Thursday, July 17, 2008
You knew it was coming.....you knew it was coming...you 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.