful paradigm shifts. Take it for what it's worth...a tell-tale. Of what? My intuition says its presaging a larger capital dislocation event as things tighten around the world (excepting where it really matters most). But fear that it might happen there, too, will be sufficient cause meaningful dislocation between now and then.

Macro Man said...

Thanks for the dets, Charles. I had a feeling it would be year(s) ahead. It is remarkable how the serial conspiracists are strangely quiescent when the sudden lurches go "their way." One wonders if the bullish implications of autumn dip buying will be repeated, in reverse, in coming weeks.

In that vein, that's a really interesting observation, Cassandra. Although I haven't noticed that recently in my "real job", where I study the P/L much more closely, that's probably because I've been running with a low risk profile given my concerns spelled out in the blog. I have, however, observed similar episodes in the past. Moreover, my p.a. has gone from trouncing the market to lagging, so I guess that is capturing the same thing.

Given the importance of liquidity to recent trends, the rather abrupt underperformance of the financials (at least those that I hold) could indeed be a sign of a turn.

Charles Butler said...

It's extremely unusual to see a trending higher index repeatedly closing at the lower part of its daily range without a corresponding and notable reversion in its closing value - so rare that I can't find much indication of what to make of it. Although I have to say that I find well-considered worrying more reassuring than glib contrariness.

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Macro Man said...

Thanks Charles, I'll check it out.

That The S&P has cracked a little bit is mildly interesting. More concretely interesting will be to see how the bubblicious shares in China react. Certainly the Bovespa (and by extension, me) hasn't been too clever today...

'Twill be interesting to se>2 SD) sell-off.

Anonymous said...

Why is the IMF so worried about Japan raising rates all of a sudden?
http://online.wsj.com/article/SB118000146043313263.html?mod=rss_whats_news_us

"Cassandra" said...

anonymous...
Funny but it still never occurs to me to think of Lipsky and the IMF in the same thought The current US administration has plumbed new depths in injecting ideology into ostensibly non-ideological multilateral organizations. And they wonder why so many now (post 2000) despise the US in general and this administration. 2009 cannot arrive fast enough.....