Tuesday, January 06, 2009

I ♥ Risk

"I ♥ risk".

That seems to be the message that Dr. Market is conveying thus far in 2009. The S&P 500 has already exceeded its maximum gain of 2008, when it briefly traded up 0.23% on the year on the first day of trading before closing down 1.4% on the day. Volumes remain modest thus far as many traders still seem to be wiping the sleep from their eyes. Nevertheless, the fact that the stock market is up at all provides as good a confirmation as any that 2009 is indeed a different year than 2008.

Indeed, Macro Man's proprietary measure of risk appetite has swung from panic to euphoria with stunning speed. Not that he truly believes that markets are euphoric, of course; a goodly portion of the index's rise simply represents a mathematical inevitability as the data points from the post-Lehman maelstrom fall out of the calculation. In market terms, this is what's known as "bear fatigue." Not that it's not worth trading, of course. The SPX has broken both trendline and moving average resistance, which would appear to support the bullish thesis. Certainly the current readings on the poll suggest a healthy balance of optimism, with respondents favouring a positive start to the year by a 65-35 margin.

There is plenty of ancillary evidence of a risk rally as well. Back end yields have retreated considerably, unwinding the last bit of December's panic squeeze. Perhaps it's down to the recent Barron's article, or maybe it is a simple asset allocation from pension funds. Either way, it's become accompanied by a recovery in the dollar; EUR/USD has now retraced more than half of its December uber-squeeze among rumours that Voldemort is now selling. Remind me again what these parasites add to the world?

More interesting is the recovery in USD/JPY, which was largely immune to the China dollar story and is traditionally a purer barometer of risk appetite. Observe how it, too, has broken trendline resistance, although the 55-day moving average still luks above at 94.10. A break above that level could see the trend followers start to exit short dollar positions with alacrity, thus providing a further psychological boost to risky assets.
And so Macro Man finds himself long equities for the first time in more than a year and long FX carry for the first time since last summer. The positions are modest, both because of the underlying volatility of these markets and because he views them as rentals rather than structural longs.

While the calendar change has brought about a change in market environment, it has done nothing to cure the larger ills facing both markets and the real economy. Macro Man retains the belief that new lows will be seen in both equities and yen crosses before the year is out. That having been said, with the Y-T-D column rolled back to zero, he wants to start the year off on the front foot. And if the market truly risk, it behooves Macro Man to like it at least a little bit.


Anonymous said...


Happy new year to You and your dearest ones, and may Risk prevail..


spagetti said...

this equity bounce is becoming a bit too consensus now, no ?

i see a small pullback more likely at this stage..

Anonymous said...

It appears that bank spreads are dropping in the Eurozone. Sign of returning confidence perhaps, but the ECB is still expected to cut rates soon. Don't think we'll see many more of those this year as the ECB will not adopt a ZIRP or near-ZIRP stance.

Consider that a NOT prediction.

Anonymous said...

so did voldemort just want the euro at 1.40 at year end for valuation purposes, so it could avoid reporting large currency losses to its political masters? and if so, why sell now, as the basic reality that a bunch of CBs bought at a lot of euros at valuations north of 1.35 remains ...


Mr Risk said...

I too have put on light equity trades on the long side right around the time your risk index showed risk appetite coming back above zero.

I've been steadily increasing exposure, but it seems now that everyone is aware of the rally.

Market breadth and sentiment have significantly improved, so with any normal and orderly pull-back, it could be a situation to get some low risk buys in with tight stops.

But for some reason, I climb my own personal wall of worry about equities, similar to your sentiment.

The carry trades got some good bid since mid-December... for the first time since mid-year 2008. The holidays were a good time bargain shop.