1) Whether Santa was waylaid or whether it was option expiry, Friday's price action was downright ugly. Some sort of bounce in the SPX is probably likely today, if only to test the market's resolve on its break of the channel (based on closing prices) that was made Friday. That being said, the apparent shelf of resistance near the yearly highs makes a deeper correction appear likely; how else will the market dissuade the Fed from (God forbid) actually hiking again?
2) You'd have the think that price action on the European periphery will be pretty telling today after the Spanish election result. Not only is there some catching up to do after Friday's US meltdown, but the elections have thrown up a broad distribution of power blocs within the parliament; a left-wing coalition featuring Podemos (Spain's answer to Syriza) is a real possibility, as are fresh elections. There's nothing quite like uncertainty heading into the most illiquid part of the year!
3) While Macro Man won;t pretend to be an expert in base metals, he does find the recent price action in copper to be intriguing. After dumping in a straight line alongside oil, it's found a pretty solid support since late last month from $200 on the Comex contract. Some of it is probably short-covering, as you can see that the open interest has gone down as the price has consolidated in the bottom half of the chart below. Still, with GDX also showing support (albeit with little inclination to bounce much off of it), it's worth asking the question if this is just the pause before the next leg down or perhaps the initial sign of an incipient turn?
4) Posting over the next couple of weeks may be sporadic for obvious reasons. He does, however, have a couple of ideas that he hopes you'll enjoy. Stay tuned.
2) You'd have the think that price action on the European periphery will be pretty telling today after the Spanish election result. Not only is there some catching up to do after Friday's US meltdown, but the elections have thrown up a broad distribution of power blocs within the parliament; a left-wing coalition featuring Podemos (Spain's answer to Syriza) is a real possibility, as are fresh elections. There's nothing quite like uncertainty heading into the most illiquid part of the year!
3) While Macro Man won;t pretend to be an expert in base metals, he does find the recent price action in copper to be intriguing. After dumping in a straight line alongside oil, it's found a pretty solid support since late last month from $200 on the Comex contract. Some of it is probably short-covering, as you can see that the open interest has gone down as the price has consolidated in the bottom half of the chart below. Still, with GDX also showing support (albeit with little inclination to bounce much off of it), it's worth asking the question if this is just the pause before the next leg down or perhaps the initial sign of an incipient turn?
4) Posting over the next couple of weeks may be sporadic for obvious reasons. He does, however, have a couple of ideas that he hopes you'll enjoy. Stay tuned.
36 comments
Click here for commentsFriday's "huge" fall in Dax re-traced by heavy buying in the first 30 mins today. lol.
ReplyThursday's "huge" fall in Dax now also re-traced by more heavy buying. So we've wiped out 2 days of "heavy selling" in about an hour lol.
ReplyDon't worry though... EU equities are in a "bear market" :)))
Is anyone even trading? A low volume rally at Christmas shocker... Bear market rallies are the fiercest
ReplyGreat dialogue on the Fed action in recent posts/comments. Expecting low volume for sure this week.
ReplyCJF's takeaway is that the Fed is more hawkish than expected/could have been...
Hawkish Fed
Any thoughts re John Hussman's comment?
Reply"The central point is this. From 2009 to 2015, sequential rounds of quantitative easing took the financial system from 0.25% market interest rates and $2.3 trillion in zero-interest assets to a world of 0% market interest rates and over $4 trillion of zero-interest Fed assets, plus trillions more in zero-interest Treasury bills and money market fund assets. This created a massive pool of zero-interest hot potatoes that fueled yield-seeking speculation. But because the liquidity preference curve is so flat at the zero bound, increasing the yield on short-term liquidity to even 0.25%, while dramatically reducing the quantity of zero-interest assets outstanding (as the Fed effectively did last week) reverses the speculative effect of QE back to 2009 levels. My impression is that one doesn’t want to be holding a significant position in risk-assets when investors figure out what just happened."
@Eddie while Hussman clearly makes some good points overall, calling something the 'speculative effects of QE' is a rather sweeping generalization - one can't simultaneously argue that because of no net reduction in the balance sheet, the feds move is largely symbolic (something CV /me/others agree on), and then claim that this move makes any difference to 'speculative effects'.
ReplyDirectionally that is probably true, but ascribing any kind of quantitative metric to that effect or saying it reverses this or that is meaningless.
http://www.ifcmarkets.com/en/economic-calendar
Reply...Chicago Fed National activity index was, hmmmm, "unexpectedly" weak...
