No man's land

Yesterday worked out pretty much as planned...that is, until Europe went home.  European equities gapped lower on the open, drifted back to unchanged, and then seemed as unsure about what to do from there as Macro Man when he made his little prediction.  US equities had no such issues, however;  from roughly unchanged on the European close, they were frog-marched up in a straight line, presumably by algos on some sort of buy program.

The rally left the Spooz chart looking rather interesting; a bounce off of the 50-day MA and a bullish engulfing candle would normally be a pretty healthy buy signal, but wouldn't you just know futures are left knocking on the door of the 200-day MA, so it's kind of hard to be enthused.  That the rally has occurred in the midst of a little fixed income squeeze is telling; one wonders whether stocks would be so resilient if rates started selling off again.   From Macro Man's perch we're kind of in no man's land; the tactical picture isn't particularly compelling in either direction, which suggests not running a lot of tactical risk at the current time and price.

As commenter abee crombie has pointed out, high yield may well be something of a canary in a coal mine.  Quite an interesting dynamic has played out over the past six weeks or so, as  punters bought HYG aggressively into the rally from early October to the beginning of this month...but sold very little even as the ETF dumped.   The entire 20% increase in shares outstanding occurred at prices at or above current levels; with little time to earn any carry on the position, one would have to think there will be considerable amount of headwind to the topside as some dip-buyers try to get out for a scrtatch.   How high yield manages to cope with that could help shape sentiment for broader markets;  given that a shelf of supply is likely, the natural inclination is to look for opportunities to re-establish shorts in risky assets.

Although oil perked up a bit yesterday, commodities are also not exactly screaming that Goldilocks is back.   Copper, for example, is now at its lowest price since the summer of 2009, though that says more about China and the dollar than it does about the economic cycle.   Then again, even stripping those effects out in some way still leaves copper looking weak; copper in Aussie dollar terms is at 5 year lows.  That having been said, sometimes looking at assets or commodities denominated in other currencies turns up interesting technical set-ups; the chart of copper in AUD terms is indeed at 5 year lows, but at levels that have produced vehement bounces the last three times they've been reached.  As a purely tactical trade, buying copper and selling an equivalent amount of AUD looks like pretty spectacular risk-reward.

Finally, yesterday represented something of a mini-milestone for the Eurozone.   The final reading for October CPI came in at +0.1% y/y, slightly higher than the consensus of 0.0%.   This was the first time that the final reading of CPI surprised to the upside since August of 2014.  Not that the euro cared, of course; it's making fresh lows on its merry march towards parity.  At some point, however, it's going to be worth taking the other side of QE/deflation bets in Europe.  Intrepid punters may already be tempted by something like paying 2y2y as a cheeky punt; as we approach QE day in Europe, however, it will be worth diving deeper to look for more structural opportunities offering a solid risk/reward set-up.


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Anonymous
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November 17, 2015 at 9:12 AM ×

Angus

Hi MM.

Great post as always.

Listened to French PM on Radio Inter this morning here in Paris. Valls pitched a really tough line on law and order - intended to weaken support for the FN in the regional elections next month. He certainly comes across better than his boss. When asked how he would pay for more gendarmes and border police he said twice that the deficit 'will of necessity be exceeded '. Seizing on this the left wing of the Socialists under Melenchon have already announced that austerity is dead. Draghi and QE and the Fed December decision suddenly become more complicated.

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Thought4TheDay
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November 17, 2015 at 10:06 AM ×

US corporations are now spending more on buybacks and dividends than net income.

Source: http://www.reuters.com/investigates/special-report/usa-buybacks-cannibalized/

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Leftback
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November 17, 2015 at 11:54 AM ×

Nice bit of TA, there, Guv'nor. We do like a bit of TA first thing in the morning.

Here at the Hammock we have been looking at the Spooz and we reckon that little gap at SPX 2075 or so gets filled during this retracement this week into expiration and then it's back to the Down elevator. We don't have a huge amount of strong conviction either way but we do think punters are getting a bit Happy-Clappy again and it's a recipe for trouble with the DX as strong as it is up here near 100 again.

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abee crombie
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November 17, 2015 at 1:51 PM ×

Interesting Aussie copper chart, thanks for sharing. I am not into the nitty gritty on Copper, but it seems to me that it has always been one of the commodities that bears harped on bc the marginal costs of new mines is much lower than still current prices. But there are other dynamics involved like scrapping (particularly in China) which helped stabilize prices.

Even though I think commodities are to be sold, that doesnt mean you sell them all the time at new lows, and when everyone is bearish. The world is coming off a very low IP growth rate for the past 6-9 months. If global growth picks up, even just a little, then you dont want to be short.

As for equities, I think it will be a rotation game here. Headline index likely in No Mans land, but lots to be made, IMO, buying beaten down sectors for a rally into Q1-Q2 next year. But tight stops in just in case I am wrong

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abee crombie
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November 17, 2015 at 8:09 PM ×

VRX and SUNE are good examples of why you need to have stop losses in single name stocks

But I dont get the reason for selling them today on the fact that fast money has already exited their positions. Shouldnt that be a good thing? Anyways, they are good reminders of why playing in the single stock sandbox is a different game... every once in a while you get a nice 70% loser

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washedup
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November 17, 2015 at 8:21 PM ×

Well - when you tout your 30% returns to raise 2/20 capital claiming special stock picking ability, I guess phrases like 'roach motel', 'heavily concentrated bets hedged with macro index shorts (cough google and apple)', and 'exclusively herd picks divined over fine wine and tasty cheese at the ira sohn conference' are not part of the disclosure.
So yes, its a different game! deep pockets with OPM always has been.

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