The blog-o-meter bottom

Perched on the edge of the abyss, stocks took a peek down yesterday and then stepped back from the brink...for now.  Was the market over-sold and due for a bounce?   Were dip-buyers emboldened by the proximity of the head and shoulders neckline as a risk parameter against which to buy?  There's probably an element of truth in both of those explanations.   But the real cast-iron rationale for yesterday's rip was the klaxon blaring from the Macro Man blog-o-meter, as traffic has jumped this week and  really took off yesterday.

In fairness, yesterday's post was linked at the FT's excellent Alphaville site, which is usually good for a nice traffic boost.  But it's hardly the first time that's happened, and the chart of yesterday's traffic outlier speaks for itself.   If anything, it under-sells the story, as Macro Man took the snapshot at 7.30 EST last night.  It's a well-known phenomenon that traffic picks up when equity markets go south, but to see an increase like that (rubber-neckers or lost souls seeking guidance?) is surely suggestive of at least a short-term crescendo.

In any event, it's not like every market in the world has gone south this year.   Macro Man got a friend to run a screen on Bloomberg, and sure enough a few bourses have started the year off very well:

Tunisia! Jamaica! Laos!  If you had the perspicacity to dump Spooz and Eurostoxx and put your money in those markets last month, Macro Man tips his cap and will cheerfully admit that you are a better investor than he is.  If not, well...it sort of says everything that two of the top ten performers are in the red.

One very notable feature of yesterday's trading was the lack of participation by fixed income.   Hell, white, red, and green eurodollars were actually up on the day!  While this would ordinarily be a cause for grave concern, Macro Man does recall that rates were a bit slow to rally in the early stages of this year's equity sell-off, only to catch a strong bid afterwards.   Perhaps the same dynamic will work in reverse if stocks continue to rally (and that remains a big if.)

One thing we can say for sure is that we're at absolutely vital levels in the Treasury curve.  2's - 10's is at 120 bps, resting on a support line that has held four times since 2008.  A break of this level should a) lead to a pretty strong flattening  b) probably mean 10's are bid  c) quite possibly start to raise alarm bells if the flattening were to be vicious enough.  It's one thing for a single bellwether asset price to sit on key long term support.   But when a couple (SPX, 2's -10 's) are in the same boat, Macro Man generally sits up and takes notice, because the possibility of either confirming or diverging price action tends to make for unusually useful price signals.

Anyhow, now that equities have given punters a chance to catch their breath, it's worth considering what actually drove the sell-off.  While China obviously kick-started things last week with its currency and equity weakness, things have stabilized more or less where they were supposed to.  Indeed, Macro Man's CFETS basket calculation has inched back above 100, suggesting that the authorities continue to view this area as a place to stabilize the currency.

Oil clearly remains a focus, though it's far from clear that it has acted as a specific driver of market weakness over the last couple of weeks.   The "equity crack" spread discussed the other day is largely unchanged on the year, and high yield (the transmission mechanism from crude to broad markets) actually fared OK last week before rolling over again over the past few days.

While growth and earnings are perennial concerns for stocks, data on the former has been mixed and we're about to kick off the season for the latter.   In fairness, anecdotal reports on the holiday season have generally been poor, and perhaps this is contributing to a negative narrative in the absence of hard data.  What data we've had, at least in the US, has continued along the same tone as the last several months, at least judging by the Bloomberg economic surprise index.

Given the relative fortunes of equities and fixed income, one might ordinarily cite pension rebalancing as a possibility, but given that both asset classes were flat last year it's hard to make a case why any institution should rebalance now.

Of course, one could cite Fed tightening, but that argument would be more persuasive if the market had done anything but price policy action out of the curve since the Fed put rates up last month.  It would be easier to swallow the argument that the end of ZIRP means a reversion to "normal" market valuation principles if those principles were in any way being applied to fixed income markets, which are still very expensive relative to nominal GDP (especially with the lack of CB demand.)

While some combination of the above factors probably explains why people may have been looking to lighten longs are try a cheeky short, ultimately it strikes Macro Man that "price is news" has been the main driver- i.e., falling markets turn all manner of people into momentum monkeys who sell because the price is going lower.   This holds for professional as well as retail punters, and in this case it's not hard to understand:  if you had a game plan for selling only to see global equities collapse out of the gate, what would you do?  Chances are, you'd hit the bid, which is what the street has done.

From here, it obviously gets a bit trickier.  Depending on your viewpoint, a further bounce can be seen as either a golden selling opportunity or a gateway back into the range.  Macro Man has to confess that while he has layered some trades this week that will benefit from a further bounce, his conviction  level that we go back to 2000-2100 is pretty low.  Fortunately, as discussed yesterday, he has the ability and the wherewithal to structure trades to hold for several months.   Which is just as well, because in the near term he's frankly happy to have the market tell him where it's going rather than trying to predict the nearly unpredictable.

Unpredictable, that is, unless the blog-o-meter gives a few more signals....