Thoughts on tactics and an historical milestone

It's a bank holiday in the UK today, so at least British chiropractors and osteopaths can look forward to a day of relief from treating market-related whiplash.   Not so their US counterparts, as futures are trading on the back foot Sunday night in New York.  Sunday night market moves are, of course, notoriously unreliable and prone to overshooting then reversing- it's almost as if someone has a vested interest in spooking the market!  (As opposed to spoofing, which anyone living in their Mum's spare room can tell you is a one-way ticket to perdition.)

Macro Man was interested to see Li Kequiang reassure the public that the RMB would not continue depreciating....(at least not til after the parade, he whispered.)  Of course, the SNB has already provided ample evidence this year that official reassurances about the stability of pegged exchange rates are worth about about as much as a child's fistful of Monopoly money.

Woe betide those engaging in rumor-mongering or other unsavory activities, however.   News over the weekend suggesting that the Chinese authorities had rounded up nearly 200 miscreants for spreading disinformation.  Woe betide Mr. Li should he fall out of favour!

Macro Man corresponded over the weekend with his former assistant, who is living out his own personal version of On the Road  by meandering throughout Asia for much of the year.  Having spent much of the time in China, where he has family, Jimbo noted that the average Chinese doesn't really care about the stock market, which is only for the select few.  Of course, if the select few represents only 10% of the population, that's still 130 million frenzied punters....which naturally is a major part of the problem.

Elsewhere, it's been a tumultuous month for investors across a number of different strategies, and it would come as little surprise to see a lot of rather large absolute values in the monthly readings- both positive and negative depending on strategy and nimbleness.  On balance, however, the market has recently selected heavily towards strategies that benefit from rising assets and low vol,  so on balance the reading is probably not too pretty.

How will that inform punters' decisions for the rest of the week?   Obviously, with payrolls on Friday the will they/won't they for the Fed will receive either a small wedge in the door to keep it ajar....or a large iron nail hammering it shut.  Rightly or wrongly, it now feels like financial markets rather than economics will dictate whether the Fed pulls the trigger next month- and markets have a funny way of throwing their toys out of the pram to get what they want.

Macro Man was intrigued to observe that the SPY stopped at the 61.8% retracement level of the "down the lift shaft" drop, almost to the penny.  The thing about Fib lines is that if you draw enough, of course you're bound to find some that appear to define the price action.   That having said, it's a useful rule of thumb that most corrections retrace roughly half of the original move, give or take an eighth or so.

In that vein, it looks like if equities are going to stop and have another look lower, it should happen from here.  (Easy enough to write when futures are already down a percent and a bit!)  The risk/reward from selling with a stop above last week's high looks pretty good, though holding such a position through payrolls (or even Draghi on Thursday) is probably unwise.  Similarly, anyone who bought the break in oil referred to on Friday might do well to set a stop at levels that lock in at least a modest profit.  The good news is that volatility is sufficiently high that you don;t have to wait long to see some pretty sharp movement.

Finally, it's worth noting a bit of a milestone that occurred over the weekend.  West Ham United won at Anfield, home of Liverpool FC, for the first time since 1963.  To put that in perspective, the day before that match in 1963, the SPX closed at 73 (erroneously reported on Twitter over the weekend as 65.  Mea culpa.)

It's left for the reader to decide whether that says more about the Spooz or the Hammers....
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Nico G
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August 31, 2015 at 7:29 AM ×

it is sad to see China go back to the dark ages we are seeing one recent leader after one other miss their chance with history: Roussef, Tsipras, and now 'Chairman Li'. (What nightmare for BRIC investors) Reading Jung Chang epic piece on Mao (twice)(because some facts were so big to comprehend you had to read it again to make sure it was not your own interpretation making up fables) you had to feel empathy for the Chinese folks and tremendous respect for their resilience. To boot there might have been more hope on Li than on Obama when they took office.