...Still waiting for the DOW to cross 17k...until then, I may have to look into one of Lefty's hammocks...
Thanks washedup.
ReplyI presume that QE had some impact on asset prices, however putting a figure on it is tricky, agreed. My thinking was that there is a new source of interest income, namely the reverse repo programme, with a de facto default-risk free counterpart for those caring more about the return of money than the return on money (which seems to be limited unless you deep-dive in MLP space... but this is not an area with which I am overly familiar).
Correlation Watchers note that Treasuries are now trading (inversely) with crude oil. As oil prices decline, junk bonds are sold and Treasuries are bid, perhaps someone out there finally decided to hedge their high yield credit portfolio. Interesting....
ReplySomeone here predicted that crude and junk would bottom together with E&P stocks some time in the winter of 2016, and we might now add US10y yield to that group.
Still hammocking here. Santa may be very late arriving this year. We'll be dumpster diving next Monday. From England.
You can thank the EU for this:
Replyhttp://www.zerohedge.com/news/2015-12-21/germans-scramble-buy-weapons-amid-nationwide-spike-migrant-driven-crime
I think crude is likely to bottom in late Q1 of 16. There is just too much supply. If floating storage is needed prices can and should go much lower. But that represents a short term oversupply situation, oil below $40 I think is a steal (big X factor is how fast electronic cars penetrate) as the market will balance at some point.
ReplyLB, re your Trannies in a bear market, i hear you there as well, just another sign of low breadth in this market. Jeff Saut seems to agree with your assessment as well. But I am not sure how much I want to trust a large sell off that might occur this week on low volume. Perhaps we need to test 1900 again before the bulls come out. Certainly not the time to be adding to spec longs
So Spain CDS popped but the 5 year cash bond doesnt look to have moved much. Am I looking at the wrong stuff? IBEX killed. ... yet bullish for Euro...December trading
Anon from this AM. Are you still lol'n? Those bear market rallies sure are fierce. At least it provides opportunity on both sides if you remain nimble.
ReplyAbee, euto carry trade. Risk off strengthens euro these days. Recall Greece during Summer. Couldn't quiet figure the rally this morning given Spanish vote. There was talk of Chinese looking to buy German assets though.
Anon from 5:00 PM - Yep, a gap up and rally of 300 points in an hour equals easy money and time to take profits (if you run the stats there was a quantitative edge in this mornings long equity trade). However rather than a "bear market rally" what if this is a 'bull market dip'? Santa rally is due later this month ;-)
ReplyAnon 520. What stats are those?
ReplyI do understand that buying the dip is a quant trade. That idea won't behave like it did in 07-08.
MM,
ReplyVery interesting re some of the metals, notably copper but also more generally the Bloomberg industrial metals index is exhibiting the same technical bottoming.
Has attracted my attention as at first glance it doesn't fit with news flow and anecdotes out of China and runs counter to the overarching theme of US monetary tightening.
Seems to me to be signalling at the least a another short term stabilisation (we have seen two others jan-may and Aug-oct), whether it leads to more is an open question. Some things to ponder, there has been a lot of chatter, mainly from china about industry groups banding together to cut supply, you generally want to bet against that type of stuff in the short term but historically it has been a powerful force in the longer term... that china beige book was pretty woeful the other day, is the market starting to look for more PBOC easing?... Is the market really taking confidence from the Feds dovish hike (this one seems less likely to me as it isnt being confirmed by credit and equities although EM in general has been pretty well supported).... is the US economy about to have a bit of a hiccup post Fed hike? (jury is still out, too much for a discussion here).
Very interested to hear thoughts or ideas
A bit of a snoozer today. Credit still looking ugly, HY trading in lock step with $wtic and dragging Treasuries along for the ride. Equities a bit of a sideshow at the moment, but US stocks seem ripe for another trip on the 7 train [= flushing] before everyone packs up and goes home. A raft of US data releases ahead of us on Tu and W (GDP, PCE, durable goods), and with everyone and their Uncle now short duration, it's obvious we are awaiting more evidence of the over-heating US economy... What's that? US macro data showing signs of slowing growth and a manufacturing recession? Pshaw....
ReplyTo us it makes no sense to be short Treasuries or long financial equities, not while credit spreads [and the TED spread] are widening so dramatically over recent weeks. Other than that, why would anyone leave the Hammock until the risk/reward ratio improves? Or until something very significant happens? Like dinner, Happy Hour, pole dancers....
