Friday, October 26, 2012
One of the elephants in TMM's room has been the behaviour of the markets in the US morning. Strange things have been afoot that have had us scratching our heads as to what piece of macro is missing from our puzzle. But of course as we alluded to yesterday, one can never just focus on one of the many functions that drive a market and indeed TMM are following a scent that leads them to an old favourite - positioning.
Glancing through some of the recent performance figures at some of the larger CTAs, it's apparent that the last month has not been a time of deep joy. So putting 2 and 20 together, along with some clues from some recent regular intraday move timings, TMM are getting the sense that the past two weeks' correlation break down can be explained by CTAs reducing their equity and bond longs, and also their Usd/Jpy shorts in a "Help! I'm a CTA, get me out of here" exodus.
Interestingly, whether because of the "get me out of here" move or just because of [insert popularist reason for equities going down], Eminis have now done a 5.01% (remember spurious accuracy confers authority) move peak to trough. One argument we have heard from bears was that we haven't had a 5% correction for ages. Well we have now. Will that do? the 100day moving average is not far below around 1391, but without further significant CTA unwinds it may be hard to breach.
Now something else. As one goes through an existence in markets one of the human characteristics that displays itself is, despite all logical reasoning, spurious pattern recognition. In fact the market and media rely on it. It was only a week ago that every down move in equities was being blamed on the 25th anniversary of the 1987 Great crash. But anniversary events are rarely repetitious. Ok, yes they are in a calendar terms and yes, some of TMM's family Christmases have been exceedingly repetitious re sock presents, but anniversaries of horrors rarely repeat the horror. If you are concerned about anniversary dates then we recommend a temporary flip back to the Julian calendar from the Gregorian and then back again thus avoiding the problem. Just as we advise reciprocating round numbers in FX to avoid "Bigfiguritis". 1.3000 Eur/Usd becomes a lot less important when it's 0.7692307 Usd/Eur.
But having said that, there has been burnt into TMM's mind a couple of seasonal turn dates. One has been the 16-18th of July and the other has been that you buy October the 27th. This has always been a supposition rather than anything proven but we did find THIS that does sort of substantiate the feeling.
Of course we have a wee event coming up that we should meld into our date selection. US elections. Sitting on the London side of the pond TMM get the feeling that our US friends are still overestimating how close the election will be and we wonder if this actually due to a reporting bias coming from our Wall Street brethren, driven by their own desire to have a tax cut (Tin Hats TMM - Think that might light the comments column up as we have just broken rule 1 - Never mention politics, religion or gold prices). But we do have to have a look at our scenarios.
Option a) (our expected one) Obama wins - perhaps we see a knee-jerk sell off in SPX - But we buy the dip.
Option b) (not expected) Romney wins - look to sell late December given his economic policy will be sure to cause a near term recession.
But whoever wins we think equities run higher 'til Christmas.
So when do we buy? Well to be honest we have a fair amount onboard already and are toughing it out despite some delta adjustment style trimming, but what little room to add we have we will be using on Monday and then the famed election.
But for now, whilst the CTAs cry "get me out of here" TMM are hunkering down eating Witchetty grubs hoping they don't get voted out of the competition.