Friday, July 10, 2009

A Coiled Spring

On the face of it, yesterday was a pretty quiet day. The Alcoa "earnings" were largely shrugged off (no thanks to Bloomberg, which singularly failed to report operating earnings per share in any headline or story that Macro Man could find), as were the decline in jobless claims (as continuing claims rose quite sharply.) Equities farted around in a range, and ended up largely where they opened. Yawn.

Oh, sure, there was news from the Bank of England, which surprisingly failed to extend its QE program. This caused a bit of a rupture in sterling and a somewhat larger one in Gilts, though such developments may well have flown over the heads of the average equity-based punter.

And yeah, whichever Chinese flunkey was left holding the bag at the G8 summit made the obligatory comment whingeing about the dollar's hegemonic reserve currency role in the global exchange rate system. Once again, Macro Man feels compelled to offer a bit of friendly advice to his friends in Beijing: if you don't want so many dollars, then quit buying them!

Anyhow, with volumes modest the underlying market flavour appears to be one of lethargy. Just look at the Bollinger band chart of the SPX below; the index is at its lower Bollinger band, which means it's a low-risk buy here for a bounce. Right? Right?
Perhaps....but then again, perhaps not. As you can see in the middle section of the chart, the Bollinger band width is unusally narrow, indicating a lack of volatility during the observation period. Maybe this means that we have returned to a low-vol, pre-Lehman, post-green shoots world. Or maybe it's indicative of complacency in the market, and that narrow bandwidth is a coiled spring, ready to explode and unleash its potential energy unto unsuspecting punters.

For some reason, Macro Man favours the latter explanation. In fact, if you look carefully, you can find instances where the spring is already beginning to uncoil. Take European equities, for example (where Macro Man's shorts are concentrated); the Eurostoxx has traded poorly for several weeks now, and as you can see the Bolly bands are beginning to widen.

EUR/USD, has also been stuck in a tearfully dire range; similar to the SPX, the Bollinger bands are at their narrowest width of the year.
So, too, were the bands in USD/ least until a few days ago when the pair magically fell off the end of a table, raising volatility and widening the bands. Not exactly an endorsement for "risk on", is it?
It sort of begs the question of how long the NZD can remain with its narrowest bands of the year. The well-flagged uridashi redemptions and Fonterra payout announcement looms large on the market radar, and perhaps everyone's already short...thus precluding a move lower.
But if we look at the chart of another illiquid, uber-speculative asset price, that of silver, we can see that when stuff finally starts to move, it can explode lower. The silver chart looks pretty dreadful, which doesn't bode particularly well for either the "risk-on" or the DGDF crowd.
Macro Man is sensitive, however, to charges of bias. He always attempts to be impartial in his analysis, because he finds that doing so yields superior investment conclusions. And so the news isn't all bad. Chinese trade data for June, leaked as Macro Man is writing this, revealed a better than expected y/y decline in imports. We have no granularity yet, so we don't know if this is "real" domestic demand or the final spurt of uneconomic commodity stockpiling.

Of course, exports were slightly worse than expected, and the overall trade surplus (y'know, the number that actually goes into the growth figures) missed by quite a large margin. But hey...we should look for good news where we can get it.

And so, to provide a balanced analysis on this fine Friday, Macro Man is happy to share with you the latest upbeat webcast from China bulls ne plus ultra, Goldman Sachs:


Anonymous said...

Again the banks forgot to buy up their allocation of the Chinese govt bond auction today, you thought they would have learned their lesson from earlier this week... I guess lending to copper futures punters is a better bet than lending to the state. What would you rather have...TY1 at 3.5% or 1yr chinese paper at 1%...hmmm. Real return anyone?

Interestingly broadening formation the last few days in EURUSD. I'm actually that bored it fills me with hope it is a continuation pattern to 1.32

H(oratio) said...

Jean-Pierre Roth giveth, and now he's giving it to the sterling? A one week gbp/chf chart has an interesting look to it.

H(oratio) said...

This just popped up. Is BOE draining stg 15 bln, or I just don't get it. MM, any thought on the stg?

Macro Man said...

Thought it was a CP purchase operation...?

Anonymous said...

SENSEX looks like the best head and shoulders I've ever seen...


Anonymous said...

MM - What about USDRUB and Russian equities? The move there over the last week is probably the best example of complacent and stale positions being painfully unwound, and a good indication of what is likely to come in other markets soon.

