S&P futures dumped their most in almost 4 months on marginal volume today as a budget deal (moar fiscal means less moar monetary policy) and a potentially hawkish Stan Fischer on the Fed spread taper fears across all assets with gold lower, Treasury yields higher, and USD rising. New 52-week-lows spiked to 4 month highs as higher beta muppetry took Trannies down most in almost 4 months. The S&P tested back below the payrolls-data and FOMC Minutes launchpad levels from last week as rather notably, while most sectors are still up 5-10% from the debt-ceiling lows, Utilities are now unch. Treasuries weakened back to unchanged from the payrolls print for 5Y (though 7s-130s are -3 to 4bps still). This is the biggest jump in VIX in 2 months as the term structure is the most inverted since US downgrade levels in Aug 2011. Dow <16,000; S&P <1,800; NASDAQ ~4,000 - Retirement Off!
There is plenty of discussion of outflows but we though the following chart was perhaps the most insightful at why this drop is different from the last few year's BTFD corrections. As we noted here, corporate bond managers have desperately avoided selling down their cash holdings (since they know dealer liquidity cannot support broad-based selling and its an over-crowded trade) and bid for hedges in CDS markets. But it seems, given the utter collapse in the advance-decline lines for high-yield and investment-grade bonds that the liquidations have begun. While the selling in high-yield bonds is on par with the Lehman liquidationlevels, it is the collapse in investment grade bond demand that is dramatic (and worse than Lehman). It's not like we couldn't see it coming at some point (here) and as we warned here, What Happens Next? Simply put, stocks cannot rally in a world of surging debt finance costs.
Longer-term divergences tend to provide the most concerning backdrop for the current relative strength of stocks. BofAML's technical research analyst Mary Ann Bartels is concerned that the major negative divergence between market breadth and the S&P 500 indicates a risk of a deep correction in 2013. As she notes: "Although the advance-decline lines have moved up with the US equity market since mid November, bearish divergences remain in place for the S&P 500 and NYSE Stocks advance-decline. This is an important negative divergence as we enter 2013." Add to that the divergence between NYSE net new highs and the divergence with Transports and markets face a triple threat.
While we are bombarded with talking heads telling us that there is money-on-the-sidelines and everyone is so bearish with the market climbing a wall of worry, the reality - as we see across multiple asset classes - is that investors are overweight risk assets (e.g. credit investors overweight IG and HY and mutual fund cash at record lows), near-extreme levels of bullishness (AAII and Put-Call Ratios), near extreme levels of non-bearishness (AAII), and yet credit investors believe markets are overvalued (though still buying) even as IG and HY bonds are seeing near-record highs in advance-decline.
Walls-of-worry; Short-squeezes; money-on-the-sidelines; Everyone's Bearish, right? Well, instead of just listening to the drone of the mainstream media and talking heads, who appear once any rally appears in the hope of garnering some more AUM and taking commissions, we thought it worth a few minutes to look at actual data, positions, and sentiment across equity, debt, and FX asset classes. Sure enough - here are ten charts that show investors are anything but bearish and that the ammunition for the next leg from here can only come from central-banks (and we are concerned that disappointment is due).
A few things have been going on in the world of high yield credit recently. While the 'beta' to recent interest rate weakness is low (spread duration reduces any empirical sensitivity here), the relative weakness on high-yield bonds in the last few days has been quite notable for the oh-so-high-beta 'safety' of high-yield credit. And while technicals (flows) dominate, the illiquidity in the cash bond market remains dire for any size and the massive 530k block sale at VWAP last night makes us nervous.
For the last four days, HYG (the high-yield bond ETF) has seen a significant underperformance in the latter part of the day. As we noted yesterday, high yield bonds (and investment grade) are seeing the advance-decline line rolling over. Stocks stand notably expensive relative to high-yield credit once again and VIX smashed over 1 vol lower from its gap up open at 16.5% to end at near 5 month lows under 15.25% - its most discounted/complacent to realized vol in over six months. A weak 10Y auction spurred Treasuries to underperform - which helped pull S&P 500 e-mini futures (ES) risk higher (along with oil strength) but in general stocks and gold tracked one another loosely higher while the USD pushed conversely higher - ending the week so far unch. Cross-asset-class correlations drifted lower all day - with credit and carry FX listless while stocks/oil/Treasuries did their risk-thang (though oil tapered back to lows of the day by the close as Gold/Copper/Silver trod water. Three days of terrible volume, even worse average trade size, and the lowest range in five months suggests anyone serious has left the building and perhaps explains why stocks aren't following credit lower.
