Was that it?

Was that it?  While calling tops may not go as spectacularly wrong as trying to pick bottoms, kevlar glove-style, it can on occasion be no less painful.  Call it death by a thousand cuts rather than a decapitation- either way there is sufficient danger that it is difficult to call a definitive extreme with anything more than temerity.  (The exception, of course, is if you're in the business of being notable rather than profitable, in which case 100% confidence is a prerequisite and accuracy is of secondary if not tertiary importance.)

Under the framework sketched out last Friday, Macro Man took profits on his speculative equity longs a few days ago and went short an initial clip of SPX early yesterday.  Although Wednesday's price action was far from climactic, particularly in equity space, there was a sufficiently compelling narrative elsewhere that the odds look good for at least an interim top in stocks.

Over the last 5-6 weeks risk assets, commodities, and non-dollar currencies have bathed in the warm glow of an accommodative Fed that's been more than willing to play it cool.   Cue short-covering across all of these markets, which has surely given way to at least tactical length.  However, the change in the tone of the Fed's tune over the past several days surely has repercussions for markets, particularly in the context of recovering core inflation;  the ongoing resilience of commodities and risky assets therefore helps create upside risk for what's priced for the Fed, thus sowing the seeds of their own correction.

Gold was one of the first commodities to bottom (its rally started in earnest in mid-January), so perhaps it's telling that it's been the first to put in a top.  It's broken some sort of trendline; you could even call it a head and shoulders top if you were looking at a portrait of Richard III. 

While the sharp rally in crude brought some ex post fundamental justifications for the increase, in reality a large portion of the move north of $40/bbl was the unwinding of a heavily oversold condition.   Remarkably, after just a couple of days' weakness, we're already threatening the uptrend from the lows.

While there's certainly no guarantee of a move back to the lows, given the vehemence of the rally a correction back to the mid-30's is certainly possible if not likely.   Should that occur, it's difficult to escape the conclusion that based on the current trading environment equities will also sustain a deeper correction.

It seems clear, though, that CTAs are long of all this stuff:  oil, gold, copper, equities, etc.  The chart below is a stylized diagram of the signals generated from a simple CTA breakout model.  A position is established if the price (red line) breaches the high (long) or low (short) of the shaded area, which is a trailing max/min window.  Positions are partially stopped if either of the two lines are breached.  As you can see, since being at least partially short crude since late October, the model flipped long ealy this month.  At this point stops are a long way away (~34/bbl), though shorter term systems will have an itchier trigger finger.  A model with a quarter of the window length, for example, would see its first round of stops triggered at $39.12, only 50c away at the time of writing.

Frankly, Macro Man doesn't know if we've seen the top or not.  What he does know, however, is that positioning is much less conducive to continued rallies in commodities, equities, and associated assets than it was six weeks ago.  With a host of other factors tilting the same direction (more hawkish Fed, impending earnings season/buyback blackout, etc), from his perch the balance of risk continues to favor a reversal of recent trends, and he is positioning accordingly.