Catharsis or beginning?

Much of Monday's price action resembled a climactic denouement, at least until the last couple of hours of the US session.  The subsequent recovery left Spooz with a dragonfly doji, which would normally signal a further bounce in the days ahead.   That being said, at the time of writing they've slid back down another 85 bps.

There are so many interesting talking points that it's probably easier just to cover them via quick-hit bullets:

* Further to yesterday's posting on the FANG/GDX spread, it's interesting to note what William Blake might have called its "frightful symmetry".   Just prior to last August's significant episode of risk aversion kicked off by a Chinese currency devaluation, the FANG/GDX index as calculated by Macro Man rose from 166 to 265 (59%) in just 19 trading days.   More recently, during a bout of risk aversion apparently kicked off by a devaluation of the Chinese equity market, that index has fallen from 272 to 173 (37%) in just 14 trading days.  If you're a believer in price symmetry, then things should start to slow down from here.  (That being said, GDX ripped through the 17 level mentioned a couple of days ago and looks set to build on its gains in absolute terms.)

*  While European banks may bounce given the speed and severity of their decline, you'd have to say that barring a policy shift it looks like such a rebound will be short lived.   People selling SX7E constituents at these levels generally aren't selling because they want to, but rather because either they're scared or they have to.  Meanwhile, if you had any doubts that Eurostoxx dividend swaps are just Eurozone bank stocks in a prom dress, recent price action should have put them to bed.   Just like bank stocks, divvy swaps look very cheap relative to "intrinsic value" on the face of it....but just like European bank stocks (cough, DB, cough) in environments like this there are serious concerns about the ability to pay out.  At these levels divvys are very likely a good long term bet....but one that only works if you have deep pockets and don't really give a hoot about daily P/L swings.

*  USD/JPY continues to thumb its nose at Kuroda-san and the BOJ's cack-handed attempt to put a jolt into the market.   Well, they did put a jolt into the market, in a way....insofar as they plugged in a toaster and chucked it into the water while Japanese banks and yen shorts were having a bath.  USD/JPY has sliced through support like a Ginsu knife and now looks very ominous indeed.  It's currently below the neckline of the last 15 months; the last stand between here and oblivion is the 100 week moving average just below 115 and the bottom of the cloud of the weekly Ichimoku chart.   If you were fortunate to sell some above 120 last week, prudence probably dictates taking something off here; if the support pictured below gives way, however, get ready to sell more...and expect plenty of company.

* If there were any debate that the market was trading off of pain rather than fundamentals at the moment, a quick perusal of the year-to-date currency movers wills set you aright.  It's not often that you find the HUF and the JPY in such close proximity among the top performers, given that one is a traditional safe haven and the other....isn't.    Consider also the disparity between the BRL (9th best performer) and the MXN (2nd worst, and the actual worst amongst currencies more valuable by weight than single-ply bog roll.)  That oil move's really been a bitch, hasn't it?   Sure, if you're the RUB, less so if you're the NOK or the MYR.

 * Perhaps the most interesting news of the day was the rumoured debt restructuring of Chesapeake Energy, long the poster child for over-levered oil wildcatting MLPs.   When Macro Man looked at the chart today, he was struck by the similarity to that of another over-levered firm emblematic of a failing industry.   The difference, of course, was that the bankruptcy of Lehman Brothers was the latest in a string of banking and financial failures, while CHK is just the first of the levered oil plays to go to the wall.

Ultimately, this is what markets will need to absorb.   Yesterday felt like a catharsis, and in the very short run perhaps it will be.   But Lehman's failure led to another six months of volatility and market-changing structural shifts before things finally reached as bottom.   Chesapeake certainly isn't a Lehman, and it's not even a Bear Stearns; a page has been turned, but it seems much more likely to mark the end of the beginning rather than the beginning of the end.

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