Can anyone knowledgeable on contempirary China explain what exactly did they try to achieve with the stock market this year. When real estate, land developing and economy growth at large started to stall at large did they see wealth effect on equities as the ultimate relay for the continuing prosperity politicians are so obsessed about? They pushed millions of profanes onto margin investing. Now they will purge every person expressing doubts or caution regarding the concept of a state trying to control its equity markets

Anyone expecting stabilisation in China has too much faith in either human intelligence or politicians. Washedup keep bringing the jokes along my friend! the other half of China short is till running from top (2200 exit, or stop above 5000 - wild number) you can imagine how eerie this period feels i won't find a trade like this again the next 10 years.

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Anonymous
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August 31, 2015 at 8:05 AM ×

Nico, if they had managed the market with a slow and steady (non leveraged) hand perhaps they could have partially floated off some proportion of their SOEs (say 25% of the equity in then ; state retaining 75%), reducing debt and allowing consumers more private ownership... now that door has probably closed.

The way I look at it the peak was 64 times doubtful earnings, now with recession and reversion to offshore norms the market should probably trade 10-20 times doubtful earnings. Its got a hell of a lot further to fall, perhaps the outstanding margin debt is actually bigger then the "true" value of the market, who really knows due to the shocking lack of corporate governance.

Perhaps those in control of the game made it rich and are now running, the shear amount of Real Estate purchased around the Pacific Rim Chinese, in Vancouver/Sydney etc.... this property is locked up in trusts with little local knowlwdge of true ownership.... safer then dodgy money in UBS proved to be?




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Nico G
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August 31, 2015 at 8:38 AM ×

so damm right

Wealth extraction in China matches a demographic scale of epic proportion if you can open millions of retail trading accounts to stuff with 'doubtful' IPOs etc. Folks in control could also learn from tax caveat suffered by some Americans and execute better. The best neighborhoods in Hawaii - to take one example - have guardian lions everywhere and the realtors we talked to are stoked to see such discreet polite buyers whose name never appears but on email

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Winginit
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August 31, 2015 at 10:33 AM ×

I think the unemployment figure in china is interesting. It’s been about four percent as long as I can remember (not that I have any superior memory, but say, for at the last 5 years). I wonder if the guy responsible for updating that number is in a separate room or something?

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Anonymous
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August 31, 2015 at 2:24 PM ×

Solyndra is the latest to receive the "get out of jail free card" entitlement

FBI: Solyndra lied to get 535 million in government loans

US Justice Department: So what.

http://news.heartland.org/newspaper-article/2015/08/31/feds-find-politically-connected-solar-company-lied-500-million-federal-

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Error404
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August 31, 2015 at 4:01 PM ×

Pleased to see MM had sufficient class to eschew the obvious Sun-pun headlines for this post - such as "Spooz Get Hammered" or "Hammers Blowing Bubbles again and Yellin' about it".

Well, it is a sodden wet bank holiday Monday.

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Anonymous
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August 31, 2015 at 4:37 PM ×

October $VIX keeping pace with September today tells me many believe the downside volatility isn't close to over

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abee crombie
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August 31, 2015 at 8:50 PM ×

Last week brought what looks like climax selling to all markets and then Wed & Thurdsday back to back 90% upside days, which usually is a good signal that its OK to buy back in. Sure some people are waiting to see Spoo's break about 50/200 day but by then it might be too late. Or you could say yes that was climax selling but I'll wait for a re-test of the lows before I'm sure. Certainly I think a retest (for more than 10min like on monday of last week) would be good for the market and then set off a big round of buys .. but alas I have come to the realization markets are often never that easy, so I wont bet on it.

With oil killing the shorts, it could easily provide the relief needed to get Spoos back above 2050, as short covering oil and EM names forces a big rotation. I didnt think WTI would get back to $50 so fast. If it breaks above and holds, I wouldnt assume a retest of monday's lows.

So basically no high conviction trades in Equity land for me. But the EUR looks tempting to short here. A false breakout and now back in the range. Me thinks if you cant break out of the range on one side, you go straight towards testing the other side. 1.14 stop...