Macro Man said...

agreed re: Russia. Frankly, I was stunned by the interest to pile back into Russia over the last few months given a) how illiquid it proved to be when it all went horribly wrong last year, and b) the injection of political risk last August, which I lived through and can assure you dissuaded me from further participation in anything Russian.

Cornelius said...

I swear to god - if SPX does a Boll bounce, I'm quitting markets and moving to Arizona.

Anonymous said...

Cornelius, are you hanging out on that much margin? Just don't do it -bad for sanity. And why Arizona?


Cornelius said...

No, not a margin issue - a faith in the rationality of man issue (Keynes be damned).

Arizona is pretty nice for the referred purposes... better weather than most would think, painfully peaceful suburbia (both points simultaneously illustrated by the setting of movies like Little Miss Sunshine and Sunshine Cleaning).

Disclosure: short SPX, long Arizona

Macro Man said...

Hmmm...never been, but the image I have is more "Raising Arizona."

wcw said...

I liked Tucson a lot last time I visited. It's pretty far from an ocean, though, and the skiing is de minimis. Also, parts of it are pretty weird, and not at all painfully normal.

US participants are pushing equities pretty hard after the gap-lower open, but I can't see them rallying long-term without energy participating, and energy is limp. That said, I'm still beta-0 right now.

Anonymous said...

I have just one disagreement with your post - describing silver as "illiquid." Say 20,000 contracts a day (just on the CME) of 5,000 ounces at 12.50 comes to 1.25 billion USD per day. Compare to say, GE with 90 million shares or so a day at less than 11, which falls short of even one billion dollars a day (yeah, I am ignoring GE options, but you get the idea).

Macro Man said...

Sure, but there are thousands of GE's...there are only a couple of precious metals. Compared to the tradition markets in the macro punter's arsenal, silver is woefully illqiuid. I see the current futures quote in the heart of the trading day is 2 lots on the bid by 4 lots on the offer. THAT is not a liquid market.

Anonymous said...

Russian equities were trading at valuations not seen since the 1998 default crisis earlier this year. While I think the fundamentals are terrible it is probably not as bad as 98. At the lows, Russia was way oversold and probably undervalued. That said, I have already exited my position - best to take the money and run - so to speak. Oil back to $20 anyone?

Anonymous said...

"I see the current futures quote in the heart of the trading day is 2 lots on the bid by 4 lots on the offer. THAT is not a liquid market."

I agree that seems illiquid. What is strange is that the front month crude oil contract, allegedly one of the most liquid futures in the world, is only 5 lots bid and 5 lots offered. What am I missing here?

Macro Man said...

You're not missing anything. Liquid markets don't go from $147 to $35 in six months.

Anonymous said...

Well the S&P dropped 50% in about 9 months and that is a pretty liquid market, I would say. if you are saying that the crude oil market is illiquid then I think alot of people would disagree with you, there.

Macro Man said...

Transactions costs in crude for a given $ trade are substantially higher than in FX, fixed income, or equity futures. Crude is almost much more volatile. That satisifes my criteria of illiquidity....

Anonymous said...

There aren't "thousands" of GEs (one of the largest multinational companies in the world, and a former "largest market cap in the world"). :)

Heck, a four lot (and remember that silver futures have half cent pricing) represents 250,000 USD worth of silver. How many equities have bigger values shown on the bid and ask? Very few. Even ten thousand shares at twenty represents less value.

There's plenty of liquidity in silver as long as you don't insist on doing ten million dollars in one fell swoop.

I am already salivating at the idea of getting back into Russia (probably three years away, though) - a market among the most prone to herd mentality and excesses.

"Liquid markets don't go from $147 to $35 in six months."

You and I have a very different definition of "liquid" then. OK, it's not FX with multiple trillions traded every day, but with 20-70 billion USD (just for WTI, ignoring Brent) depending on the price of oil traded every day, I know that I can easily buy or sell far more than I will ever need to. :)

Macro Man said...

By thousands of GEs, I of course meant thousands of different corporate equities that one can buy and sell. Not all are just like GE, naturally.

And yes, it's entirely possible for us to have different ideas of what "illiquid" and "liquid" markets are. I personally place a high premium on knowing where I can exit positions in stressful conditions. As such, futures markets that are 3 lots up in normal trading conditions fall well short of that threshold, and thus receive the lower "illiquid" risk budget/position size. I've found this to be an invaluable methodology over the past couple of years, so I'm sticking with it!

(Oh, and after I got f+cked in Russia last August during the invasion of Georgia, I've given them the red card.)

Professional Gringo said...

