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Time for a bounce in risk?
More bearish US data came out today, as July durable goods came in at -3.8% MoM vs 0.5% expected vs a revised 0.2% in May and new home sales drop a record 12.1% in July to 276k vs 300k (0% MoM) vs a revised 315k (12.1% MoM) in May. Home prices also fell 0.3% in July vs an 0.1% expected increase.
The recent string of negative economic news from the United States has led to large downward Q2 GDP revisions from many banks and research houses, ahead of the GDP release on Friday. JPMorgan and Goldman Sachs, for example, have revised their estimates downward to 1.1% and 1-1.5%, respectively. The consensus estimate is 1.4% and with the flurry of negative surprises in economic data lately, traders are probably bracing for another lower-than-expected number, bringing the priced-in estimate to be perhaps closer to 1.2%. This leads me to believe that there will have to be a seriously lower-than-expected GDP print on Friday to make risk materially sell off, because estimates are already quite low and the negative sentiment suggests participants are positioning for the lower end of estimates as well. I expect a 1.1-1.2% print, which is lower than the consensus, but I don’t expect a very sizable negative reaction to it. Of course, this type of aggregate positioning and expectations creates conditions that permit sharp short squeezes to occur, but I also don’t think the data will have a positive surprise to catalyze a strong surge in risk. Unless tomorrow’s initial claims data is very bearish, I don’t think there is a catalyst for another strong selloff in risk until Aug ISM on September 3.
Because of the pervasive negative sentiment (AAII survey for the week ending 8/14 showed a 42.5% bearish print, 12.4 points above the week prior) and technical support levels coming back into play in a number of assets, I have been mentioning my expectation of a small bounce in risk soon. Today, we hit the significant 1040 level in the S&P, which marked February and early June lows, and I was looking for a bid around there. 1039.83 ended up being the LOD and the market rallied from there, with the SPY ending up only 0.39%, but with some volume expansion to boot. Lower highs and lower lows are still intact, as is my bearish outlook, but I think today could be day one of a short term bounce in risk that could take SPY to retest the underside of the channel it broke down from on the 20th.
The bounce in risk definitely got some help from today’s rally in yields, with the 10yr posting a bullish engulfing candlestick with a nice bullish hammer signifying an intraday reversal to the upside. I went long 10yr yields yesterday at 2.5% but got stopped out as my unnecessarily-tight 2.45% stoploss was taken out. But I went long yields again (shorting /ZN), as today showed the highest volume in three months in /ZN.
Zero Hedge had a nice chart today showing how S&P futures are tracking the 2s10s30s butterfly, which I have mentioned in previous pieces as an important correlation to watch.
Another product trading off of yields is the USDJPY cross, which traded up about 50 pips today and is challenging that 84.75 S/R zone it broke down through yesterday. A rally back above this level could send USDJPY shooting up to 86-87, but it is too early to tell if yesterday’s move was a false breakdown or today’s move is just a countertrend bounce to retest the breached support line. If USDJPY continues ticking higher, expect all risk to follow.
The Dollar Index indeed found some selling at its 55d today, as I predicted in last night’s piece, and if it pulls back a little bit more, it should take out the 38.2% Fibo level I’ve been pointing out, which would suggest a near-term correction in USD. When the 55d is taken out however, I expect a strong rally in the dollar.
CADJPY found a bid around the S/R represented by July 2009 lows and bounced more than 50 pips today. Technically, this cross is a helpful proxy for risk because of the overhead 81 S/R level it broke down from yesterday. If this level cannot be breached, any rallies in risk can be considered oversold bounces. A breakout through CADJPY 81 implies a more sustained countertrend rally could be in play, however.
Because of the widespread support levels I’m seeing, as well as the very short bias of my current positions, I went long a couple high-beta go-to equities as tactical bullish bets and strategic hedges for my core positions. BIDU is bouncing off its 55d and if risk continues to be bid, some volume could come in and help it rally back into the mid-80s. CMG posted a nice intraday reversal to the upside today, as it too bounces off its 55d and has a nice three-month base it is working on that could propel it higher if risk is bid, especially after its bullish earnings release late last month. Again, these are short-term trades to buy hedges at technically low levels.
Crude also had a nice bounce today, as it found support near its July lows around $71/bbl, reversing higher after an intraday selloff from higher-than-expected inventories in distillates, crude, and gasoline. A retest of the support trendline of the triangle it broke down from this month could be next if markets extend today’s bounce. I am holding my crude short position but still see a small bounce in oil developing. The USO ETF, which is a poor proxy for crude prices but is a heavily-traded product whose technicals sometimes can be very relevant to oil price fluctuations, also bounced off of a support level today, with strong volume coming in as well. If I were a more short-term trader I’d probably close my crude short today and/or buy some USO or /CL as a hedge, but my market outlooks are for longer-term positions.
Precious metals had a bullish day today and my silver long from yesterday turned out to be a timely purchase as silver rallied over 3% today. A test of its long-term resistance level around $19.65 seems to be up next, and a breakout through there could send the metal flying.