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hipper
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September 1, 2015 at 12:32 AM ×

Don't really know what to say about oil. Not a whole lot of news other than US supply flattening a bit and OPEC "worrying" (not really anything else it can do) which obviously acted as a sign for all those hesitating, trigger happy dumpster divers and trend shorts. Quick and violent, just the way Mr. Market likes it. But the issue is coming seasonality weakness and the potential supply in US is still there - and will be back eventually so natural pricing (excluding future specs which can naturally remain solvent longer than I can) "shouldn't" allow prices to get too wildly out of control. Really not a lot of conviction, but if anything, then still sticking to the assumption of slow EZ improvement from a low base level.

Anyway if oil still wants to keep going it might keep spooking the market for a while, meanwhile hoping for a decent dip to add bonds occurring with these (momentary) transitory effects on inflation, on what seems to be a desperate and overly excited reaction to any news following the long, boring period of no news at all. Not really worried about the equity markets sinking too much either. Playing the eventual end of the EM "crash" might still be holding the title for the next big idea.

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September 1, 2015 at 1:52 AM ×

Nico G - good question on why China went down this rabbit hole. My conclusion is as follows (with no particular direct insight from anyone in China): look at the A-share chart from 2010-2014. With global stock markets doubling, post-financial crisis, China's market was DOWN. When the economy started to slow last year, China figured it could manage and control a rally. A China's rally was "due". It was deserved. Obviously, government owned stock markets don't have a great historical track record. But hey, it worked for awhile.

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Macro Man
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September 1, 2015 at 2:34 AM ×

Moreover, it's easy to forget that China's best run of economic growth through 2006 coincided with the A share market going nowhere. It was only in the latter stages when the investment boom had reached silly proportions that A shares went parabolic at the end of '06.

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Anonymous
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September 1, 2015 at 3:13 AM ×

September $VIX closed higher than October by 3 VOLs. If the market does tomorrow what it did today $VXX is going to explode

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Anonymous
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September 1, 2015 at 6:49 AM ×

China’s central bank moved to curb currency speculation, making it more expensive to bet on yuan weakness in the forwards market after an Aug. 11 devaluation sparked concern capital outflows would accelerate.
The People’s Bank of China will impose a reserve requirement on financial institutions trading in foreign-exchange forwards for clients, according to six people familiar with the matter. The changes, which take effect Oct. 15, will mandate a deposit of 20 percent of sales to be held at zero interest and frozen for a year, said the people, who asked not to be identified because they aren’t authorized to speak publicly.
The PBOC has intervened to prop up the yuan since the devaluation, a policy that eats into its $3.65 trillion of foreign-exchange reserves. The stockpile will drop by an estimated $40 billion a month partly because of the support, according to a Bloomberg survey conducted in August. Premier Li Keqiang signaled support for the currency, saying late last week that there was no basis for further yuan declines.
"The move aims to curb speculative onshore positions as it makes the cost of buying dollars higher," said Becky Liu, a rates strategist at Standard Chartered Plc in Hong Kong. "It will also remove lots of speculative trades that aim at short-term gains as the reserves have a minimum lock-up period of one year."
Yuan Rises
The currency in Shanghai rose 0.12 percent Tuesday to 6.3685 a dollar as of 11:44 a.m. in Shanghai, while the offshore rate climbed 0.46 percent to 6.4164 in Hong Kong. The latest rule change comes as China further opens its domestic financial markets to foreign investors, including inviting some offshore yuan clearing banks to apply to trade in the onshore swap and forwards markets.
“My first impression is that this may drive a slight technical convergence in the onshore and offshore yuan curve from current levels,” said Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong. “I am not sure more restrictions bring us closer toward financial market reform."

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Nico G
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September 1, 2015 at 7:01 AM ×

CF

true that - quite ironic that when everyone was busy making quabullions on the DM recovery Chinese equities were completely ignored. The late timing of the 'pump and dump' in 2014/2015 could not have been worse.

nice little gap in Europe this am it is official: the V shaped, bear face ripping rallies are gone we are back to 'normal' trading and longs have just been nuked on Eurex futures options

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Nico G
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September 1, 2015 at 7:06 AM ×

*auction not options

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Hwa Jurong
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September 8, 2015 at 2:56 PM × This comment has been removed by a blog administrator.
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