Yes, I watched the Yen fall off the table after removing my short just an hour prior as it was "going nowhere."

Yes I'm a Yen moron, but its all going according to plan. Once my stooge Obama destroys the USA, my path to world domination is clear.

Anonymous said...

Liquidity is odd thing, indeed.
Anon, Only looking total notional amount traded in a day is certainly useful in comparing the 'depth' of the market, but truly gauging the ease with which one could enter or exit is much more difficult. For example, FX might just be the most liquid market in the world, but still, if you trade it regularly you know it can feel very choppy, have plenty of jump conditions, intraday gaps, etc.

PG, usd/jpy has been confounding indeed. I am tempted to short right here 93 was a major 'technical' break. minor support at 90, then nothing really till 87. eur/jpy and the rest of pairs are holding up on support precariously as well, should be an interesting trade.

Meanwhile, what is the verdict on sterling and euro? they are holding up like there is no tommorow. Only the Aussie has broken down a tad, and I am short, but would leave to see a bit more follow through.

Professional Gringo said...

Well, being the King Yen Moron that I opinion of the 93 level is that I need a drink.

Ask Voldemort. If MM will let him out that is. I did catch the Euro and Swissy moves this morning and don't feel entirely stupid. This is pretty much a technical get your 20-40 pips and run like a skinny chicken market.

Maybe MM could post some pics of IDF gals holding their Uzis to go along with the charts? I feel like that would be helpful somehow.

I'm going back to my black coffee and cigar breakfast.

Macro Man said...

PG, you gotta understand....I subscribe to the "method" school of writing. I have to feel like I am the people I write about. And let's just say that it takes a lot of work and practice and effort to feel like those jagoffs at SAFE long enough to write a post like them...

Anonymous said...

"(Oh, and after I got f+cked in Russia last August during the invasion of Georgia, I've given them the red card.)"
The invasion of Georgia may have been an additional catalyst for a slump but in fact Russia tumbled practically in line with other commodity markets and stocks at that time. The collapse of commodities was the utmost reason for Russia's plunge. Had we been in a continued commodity boom, investors would have quickly forgotten and forgiven Georgia like they did with Khodorkovsky. Imo

Anonymous said...

The silver market more and more resembles a situation in the Soviet Union where the authorities arbitrarily set prices, concurrent with shortages in available supply at said prices.

The U.S. Mint instituted a rationing policy, recently lifted, for more than a year starting April 2008. The rationing was blamed on a shortage of "blanks."

USD/TRL is illiquid, silver is a smoke and mirrors show.

Anonymous said...

"it's entirely possible for us to have different ideas of what 'illiquid' and 'liquid' markets are."

Indeed, someone managing 100 billion USD probably has a completely different idea that someone managing 100 million USD.

"I personally place a high premium on knowing where I can exit positions in stressful conditions."

An interesting definition. I believe that markets will move in stressful conditions, so I really have no idea where I can exit positions (I try to be on the right side of those moves, though :) ).

"As such, futures markets that are 3 lots up in normal trading conditions fall well short of that threshold,"

I tend to think of liquidity as the ability to enter or exit a position (any size I am likely to do) over the course of a day with a minimal affect on the price. Since I actually have some futures positions (less than a hundred contracts) of more than a whole day's trading volume (those ARE illiquid), silver seems like a relative ocean of liquidity to me.

I've found this to be an invaluable methodology over the past couple of years, so I'm sticking with it!

Nothing wrong with staying with what works (but I will still disagree with your description :) ).

"(Oh, and after I got f+cked in Russia last August during the invasion of Georgia, I've given them the red card.)"

You have my sympathy there. I know someone who had a good sized position in RUB futures then. There was always some market maker (sixty a side and just a few ticks wide) there, so it seemed reasonable to assume that one could exit a position without too much difficulty. Of course, after the invasion of Georgia (most likely due to Russia's crackdown on "speculation," which probably made it harder to hedge), the market maker disappeared, and the victim ended up riding his long position down to near oblivion.

That's another reason I put more importance (to define "liquidity") on something that trades at least 10,000 contracts a day (even if it is just two or three at a time) than one actor sitting there with (as September Ruble futures are now) 67x67 four ticks wide in something that sometimes trades fewer than fifty contracts a day.

Macro Man said...

Yes, My Russian experience was also in the RUB. The invasion happened while I was away on holiday, so I spent a few rather stressful days trying to follow things from afar.

I got out during a mini-recovery, but it was one of a few things that utterly ruined that holiday...hence the red card.