UPDATE: PCLN -12.5% AH (and DIS missed)
Admittedly slightly higher than yesterday's year-to-date lows in volume, today was not much better as S&P 500 e-mini futures (ES) pushed up over 1400, back to three month highs, on decent average trade size (following yesterday's low average trade size). Treasuries tracked stocks (higher in yield) but Gold and the USD disconnected (from stocks) into the US open and never really recovered. ES rolled off its highs late on and reverted perfectly to VWAP once again and rather coincidentally the 'correction' occurred just as ES priced in Gold hit the year's highs (which intriguingly is a critical cliff's edge level from a year ago). Oil's surge (and Treasury's weakness) were the main risk drivers which pushed CONTEXT to lead stocks higher as FX, credit, and PMs trod water largely. Interestingly, in ETF-land, our capital structure models were flashing red with HYG down notably and credit underperforming broadly, along with VIX (and VXX having an outside up-close day) not playing along with the rally. With VIX bouncing off 4-month lows, closing back over 16% (and up on the day), the pull to VWAP into the close on decent average trade size, the plunge in short-interest, and the underperformance broadly of credit markets (especially the ever-reliable-for-a-pump-job HYG); we'd be a little nervous up here (especially after Europe's sovereign and credit weakness today).
Equities traded in a very narrow range (aside from an early day-session stop-run) amid extremely low volume in equity cash and futures markets and ended the day modestly lower (holding the post-Draghi gains). However, a funny thing happened on the way to the equity bull market; HY and IG credit have underperformed since mid-day Friday, VIX (+1.3vols to 18.03%) has risen notably since the open on Friday - completely shrugging off equity's strength, and while Treasuries saw a great deal of ugliness at the end of last week - and a pull back would be expected - they notably outperformed (relatively speaking) their equity cousins today. The USD gained 0.25% today as the EUR dropped a notable 0.5% but only WTI reacted to that (by dropping 0.67% today) while Copper and Gold trod water and Silver spurted to a high-beta 1.7% gain (crossing back above its 50DMA for the first time since mid-March). As Unilever and Texas Industries issue debt at record-low coupons we also note that IG/HY advance-declines lines are extremely high and along with implied-skewness in SPY options suggests a very high level of complacency.
For those who believe in this sort of thing, here is JPM's Chief Technician Michael Krauss, who says that "The “one way” market rally since Dec-Jan is over. Expect weeks, if not months of lateral movement." Well, there's that. Then there is the only thing that matters in "markets" these days - which way Ben Bernanke sneezes. Everything else is meaningless: McClellan oscillators, Ichimoku clouds, RSIs, oh and of course, fundamentals.
We have been pointing to the 'changes' that are evident in the high yield credit market (bonds, credit derivatives, and ETFs) for a few weeks now. The fall in the high-yield bond advance-decline line (and up-in-quality rotation); the decompression of HY credit spreads; and the lack of share creation, discount to NAV, and underperformance of JNK/HYG; but these canaries-in-the-coalmine pale in comparison to the massively over-crowded nature of the high-yield credit protection bullish positioning among arguably levered market participants. As Morgan Stanley notes: "US High Yield Investors Are 'Full Overweight'". Remember large crowds and small doors are no fun.