Nibbling candidates for next week: SAN and BBVA, AGNC and NLY, high yield CEFs, European big oil, Brazil, gold miners? Anyone else have ideas for the Kevlar-wearing days ahead?
@LB - "US stocks seem ripe for another trip on the 7 train [= flushing]"
ReplyClever, quite clever - dibs on re-use in future comments, presentations, and the like, especially those made in Manhattan - additional note to self to never use the word 'dibs' in Manhattan for fear of being thought of as slow by all of y'all liberal elites.
My idea from the long side continues to be REITS - of course, that was true 6% ago, but the price action in the face of a weak tape has been, shall we say, defiant?
thanx for naming names, lb.
Replyhave had agnc & nly on my december shopping list, looking to add to older positions there.
already holding brazil u/w (cig, ebr, pbr), not sure about adding any to those.
in euro big oil: repsol? sto?
in lieu of goldminers, on anticipation of falling au:ag ratio, looking to re-establish significant slw position, trawling below 12.
anyone looking into agri-biz/commodities? dba?
with natgas input costs so low, are nitrogen fertilizer makers (agu, cf, tnh) going to reap the benefit? outlook for ag comm prices in 2016?
@ washedup
ReplyTo me the main takeaway from Hussman is that the'...speculative effects of QE...' has placed the market in a very dangerous territory, distorted risk premium and mis-allocated capital in a grand scale.
MM and commentators here such as yourself are very good on some of the technical of the FED's mechanism with the market which is very interesting for me and I know others to read. I wouldn't be able to articulate and argue with you well enough the pros and cons of what someone like Hussman says but a good dose of common sense tells me I agree when he lays his thoughts that the nature of what the FED is doing is long term a clear negative.
ZeFrenchFrog
LB and 72bat, are you sure you want to be buying levered mREITs when repo rates are going up? I'd rather buy TWO, IMO. NLY is only good for a trade IMO, poor stewards of book value
ReplyCF is a cash cow, but its adding to capacity big time. Look for prices & margins to come down. I'm a bigger fan of POT but its a LT investment.
Want something else to nibble on, how about some Gerdau... Brazilian Steel maker (but runs mini mills, like Nucor, good operator) I cant think of much more out of favor.
Well, mREITS ETF in my portfolio had risen for about 10% in the past few days(REM). I am sure that it can still climb but for how long?
ReplyAgree with @abee Ag sector seemed to be a good bet right now. But I am concerned with POT's currency risk, with CAD dropping like a stone. Or it is the upside for export?
http://www.bloomberg.com/news/videos/2015-11-24/at-least-four-fed-hikes-coming-in-2016-pimco-s-clarida
Reply..I have been reading today, and one of the things is that somebody is trying to get the idea in that the fed will have to re-drop rates after one rate increase...I think if I could get odds on that, I'd have to bet Lefty's hammock and its contents that that is nonsense. I don't see Janet offering up just one rate hike to the god of normalization next year. Just doesn't compute. Sounds like somebody trying to sell gold or keep the bull in the ring another few months...
...My 2 cents.
Europe is broken again - lower lows vs. US higher lows
Replylook no further when you need a hint on multi week market trend just heed Europe underperformance
@Bruce - my base-case is that the Fed will be able to slide in one additional hike but no more - the labor market tends to lag IP by 6-9 months or so, so I suspect by March the unemployment rate will be down to 4.8%, wages may even be starting to show some life, and crude may have found a hard floor - not that it means much in a stag-flationary economy, just that the fed badly wants to hike to claim credibility and those may be the only positive data points by then, with the possible exception of housing numbers - by Q3/Q4 with all cycles rolling over, the headwinds will probably be way strong for them to do anything but stand pat or cut again.
ReplyStill waiting for opportunities here. Abee, right now we don't believe that repo rates are going to go up quickly, or very much, or at all, perhaps from where they are now. We are in the Gundlach camp of Lower for Longer, or even that the Fed will have to cut rates and even retrace its steps to stimulate the economy with QE4. There is an enormous deflationary wave that has built up out there from the fall in commodities prices, and it is going to continue to inundate these shores for some time.
Reply@washedup:
ReplyMaybe. Probably only the shadow knows, but I do not that the Aussies, with all the dependence on China, and the implosion of their export markets, have kept their rates at >2% this entire time. I think there may be the trap in thinking that .25% is a magical number. Can you give me a really good reason that the FFR couldn't easily handle 1%? I can't....the Fed overdid the rate decreases, and I suspect we'll see 4 increases next year.
