Equity market crack

Flat is the new up, apparently, as the SPX broke its early-year losing streak in the least spectacular way possible, closing up a paltry 1.64 points.  Still, after giving up early gains the index was comfortably down for most of the afternoon, so at least you can say that it showed a spark of life when 1900 was under serious threat.  If you've been short all year, it must look awfully tempting to book a few profits now that we're so close to the neckline/bottom of the range.

One asset that shows few signs of stopping to the downside is of course oil, which endured another shocker yesterday.  Perhaps one of the problems is that traders are conditioned to it moving a few bucks a day back when it was close to 100, which at the time represent only a few percent.  Fast forward to today and even a $1 move is 3%, which can be accomplished in a matter of a few minutes.
Somewhat ominously, we've now broken through the panic lows of 2008, only this time there is a real supply and demand dynamic behind it.  That the Saudis would conceivably cash in on some portion of Aramco rather than cut production to boost the crude price is as damning a statement as you can make on the future of the oil price, though of course we'll have to see what decisions are ultimately taken.

Regardless, one of the most enduring sectoral trends in equity land over the past few years has been long technology (embodied by FANG) and short energy.   In a way, it's ironic; in 2007 and the first half of '08, long energy (XLE) and short financials (XLF) was so alluring that Macro Man dubbed it "equity market crack".   This time around, there's a brand new drug, and for the last few years this "new crack" of long NDX and short XLE has given its adherents a wonderful high.

Of course, at some point this will come to an end, as all things of this nature do.  If we expand the time horizon of the chart we see that the current level is nowhere near the all-time high (not that one would use late-90's tech valuations as any sort of value reference.)  However, if one believe that trends can be defined by time as much as price, this "new crack" spread has been rising for seven and a half years...nearly as long as the previous decline from the bubble highs.  It's difficult to say which will break first- oil or this spread.   It's probably worth checking in on them periodically, however, to see if one or the other exhibits divergences that could signal the end of the trend.

Speaking of trends, the flattening of the eurodollar curve has really been something to behold.   Coming from a blank sheet of paper, you'd have to say that some of these spreads really look like they offer value:  the 2nd versus the 10th ED contract is priced at just 83 bps, while the Fed expects to put rates up by 100 just this year alone.

Unfortunately, the market is not coming from a blank sheet of paper, as a lot of punters got sucked into steepeners after the hawkish October Fed.  Macro Man himself wrote in favour of the trade, and while he also suggested taking a bit off when it came good immediately, the subsequent collapse has been disappointing, to say the least.

Clearly ED's are being driven by negative risk sentiment surround equities, oil, and China, and figuring that the Fed will blink.   Dennis Lockhart admitted yesterday that the January meeting wasn't really live but noted that March is.   Ultimately, you'd have to think that we'll get some sort of guidance from a Fed that is truly a central bank for the modern age, providing a running commentary of its assessment with as much frequency as a teenager sending out Twitter updates.  These days, that feels like about the only thing that can arrest the juggernaut that is the ED flattener, regardless of the dubious value proposition at current levels.