Commitment of Traders
There were some readers who took offense at our "bloodbath" recap of yesterday's market action (modestly different from that provided by MarketWatch). And, all else equal, a modest 28 step drop in the E-Mini/SPX would hardly be earthshattering. However, all else was not equal, and based on peripheral facts, the reason for our qualifier is that as of last week virtually nobody was prepared for a move as violent and sharp as the one experienced in the last minutes of trading yesterday. In such a context a "mere" 1.5% drop in the futures market has a far more pronounced impact on participants than a 10% or even 5% drop would have had, had traders been positioned appropriately. They weren't. So what was the context? Let's find out.
The holiday week saw the dollar consolidate against most of the major currencies. The yen was the main exception as its losses were extended under the aggressive signals coming from the new Japanese government.
At the end of the week, the other key consideration, the US fiscal cliff made its presence felt. The recent pattern remained intact. News that gives the participants a sense that the cliff may be averted encourages risk taking, which means in the foreign exchange market, the sale of dollars and yen.
News that makes participants more fearful that the political dysfunction failed to avert the cliff and send the world's largest economy into recession, generally see the dollar and yen recover. This is what happened in very thin markets just ahead of the weekend as Obama's ling last ditch negotiating stance seemed to reflect a retreat from his earlier compromises.
In Late 2006, the S&P 500 futures market traded around 1435 and the commitment of traders was at an extreme net long position. The market fell shortly after only to manage a miraculous rise in the face of hedge funds going bust and an exploding and over-leveraged credit market. In mid-2008, the S&P 500 futures also traded around these levels, from where the epic collapse really began. Six years later, the S&P 500 futures traders are the most bullishly positioned they have been since those heady over-confident days. Still believe the talking heads that there is money on the sidelines waiting to be put to work? Still convinced that there will be some epic rally if the 'fiscal cliff' fallacy is resolved? Positioning (real money) trumps Sentiment (AAII surveys etc.) every day in our book. The Bernank will be pleased at his success.
The US dollar rebounded smartly at the end of last week as the realization that it was increasingly likely the US would go over the fiscal cliff. This has been our base case, but many seemed to expect it to be averted and were looking past it.
At a time in the year when the market should be at a standstill, and when all trading should be over, the tension in the S&P is unprecedented, driven by two main factors: the ongoing Fiscall Cliff confrontation, which now appears set to not be resolved by Christmas, and very likely to persist into the new year, and what happens with hotel AAPLfornia, as suddenly it has become a liability to show LPs any holdings of the fruit in the year end statement. The two events combined will likely see furious market volatility persist well through the year end, and since volumes will further die down, we may well see massive stock moves on odd lots. And while AAPL is trading under $500 for the first time since February following last night's Citi downgrade, the confusion over the Fiscal Cliff persists, with The Hill first reporting that Boehner is willing to cave on the debt ceiling extension, even as Boehner himself subsequently tweeted that "Any increase in the debt limit will require a greater amount in spending cuts and reforms." So back to square one, with a red herring proposal that Boehner can say we offered to the president and the president turned down. Japan continues to attract a lot of attention with the ADHD market desperate to hope that the coming of Abe 2.0 will be much better than that of 1.0, when in one year he achieved nothing and then resigned due to diarrhea. Judging by the action in the USDJPY, we may be a few short hours away from closing the gap that sent the pair to 84.30 first thing, and proceeding to unwind the near record JPY commitment of traders short position as the JPY realizes this time will not be different. Quiet calendar in the US, with the Empire State Manufacturing Index expected to print at -0.5 at 8:30 am Eastern, TIC data to show China's ongoing TSY boycott at 9 am, and a hawkish Jeff "Mutiny on the Eccles" Lacker speech at 1 pm.
The US dollar moved lower over the past week against the major currencies, with the notable exception of the Japanese yen. The greenback's technical tone has deteriorated. The euro and sterling appear to have convincingly broken above significant down trend lines. With the holiday season upon us, there seems to be no compelling technical reason not to look for a continuation of dollar weakness into the end of the year. Few are incentivized to fight the trend.
The extent of the Fed's easing, and the implication of its guidance, suggests an even more dovish posture than the expansion of QE3+ (remember it was purposely open-ended, unlike QE1 and QE2). While the euro zone economy appears to be contracting this quarter at a slightly faster pace than in Q3, the slowdown in the US is more dramatic. Growth may be more than cut in half from the 2.7% annual pace seen in Q3. The fiscal cliff is the main cause of consternation at the moment. Although there is private negotiations taking place, the public posturing is what investors have to guide them, and it is not particularly flattering.
