Recap 2014-10-10: Random Thoughts on Equity Price Action, Long Term Charts

Commentary:

Seems like most people are as confused as I am about what’s driving the market sell off. That is likely to beget further risk reduction. Volatility and uncertainty will need to fall before longer term buyers step in.

Peter Brandt noted that both the DAX and Russell have broken below long term support. Bespoke noted that based on a limited sample, there is a bearish bias stretching out through the next month:

But other studies via @WildCatTrader suggest the opposite:

Selected commentary from JPM: The failed rally from Fri 10/3 was one thing but the inability of stocks to at least trade flat following Wed’s surge has killed off the last few near-term market bulls. 1925 obviously has been strong support and people are hesitant to press close to this level but for many the 200day MA has become the next “inevitable” stop for the SPX cash (that is now ~1900). At least last week (Thurs morning 10/2) the sell-off had an authentic and mildly panicked feel to it w/participation from both MFs and HFs. This week though has been different w/volumes lower and faster-money HFs dominating. The flows had a much more artificial and forced feel. The Thurs descent was particularly troubling in that it was very calm and orderly. . The growth questions are one thing but lurking beneath the surface is the age-old fear of a QE-less market and how stocks can possibly survive the absence of Fed balance sheet expansion. As of the end of Oct the Fed will no longer be expanding its balance sheet and it has become very popular to look back at the experiences post QE1 and QE2 and extrapolate them to the future (in Mar ’10 when QE1 ended the SPX slumped ~16% and after QE2 in June ’11 the index fell nearly 20%). Obviously there was a lot more going on in 2010 and 2011 besides Fed purchases but that isn’t stopping investors from grouping all the QE eras together.

Given the current pace of market moves, various options based indicators, and given my hypothesis that options hedging activity may have had an outsized impact, we should have a tradable low towards the end of next week. And this may be completely spurious, but real yields appears to have been leading PE for most the past 12 months. If the relationship holds, that also points to a low around late next week.

Some other perspectives:

· @RareviewMacro noted that: the Largest weighting in $HYG is #Oil & #Gas @ 13.5%.
Here’s a chart of HYG vs the front WTI contract over the 12 months:

As a result, it’s probably not a surprise that the selloff in HY doesn’t seem over yet. Here’s a chart of the price of CDX HY Series 22,

Having said that, WTI has gotten reasonably cheap here, IMO. Even with all the shale production, it’s not too far from the marginal cost of production. It can obviously fall another further given the global growth concerns, but it’s probably reasonable to expect supply to start reacting soon. Some commentators have noted that the drop in oil should help real incomes and hence real GDP growth, which is true, but the effects are likely to be quite modest and with a long lag. The chart below of ISM and WTI price changes (which is extrapolated for future dates) illustrates:

· FTA notes about yesterday’s move: Over the past 50 years, the market’s been down this far in a day 289 times, or almost six times a year. It is nasty, but on this basis it looks normal.

Separately, let’s take a look at the longer term charts:

SPX is now the most oversold since late 2012. In addition, this is the lowest weekly close since May and qualifies as a lower low. However it is now not far from a series of support levels: the bottom of the weekly Bollinger Bands, (the first time in 23 months!) the 40-week moving average, (roughly the same as the 200 day) and the support / resistance at ~1880 that was in play for most of 2Q. Given the prevailing sentiment and technical backdrop, there is a good chance those levels hold, at least in the near term. Also worth nothing is the time dimension. The sell off will be 4 weeks old at the end of next week. The S&P hasn’t had a fast correction (loosely defined as a correction that excludes consolidation periods) lasting more than 5 weeks since 2011.

In rates space, 30yr yields are now at the lowest level since the Taper Tantrum, and the given the recent failed move higher and the continued trend lower, the technical backdrop is as strong as it’s been all year. Oh, and apparently there are growth and disinflation concerns now too, so that’s not going to hurt:

However, the belly has just been consolidating. The high print for yields back on Sept 18th and 19th turned out to be a massive bear trap, and yields are now at the bottom of the rising wedge that has been in place for over a year. This suggest paying fixed / shedding duration may be good risk reward. (Normally, that would be a positive sign for equity prices as well, but perhaps not now, given recent correlations)

The oil sell off has gotten a lot of attention, but note that we are now at the most substantive support/resistance levels since … a month ago. The $90 level has been in play since late 2007:

EURUSD was unable to break below 1.25, and given the speed / volatility of the move and the first substantive higher weekly close since the end of June, seems quite vulnerable for a retracement:

USDJPY has similarly rejected 110 amidst a series of articles suggesting growing Japanese concern regarding excessive Yen weakness:

AUD was unable to bounce this week, and prices are right at long term support. The picture for CAD is similar.

Gold, unlike Silver, has held above the 1200 support level. Given that long term yields have been falling, the weak price action is quite concerning:

Notable:

  • S&P revises France outlook from stable to negative; affirms its AA rating
  • Draghi noted he expects credit to pick up soon next year “as the banking sector is progressively cleaned up and the deleveraging process reaches its conclusion, banks will have new balance sheet capacity to lend, and our monetary policy will become even more effective” Draghi said the next step is to “exploit the available fiscal space, so that fiscal policy can work with rather than against monetary policy in supporting aggregate demand” further noting that “the aggregate fiscal stance must be supportive of aggregate demand in the current cyclical position, and this can and should be achieved within the existing rules”. Mr. Draghi drew the conclusion that for “Governments and European institutions that have fiscal space, then of course it makes sense to use it”.
  • Canada Employment was strong, rising 74.1k vs 20k exp and -11k prev, and driven by Full Time rather than Part Time employment. The Unemployment Rate declined to 6.8% vs 7.0% exp and prev, with the participation rate steady at 66.0% as exp.
  • The WSJ discusses how “fracking firms are being tested” by the current crude environment. “At $90 a barrel and below, many hydraulic-fracturing projects start to become uneconomic.”
  • OPEC price war shows no signs of abating as Iran matches Saudi Arabia; Iran will sell its crude to Asia in November at the biggest discount in almost six years, matching cuts by Saudi Arabia.
  • USDA WASDE report End Stocks:
  1. Corn: 2081M vs 2152.5M exp
  2. Soybean: 450M vs 488M exp. However, Production was broadly inline at 3927M vs 3990M exp
  3. Wheat: 654M vs 705M exp

Upcoming:

  • Mon: US Holiday, China Trade Balance, Australia Business Confidence
  • Tue: France CPI, UK CPI, German ZEW, US NFIB Survey,
  • Wed: Draghi Speaks, UK Employment, US Retail Sales, PPI, New Zealand PMI, Consumer Confidence, RBA FX Transactions
  • Thu: EU CPI, US Jobless Claims, US Philly Fed, NAHB Survey
  • Fri: Yellen Speaks, Canada CPI, US Housing Starts, U Michigan Confidence
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