Marc Faber Previews Q2, Is Long Japan, Cautious The US And Gold, And Sees A 5-10% Increase In InflationSubmitted by Tyler Durden on 04/02/2012 13:17 -0500
Mark Faber was on Bloomberg TV earlier, presenting his latest outlook on markets and the economy, but first he summarizes 2011's first quarter which as repeatedly observed here before has so far been a mirror image of 2012, with the only different that while it ran up on 2010's QE2 back then, now it has surged on the transitory flow (not stock) impact of two back to back $1.3 trillion LTROs. "I think that if you look back at a year ago we made a peak of 1370 on S&P on May 4 and then dropped sharply to 1074 on October 4. Then we recaptured the lows in November and December. Since then, the first quarter has been very powerful and has surprised investors because of its strong performance. And I think now the expectations are very high. The market is no longer oversold the way it was in December. And everybody thinks that the race is on, go along with equities, the hedge funds have positioned themselves on the long side and optimism is high. I would be very careful at this stage." As for his outlook, he is "reluctant to short" in a money-printing environment, believes that Japan will provide the best equity futures returns (more easing from the BOJ appears imminent), is confident margins will roll over (as they already have) on the back of record for this time of year input costs, and thus thinks earnings will disappoint, sees inflation running 5-10% more than a year earlier, and is still accumulating gold every month. Overall, mostly as expected from the pony-tailed one.
Whether it was FX majors, the Treasury complex, or the economically-sensitive commodity markets, the 'negative' shift from yesterday's open (USD up, TSY yields down, Commodities down) plateaued overnight and retraced throughout the day today. Equities and credit however managed to make new highs (while all these other risk-related assets did not) as they stayed in sync for the afternoon (double-topping on lower volume) as financials outperformed (MS +5% for example) on what we can only imagine was Greek rumors (which later proved as usual to be completely false). Oil dropped markedly into the close, heading for $97 as Gold remains the week's winner (though Silver and Copper won on the day). The USD is flat (leaking higher in the late day) to yesterday's pre-market after trying and failing at 1.32 against the EUR (which is the underperformer vs USD on the week for now -0.48%). Treasuries sold off, adding 3-7bps across the curve (though still lower yields on the week) and while 30Y underperformed, 2s10s30s did not move much as the rest of the curve pivoted. The last 30 mins of the day saw ES pull back from its lonely highs to test VWAP (and IG and HY credit also fell with it) as open to close, credit underperformed, and cheap hedge IG was moving more negatively than beta would suggest. By the close, ES had pulled back (lower) to converge with CONTEXT (proxy for broad risk assets) and fell below VWAP as once again average trade size picked up significantly to the downside.
NYSE total volume was the lowest for the year today. Almost 20% below December's average and down 10% from Friday's already low volumes, US equity markets managed to limp higher post the European close. Notably, volume in ES (the e-mini S&P 500 futures contract) was also the lowest of the year (at around 1.43mm cars vs 2.11mm 50-day average) and what volume there was focused on the European trading session (and right at the close). Today saw the average ES trade-size rise to recent peak levels as we note trade-size picked up into the Europe close (considerably higher average trade size around the European close than normal) and then again at the close. Peaks in average trade-size have often pre-empted turning points in the market and we note that while markets closed quietly unchanged (practically), high yield credit lost ground on the day and broad risk assets (while mostly showing small net changes) did not as a whole rally off the European close lows as enthusiastically as stocks. VIX futures and implied correlation continue to diverge as we note that VIX actually closed higher for the first time in five days.
The message of the market has been very clear the last week or two and we have been actively discussing it - the hope that was priced into equity markets is being discounted back to the reality that was always priced into credit markets. HYG, increasingly liquid, accessible, and actively traded has become the weapon of choice for hedgers and shorts and once again today it dramatically underperformed. IG credit also underperformed as we suspect the relatively low cost of carry made it an attractive macro-overlay into a long weekend of possibilities. Commodities in general converged back on the inverse of the USD performance of the week, down around 1.5% (with the exception of Copper which is -4% on the week as China hopes fade). Equity weakness was generally supported to the downside by CONTEXT's broad basket of risk assets - especially as TSYs rallied aggressively in the afternoon following the record 7Y auction. AUD remained the ugly duckling of the week in FX land (as carry was unwound) but EUR's slide was the biggest driver of DXY's strength as it gained around 1.3%. Evidently very few wanted to go home long into this weekend and ES dumped into the close ending the week -4.5% or so with a major volume surge at the very end.