2 cents...
Most people spell "Not" in the above as "know".....:)
ReplyBruce is right, rates are going up in the US. Also all this crap about equities falling through the floor is just that - crap. Equity bears have been predicting a crash every 2 months for 6 years and have been consistently wrong...
Replyhttp://www.marketwatch.com/story/this-smart-money-indicator-nailed-the-dot-com-bust-and-its-even-more-bearish-now-2015-12-22?siteid=bigcharts&dist=bigcharts
Reply“Historically, this group has been on the right side of the market more times than not when their collective options position is at an extreme,” Lyons wrote in a blog post in which he pointed out that OEX traders have never held more put options relative to call options.
By the numbers, Friday’s readings marked the first time in history with more than three put options for every call. The record didn’t last long. On Monday, it rose to 3.3 options for every call. "
...@anon at 8:09...Well, maybe I'm right and maybe I'm not, but I think this IS the turning point for equities, and have stated as such...I'm just waiting for my entry point as this year is too choppy for me, not a pro investor. I think this may be an inflection point, and I'm waiting for the DOW to reassure me. I just think the Fed will tighten, but on many points I'd agree with washedup...
I have no idea what equities are going to do. I am not the equities guy here. What I do know something about, and the record generally bears this out, is rates, and the relationship between rates and FX, and some rate-sensitive equities. I am not the only observer to be skeptical about the pace of Fed rate hikes. Most smart observers would agree with me that at this point a stronger USD isn't good for anyone (US, EMs, esp. China would all suffer), and because of that it may simply not happen, even though at this point the FX markets are pricing in several US rate hikes in 2016. If the market begins to predict that less than the four hikes will occur next year, then the USD will retrace part of its advance.
ReplyYou have to realize that short-term interest rates, and specifically the perception of upcoming movements in short-term interest rate differentials, are the main driver of FX. Thus the market's view of what is going to happen to US/German interest rates is a key driver of EURUSD. Any unexpected pick-up in economic activity in the EZ will soften the market's perception of the likelihood of faster QE by the ECB, as will any unexpected slowdown in the US recovery. In our view, neither of these events is as unlikely as most punters seem to think. Tomorrow's durable goods orders and PCE data will give us another set of data points on US economic activity and inflation that are more contemporary than today's (backward-looking) Q3 GDP number.
wouldn't worry too much about the PCR in isolation Brucie. esp. as the article notes OEX volumes are dog dirt. SPX still trades decent volume, and that PCR is about middle of the road, put it all together with VIX and SKEW....nothing special here.
ReplyFrom DZ
ReplyMy temptation as we head into 2016 is look for US reflationary momentum to take hold. The US has successfully conscripted growth from many of its trading partners via the QE led devaluation during 2009-2014, and now it is ready to reap the rewards of that growth grab. It has been 2 years since we advocated any kind of US risk parity storyline in the US, but I think the time has come to revisit that trade. Our old friend the “blues” are trading at around a 2.25% implied yield in 2019. There is plenty of room for that yield to drop if the economy fails to perform over the coming quarters/years. In that sense it represents a decent insurance policy for the spoo! And if we end up pushing rate expectations towards the Fed’s longer term target of 3.5% for 2019, that will be in the context of a MUCH stronger labor market, economy and stock market. The rise in yields will be easily offset by much larger percentage rise in spoos! So for 2016 we are going to step back into one of our all time favorites – the “spoos and blues” trade. We recommend the same old weighting of $100m of spoo and $100k/01 of blues!
Once again, not an expert on equities, on which we remain agnostic at present, but we do know a few long-only small cap equities guys and it is not pretty over there, for a lot of the same reasons that it has been ugly in the high-yield credit world. Many of the punters who comment here at MM are day traders of S&P E-minis, and hence very Spoos-centric, but the behavior of ES doesn't always reflect trends in the broader market. Small cap stocks, like junk bonds, tend to lead on the down side as well as the up side, because of the relatively higher debt load and debt-to-enterprise value ratios of these companies [note that these can become infinite!].
Reply@LB, don't be too shy about equities, I remember well the LB Bottom (TM) call in 2009. I only wish I would have paid attention at the time; I'd be spending a little more time chasing a small white ball around...
Reply- Whammer
Any take on the moves in TED & LIBOR/OIS?
Replywhammer -
Replysame here, oh me of little faith.