Ireland’s credit rating was downgraded one notch to AA- by S&P overnight last night. Though European sovereign CDS rallied today, they ticked down from their highs later in the day and their recent rally in the last few weeks may have been pricing in the downgrade. It is too early to tell if debt concerns get a bit of a rest, as everyone seems to be watching US data, but if risk is bid in the near-term then EURUSD and EURCHF could rally a bit. I still contend that any rallies in EURUSD and EURCHF should be sold but the technicals are aligned for a possible bounce from current levels. If CHF does sell off a bit, it could also provide an attractive entry point for the CHFHUF long I presented a short thesis for in last night’s piece. Reclaiming the 1.31 handle in EURCHF would signal a short-term bid is in play.
VXX reversed yesterday’s rally today, and could not break out through the $24 level I mentioned last night. If the small ascending triangle VXX has developed in the last 3-4 weeks sees a breakdown, markets could see a continuation of today’s bounce. A breakout through $24 would indicate risk-off, however, and as I’ve said, a breach of VXX’s 55d should lead to more bearish price action in risk assets.
And a quick note on the JCJ—implied corrs sold off today and yesterday’s surge could have marked a short-term peak as today offered no follow-through.
To conclude tonight’s piece, I’d like to respond to reader comments and questions regarding a possible bond bubble in the making. Hawks and vigilantes point to the US’s ballooning debt levels and ratios and the analogues of sovereign debt issues abroad to suggest Tsy yields are way too low and that the recent bond rally is little more than a bubble. It is my opinion that the United States does not suffer from any near-term funding issues and though the bailouts and deficit spending and QE have increased US sovereign credit risk, deflationary risks are much greater and justify a decreasing-yield environment, at least presently. However, a number of technical dynamics are also behind the recent bond surge, including duration-hedging from MBS books ahead of/as a result of the massive refi boom in the spring and QE 1.5 earlier this month, record retail inflows into bond funds as equity funds see consecutive monthly outflows, and positive net convexity still existing in curve flatteners. These factors alone are enough to explain and justify the current rate environment. But beyond internal dynamics, there is the fact that the Fed/Treasury/Congress account for the entire marginal supply and demand of Tsys, as the Treasury issues record supply that Congress is requiring financials to hold increasingly greater ratios of (as a consequence of financial reform’s capital ratio requirements) and that the Fed is buying more amounts of. While the macro and financial environment remains risk-averse, Tsys and other core sov bonds should continue to outperform, allowing countries like USA & Germany to issue debt at very low rates. The increasing government spending also finds justification as a “necessary evil” that will be unwound and reversed as crisis abates. However, when global growth does finally pick up, the structural deficits and debt burdens will be exposed and will be the relevant theme to be watched, and when yields start rising, they could really take off. I see this as a scenario in Japan in 2011-2012 and in the US as early as 2012-2013. However, that is far in the future and right now, the UST is about as safe of a security as one can buy to shelter away from global growth declines, and there’s no use delving into whether UST’s are a bubble until there are some near-term catalysts for Tsy outflows and until growth picks back up.
OPEN TRADES
Short EUR/USD | 1.3120 | stop 1.2915 | +460 pips
Short AUD/USD | 0.9175 | stop 0.9100 | +330 pips
Short GBP/USD | 1.5985 | stop 1.5810 | +520 pips
Short /NG | 4.485 | stop 4.510 | +12.04%
Short /ES | 1113.00 | stop 1100.00 | +5.23%
Short /CL | 76.25 | stop 76.50 | +4.47%
Short FCX | 68.07 | stop 72.50 | +2.07%
Short PCX | 10.85 | stop 12.40 | +2.30%
Long /SI | 18.41 | stop 17.75 | +2.77%
CLOSED TRADES
Sell /TNX | 245bps | -5bps
NEW TRADES
Short /ZN | 126’11 | stop 126’24
Long BIDU | 77.50 | stop 75.60
Long CMG | 145.95 | stop 140.00
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Tony Robbins anyone?
You're one smart cookie. Great analysis!
sorry, what is /zn? I guess it has something todo with 10yr yields as you write above? And thanks for the write up!
Nice reality check, bitchez.
Folks, please stop using the phrase "lower than expected". The ones who use that phrase are looking more like idiots every day. The only economic assessments I have respect for now are the ones that plainly say, "this is expected given the decisions our leaders are making".
No use in trying to trade rationality-- very rarely is part of the relevant market discourse. Doesn't make you money. Trading positive/negative surprises (vs the consensus) on economic data does.
I love it.... "until growth picks back up". When is that supposed to happen? 2020? I don't see growth picking up unitl all the debt is unwound. Why? Because you can't solve a debt crisis with more debt. Perhaps delay it, some, but at the expense of making the final unwind much more painful.
Until all excess structural debt is unwound, sustainable long-term growth is unlikely-- but there can be strong growth spurts in the meantime as long as the Treasury can continue to find buyers to roll its debt and issue more to.
We all know the end game but trying to time it based on when you "figure it out" is useless-- only thing that will make you money is timing it based on pertinent catalysts that would rise perceived usa sov credit risk.