Wednesday, July 23, 2008
Macro Man forwarded yesterday's modest proposal to the Congressional Budget Office, where it received an enthusiastic response. He also contacted the major networks as well; expect to see the Macro Man Plan feature prominently in the autumn McCain-Obama presidential debates.
Moving back to the more prosaic world of financial markets, we seem to be at a critical juncture. One market that shows signs of reversal is interesting; two might be a coincidence. But when a whole host of markets break supports/resistances simultaneously, Macro Man sits up and takes notice, because such behaviour is characteristic of thematic turning points (even when the theme switch is from "everyone makes money" to "everyone loses money".)
Let's start with the obvious: banking stocks. The sea change there is best exemplified by Wachovia, which posted shocking results yesterday, delivering a much larger-than-expected loss....and rallied 27%. Would that have happened a week or two ago? Nope. Over the past six days, the BKX has rallied 45%. Holy cow! For any basket of stocks to move that far, that fast is truly stunning, and almost certainly represents a (very) painful scramble to cover shorts.
A short-covering break of resistance is occurring in broader indices as well. Yesterday's SPX recovery was truly impressive, and has fed through into the Eurostoxx, which has broken the resistance created during the consolidation period that registered so strongly on Macro Man's chop-o-meter a few weeks ago. You'd have to think that there's a decent chance of follow-through as shorts scramble to cover.
The dollar is also poised to confound the bearish consensus. Yesterday, EUR/USD broke through the support of the uptrend from mid-June. The move has followed through today.
Similarly, USD/JPY has broken the downtrend line off the mid-June highs, as well as the widely-watched 200 day moving average.
Slightly further off the beaten track, you can find even more stunning reversals. Yesterday, Czech CB governor Tuma suggested that the CNB could trim rates next month in response to CZK strength, even though inflation's shown little sign of moderating. There is little more bearish for a currency these days than abandoning the inflation fight in a pursuit of growth; this is particularly the case when the market is heavily positioned the other way. Yesterday was reportedly the largest one-day move in EUR/CZK of all time; while Macro Man has not confirmed that statistic, there's little doubt that the reversal has exposed a very small exit door in long CZK positions.
Two other central banks who are straddling the growth/inflation divide are the BOE and RBNZ. The former released the minutes of the July meeting this morning, and treated the market to the odd spectacle of one member voting for a cut, another voting for a hike, and the remainder sitting on their hands. This has prompted another nasty reversal (yes, there's that word again) in short sterling, which one would have to presume has not been a profitable one for market punters.
The RBNZ, meanwhile, announces rates tonight (or tomorrow, depending on your time zone), with the market split 50/50 as to whether they'll cut rates. Really, it's only a matter of time before they do go, but with NZD positioning extraordinarily heavy relative to the size of New Zealand's GDP, expect fireworks no matter what the outcome.
Whether this week turns out to be an intermediate (1 month) or even longer term turning point, or just another head fake, will only be known in the fullness of time. But after the length and scale of many market moves in June and July, there'd appear to be worse market strategies than betting on a position squeeze and reversal of recent market fortunes. If the CTAs are going to engage in a stop-loss feeding frenzy, it's best to let them have at it.