Source: Short Side Of Long
- If you haven't heard the news already, the bulls have declared victory. Various bloggers around the internet have posted articles titled "The bottom is in", "Waiting for Santa Claus rally" and "Major buying opportunity" (plus many others). The first note in Saturday's post warned that "all in all, one could make an argument that a bounce or relief rally might be in store soon" and that is what we have gotten so far. However, I'm personally not expecting anything remotely close to "a major buying opportunity"... just yet. While there are many reasons for this, the chart above which tracks short term market breadth internals, shows that the market didn't really experience a proper oversold condition. We only became slightly oversold with Net New Highs, while the AD Line & Volume as well as the Stocks Above 50 MA never really washed out properly. Many will ask, why is it import to get oversold? Extreme oversold conditions create panic selling and re-build the wall of worry by removing weak hands from the market. These occurrences are necessary to forge longer term lasting supports as anything less usually fails.
Source: Short Side Of Long
- Within the foreign exchange world, the Australian Dollar Japanese Yen cross pair is commonly known as the risk barometer or a perfect example of the carry trade concept. In recent years, this trade has been a great signal of market sentiment as it ebbs and flows from pessimism to optimism and back to pessimism again. As of last Friday, the CFTC commitment of traders report showed that hedge funds are currently extremely long the Aussie and extremely short the Yen. Furthermore, since that report was complied two Tuesdays ago, on the 13th of November, the recent price action has been very negative on the Japanese Yen. Therefore, one could assume that hedge funds have increased their bearish Yen bets and pushed the Carry Trade COT towards further extremes. Similar events occurred in April 2010, May 2011 and March 2012 with a result of a sharp and swift sell off (in all risk assets). I eagerly await the new CFTC report today to see further hedge fund positioning developments in both the Aussie and the Yen.
- Gold Volatility measured by the GLD CBOE VIX is at record lows (video above). As a matter of fact, volatility all around the world has fallen dramatically. The S&P 500 VIX is around 2007 lows, the DAX 30 volatility is amazingly low, Hang Seng Volatility is also at multi year lows and finally the JP Morgan G7 currency volatility is as low as 2007 as well. Implied volatility for stocks, corporate bonds, junk bonds, currencies and commodities is just dead quiet. Skew indices for various currency crosses shows that bulls are paying premium costs for Calls. The Euro Dollar option skew is very elevated with Calls almost as cheap as Puts. In similar fashion, the Dollar Yen option skew is actually showing record premium being paid for the US Dollar rising. With volatility dramatically low on almost all risky asset classes and bulls paying premium for Calls in the options market, one should apply a lot of caution moving forward.
Source: markit / HSBC
- As far as I am concerned, one of the major conundrums in the market today is the so called Chinese economic recovery we are constantly being bombard with by various media outlets. This morning in Asia during work, I noticed Bloomberg reported that "Chinese manufacturing index signaled the first expansion in 13 months, adding to signs that economic growth is rebounding after a seven-quarter slowdown" (chart above and link here). Poking further in-depth I checked out the report and read Mr Qu's comments (Chief Economist at HSBC): “As November’s flash reading of HSBC manufacturing PMI bounced back to the expansionary territory for the first time in 13 months, this confirms that the economic recovery continues to gain momentum towards the year end." The conundrum occurs with the lack of enthusiasm out of the financial markets. Just think about the conditions for a second. Chinese manufacturing expands for the first time in 13 months and Shanghai Composite continues its selling for yet another day? Whether we look at the price of Copper or the current level of the Korean KOSPI or the Shanghai Composite itself, it is impossible to see a Chinese recovery in the price. Let us remember that the majority of the time, markets act as a discount mechanism as they price in events up to 6 months ahead, therefore these markets should have front run todays data well in advance. During a real recovery in 2009, prices of Copper and KOSPI were rising rapidly, almost without a pullback. So why is there a lack of enthusiasm today? You will notice that the KOSPI and Copper both reversed all of their recent gains. Is the market doubting the Chinese recovery? One thing is for certain, while not perfect by all means, I rather trust the market than Chinese official statistics.
Source: Morgan Stanley
- It has been my view for awhile now that global economies continue to slow as we are moving toward another recession. First it was the peripheral Eurozone countries (PIGS) that started slowing due to the financial crisis in 2010/11 and it wasn't long before the majority of the EU became affected in later parts of 2011. Afterwards it was Europe's largest trading partner China that started feeling the effects of a slowdown in 2012 and as China slowed the majority of Asia followed. One of China's biggest trading partners and the world's third largest economy - Japan - has now experienced a dramatic five month decline in exports and has become the latest economy edging toward a recession as we start 2013. The chart above, thanks to Morgan Stanley Research shows that German Business Confidence is now in free fall (something we have been covering here on the blog for awhile). MS research writes: "Germany might not be able to avoid a recession either - While we continue to expect the German economy to outperform the euro area as whole and expand by an average 0.3% in 2013, we worry that economic activity might contract over the winter. Not only is export demand (notably from the euro area) deteriorating sharply, but German companies are also embarking on large-scale cost-cutting programmes. Alas, consumer spending is not dynamic enough yet to compensate for the shortfall in external demand and investment spending." I also eagerly await the new Ifo Institute report today, which should give us further clues on what 7,000 German CEOs are currently experiencing.