Thursday, July 17, 2008

You knew it was coming

You knew it was knew it was knew it was coming.....BAM! Yesterday it finally came. Macro Man refers, of course, to the dreaded short squeeze, which finally arrived with a bang last night. Yesterday's 2.5% rally was the largest since April Fool's Day, which set the stage for the painful short-covering rally of April and most of May.

It would appear that the market is liable for a further squeeze from here. A number of of factors that Macro Man watches are flashing red. Consider the XLF, which posted enormous volume on Tuesday while tracing out a doji-ish candlestick that often warns of turning points. The follow-up rally yesterday also occurred on high volume; it all looks a lot like capitulation selling earlier in the week.
Insofar as higher oil prices have represented a significant squeeze on consumers and non-energy corporates, yesterday also saw an equity-positive development in that space. Crude extended Tuesday's losses after yesterday's inventory data which showed both crude and product builds. What's significant about yesterday is that it represented the first time in the whole parabolic rally that a higher high has been followed by a break below a previous low. Is this a sign of a turning point and a deeper (presumably equity-positive) correction? Inquiring minds want to know.
Macro Man and others have also observed that financial blog traffic tends to spike at panic bottoms. While there hasn't been a Bear Stearns-type surge in Macro Man's visitor figures, he does think it's telling that this week has seen the three highest traffic days of the past few weeks by a healthy margin. Another sign of a panic low, perhaps?
The S&P 500 closed right at the resistance level that Macro Man's been eying...1245 on yesterday's chart, 1241 on today's. A close above would give tape-readers reason to build at least short term longs. Of course, everything could turn on a dime, based on how today's earnings announcements pan out. Thus far, the expected earnings shortfall has not materialized; this month 26 out of 34 companies (76%) have beaten expectations, slightly better than this time last quarter, when 73% of companies had beaten.

The next 24 hours will see a number of key reports, including Merrill and Google tonight, and Citigroup before the open tomorrow. The noise quotient will be high, and it wouldn't be a total shock to see the SPX below 1200 at some point tomorrow. After all, the underlying environment remains dangerous , to say the least.

Yesterday's CPI was pretty ugly, showing the highest rate of inflation since the first Bush presidency. And while "core CPI" apologists might maintain that the inflationary phenomenon is confined to headline, but Macro Man cannot help but observe that small businesses are more determined to pass on higher prices than at any point in the past 20 years. While this willingness doesn't necessarily correspond to an ability to pass on higher prices, it certainly suggests that some of the "core inflation complacency" that Macro Man observes may be misplaced.


Anonymous said...

Your correct MM. I covered most of my shorts Friday as a desperate government in the US was almost issued to do something. This may be a rather spirited rally but it remains to be seen how far it runs. Cox threw a hand grenade to the long oil short financial crowd. You knew that was coming also. Geopolitical events or weather look to be something that could derail and cannot be manipulated.

Macro Man said...

Hell, even geopolitics can be manipulated. There's a story going round that the US will send diplomats to Iran for the first time since 1979, which one could take as another way of putting (downward) pressure on the oil price....

Anonymous said...

Knew it was coming and bam, just a nicer opportunity to short at better levels (something else you had already 'predicted' MM). The GP front is a bit messy I think, a +ve that diplomatic relations between the US & Iran are to resume, but given last weeks sabre rattling with Israel and the vulnerability of Hormuz risks are usually to the upside. Besides, in the realm of realpolitik Bush has 6 months to go so escalating rhetoric against the Iranians is pointless.
Seems some correlations are re-establishing themselves, equities vs yen, crude vs gold - any thoughts MM?
Cheers, JL

davews said...

Unfortunatley, I didn't cover my shorts until it mid-day yesterday. I too am hoping for a 1245 rally before putting on more short exposure.
On a side note, I was short oil at $138, but covered too soon at $142. If there's a little "geopolitical" rally, I'll get back in.

Macro Man said...

JL, I think what a lot of us have missed is that the market seems to be trading the dollar, rather than the yen, as a stock market barometer. Stocks go down, it's been the dollar, not yen crosses, that have declined. Now that stocks are rebounding (at least until MER reports!) so too is the dollar. I covered my USD/JPY short yesterday and have dabbled today in a low-risk punt on EUR/USD drifting lower over the next few weeks.

As for equities, most of my shorts roll off tomorrow and will not be rolled until prices are higher. I actually went net long delta as a day trade and made a bit of dough, though sadly hit my trailing stop before oil got cratered. So I left long gamma into tomorrow's hopefully MER is either really bearish or really bullish...could user a 1.5% gap opening (in either direction)! ;)

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