Wednesday, July 09, 2008

Enough is enough

Yesterday was an instructive (and, for equity shorts, expensive) lesson that it's not how you start, it's how you finish. Tuesday might have started ugly early, but provided evidence that the equity market Maginot Line is providing a more effective resistance to the marauding hordes than the real one ever did.

So what now? Macro Man can feel the near-term conviction draining out of him like water out of a bath. That VIX came off so sharply (2.5 points) with yesterday's rally makes him concerned that the real pain trade out there is long equity vol. The same held true in April, and we got a horrible, drawn out squeeze in cash indices as a result.

From a technical perspective, momentum is waning. The Eurostoxx is exhibiting signs of classic bullish divergence, with marginally lower prices accompanied by a rise in momentum oscillators (in the chart below, RSI.) Such conditions are usually followed by a squeeze. Having had a great run shorting European equities (he first sold above 3800), Macro Man is wondering if enough is enough for the time being. With earnings season upon us, perhaps the Keyser Soze equity sellers (i.e, the Usual Suspects, in this case, mutual funds facing redemptions) will hold off for a bit, thereby allowing for a squeeze. Perhaps the best advice here for anyone contemplating a fresh equity short is "patience, young grasshopper....better levels will come."
Someone else saying "enough is enough" is the Bank of Korea, which continued its campaign to strengthen the won. Anecdotal reports suggest that they have sold $5 -$7 bio today, jamming stop losses from momentum models and other punters looking for a higher USD/KRW. BOK is at the vanguard of emerging market central banks, erstwhile currency piss-takers, who've had enough of the collateral (inflationary) damage from years of partially sterilized intervention to weaken the domestic currencies. India, Indonesia, and the Philippines have also been in over the past few weeks, albeit with mixed performance.
Heck, even Macro Man's best mates the Russkies have joined the party, allowing the rouble to appreciate roughly 35 bps against the dollar and euro basket this morning. The move is unusual for two reasons: it's followed swiftly on from the previous revaluation (usually they wait a few months), and comes after persistent central bank promises to screw speculators who buy the rouble. Instead, these dastardly foreigners have been rewarded.
The rouble revaluation comes just a day after President Medvedev suggested that the rouble become a reserve currency alternative to the dollar and euro. Uhhhh...Dmitry....sock puppets don't usually know much about foreign exchange, so you might like to know that turning the rouble into a reserve currency when you have broad capital controls and a central bank that promises to screw anyone who buys it might be a bit of a tough ask. Still, the timing of the revaluation with respect to Medvedev's comments is curious to say the least. Macro Man can only hope that Russia is close to saying "enough is enough" to currency piss-taking.

UPDATE: Psych! Looks like the new kleptocracy is same as the old. The rouble basket is back up close to its previous level, but only after there was some suspicious "private sector" buying of dollars. It now looks like the "revaluation" may only have been a good-old fashioned market manipulation to let an onshore operator buy cheap dollars. Heaven forbid that the CBR fulfill local dollar demand at the market rate from its pile of $534 billion of FX reserves.....


Anonymous said...

I had shorted Dax futures at 6800, and covered at 6300. Though "everything" doesn't line up for a bounce, I don't see enough to convince me that the market goes straight down from here.

Sometimes you just have to take what the market gives you (my favorite recent gift - selling GBP/USD when it poked its nose above 2.0000 on the first of the month).

Russia actually has reduced capital controls quite significantly over the past few years. Obviously, they still have much more work to do if they want to make the ruble a "reserve" currency, but I wouldn't count them out of pursuing something like that, if only for their ego.

Charles Butler said...

Haven't seen a poll here for a long time....

1. Continue down
2. Playable bounce
3. Head fake bounce


For how long will 'vix spike' appear as a phrase on the wires?

1. Three seconds
2. Until the next commercial break
3. Til Amy goes to rehab


Anonymous said...

What is PBoC/SAFE doing now?

Macro Man said...

Oh, they're still knocking about, though seem happy to buy things on the bid rather than paying offers for the time being. Perhaps they're content to let BOK sell them EUR, JPY, et al....

spagetti said...

re: poll


(for now) but thats before the US opened today

Anonymous said...

Re: RUB as a reserve currency --- I would have thought the lack of property rights might be an impediment.

Anonymous said...

looks like yesterday was just a kiss of the neckline for the indexes, b/c they are all back to getting slaughtered.
Unfortunately I play my equities book strategically from the long side, but I have a portfolio of currencies which (long GBPCHF, AUDUSD, EURUSD, short NZDCHF) has helped me hedge out most of my draw downs in particular stock holdings.

Macro Man said...

Well, the theory that we'd done enough near-term damage to equities was wrong, wrong, wrong. The nice thing about this business is that when you run money, your P/L tells you if you have got it right or not. Sadly, my P/L is telling me today that I am a sucker.

Anonymous said...

AAAAAAAAAAHHHH , I share your frustration MM, sold of my SPX shorts Monday, at 1280.

Monday; pissed
Tuesday; happy
Wednesday; pissed
Thursday; ??? (probably pissed...)

Since I entered at 1398 I should be laughing all the way but it takes some time to let go of the "what if I only kept it/bought it..." syndrome when you kill your the time you really should hit it again, you finally dropped the case...

I hope for some sort of bounce before soon so I can take it on again before that happens…otherwise, just give me two “worse-than-real-consensus-reports” and I'm entering short again before thinking twice;) !

Anonymous said...

S&P500 Index stood at 1270* monday at sell of time but still...bad timing!!"#¤

Anonymous said...

anon 10:31

I empathise with your pain, but fortunately, don't feel it ;-). My dilemma is do I "yank the rip cord" around 1225, or do I grow a REALLY big pair, and hang around on the off-chance of a thrilling ride...


Richy Rich said...

Somethings about to give big time. Tabloid mood is record bearish.
Whipsaw on US equities - but Asia didn't follow last night. All these correlations out of sync are indicative of shadows in the alley ahead. A Peckham market.

So, Standing by for another equity "double screw you up move" baseball bat beating together with a usd rally kicking in the head. The commodity hoodies then pull out their blades and slice up your energy prices. Meanwhile, as you are covering your soft parts, some 12 year old runs off with your nzd shorts.

Oh and the authorities are no where to be seen because they are back at base writing up reports on how to tackle inflation crime.

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