We have been tracking the deterioration of the US dollar's technical tone over the past three weeks. That ended abruptly. Weak euro area data, a more dovish than expected ECB, and heightened political uncertainty in Italy, saw the euro reverse lower after briefly moving above an eighteen month-old downtrend.
The UK also cut its growth outlook, and poor data increases the likelihood that the BOE may have to resume its gilt purchases in the new year, though consumer inflation expectations have ticked up recently.
At the same time, there appears to be little progress on the US fiscal talks. Whenever a top official signals this, the dollar seems to tick up on risk-off considerations, though with diminishing impact. The stronger than expected November employment data is not sufficient to stay the Fed's hand and the FOMC will most likely expand the long-term assets purchased under QE3+ at its meeting that concludes on December 12.
Our assessment of macro fundamentals leave us inclined to favor the dollar on a medium term basis. However, we continue (seehereandhere) to recognize that near-term technical considerations favor the major foreign currencies, but the yen.
So Much For "Sell Bonds, Buy Stocks": Net Long Positions In 10 Year Treasury Highest Since March 2008Submitted by Tyler Durden on 11/05/2012 09:35 -0400
Remember when back in March Goldman presented the "Long good buy: the case for equities", when they, and everyone else of course, said the once in a generation opportunity to short bonds and buy stocks is here (and when BlackRock chimed along, saying the time to go all in... BlackRock ETFs.... is here)... Or when in September, right after QEternity, Goldman, having blown up previously on said trade, reiterated its call to go long stocks and short bonds (and when BlackRock chimed along again, saying the time to go all in... BlackRock ETFs.... is here). Well, so much for that. Or rather, those. As of last week, the speculative long exposure in the 10-year Treasury more than doubled in the past week, soaring from 79,296 to 169,456 net contracts, the highest position since March 2008. Looks like Uncle Ben will need to come up with more creative and counterintuitive ways to get traders to stop frontrunning him in purchasing every bond in the open market, and herd them into buying stocks...
Gold climbed $11.80 or 0.69% in New York yesterday and closed at $1,712.70. Silver surged to a high of $32.232 and finished with a gain of 1.36%.
The slings and arrows of outrageous EUR positioning remain key to figuring out where next in this on-again-off-again currency. The last six weeks or so have seen a dramatic regime shift from smooth transitions from risk-on to risk-off to more staccato-like jumps and trends as the world hangs on every rumor and flashing red headline. We note three things that may be critical to understand where we go next: 1) EURUSD has entirely recoupled with its EUR-USD 'swap-spread' implied fair-value - removing the 'chaos premium' in the pair, and providing less room for upside without broad-market agreement; 2) EURUSD has decidedly lagged the very impressive rally in European sovereign risk (suggesting the latter may be a little over-exuberant); and 3) Despite every talking head telling you about 'all the EUR bears', both Commitment of Traders and Citi's FX positioning indicator have shifted notably more positive - with the latter, as Steve Englander notes, beginning to show significant EUR longs. Now that an active segment of the market actually seems long EUR and associated currencies, the 'good news' bar is a lot higher, and the impact of bad news will be more readily visible.
Gold $1669.80 up 20 cents - Silver $30.61 up 16 cents Silver Charges Ahead, Gold Rebuffs Cartel RaidSubmitted by lemetropole on 08/24/2012 20:03 -0400
Silver is going to blow SKY HIGH!!
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).
All throughout the epic surge in corn prices, the big Kahoona, Goldman Sachs, where buy means sell, and sell means Goldman's traders are buying everything its clients have to dump, was quiet. That is no longer the case: "we recommend a short May-13 CBOT wheat position vs. a long May-13 CBOT corn position." In other words, Goldman will now be selling May 13 corn. We all know how these recommendations end.
While analogs for periods past have been shown time and time again, the striking similarity of the last four months of this year and the same period last year is becoming extremely worrisome. The rips and dips are of almost perfectly equal size and duration and retail and professional participation is also very similar. July 21st marked the top last year after failing to break the highs of a July 4th week peak (which occurred on low average trade size). It would appear the bulls are hoping that it's different this time - or else it is very scary with S&P 500 set for the magic 1200 Bernanke Put strike very soon.