Price Action

When is the last time you got a stock tip from a cab driver or chatty not-in-the-business neighbor?  It’s probably been the better part of a decade, if not longer.  Yes, that’s probably the most bullish argument for owning stocks just now, but, as ConvergEx's Nick Colas notes, it also raises a question.  What investments are retail investors considering, exactly?  Various online tools and resources provide some answers.  From Yahoo! Finance’s analysis of number of requested price quotes last week: AAPL, BAC, TSLA, INTC and CALL.  From Google Trends: AAPL, GOOG, and YHOO.  And from one very popular online brokerage for today’s volume: AAPL, F, BRCM, BAC, and NUGT.  Whether this interest indicates a top or a crowded momentum trade is in the eye of the beholder, of course.  But in a light volume period like summer, Nick notes, tracking individual investor attention can be an important piece of the day-to-day trading puzzle.

For the second consecutive day futures have drifted lower following a drubbing in the Nikkei which was down nearly 3% to just above 14K (time to start talking about the failure of Abenomics again despite National CPI posting the first positive print of 0.2% in forever and rising at the fastest pace in 5 years) and the Shanghai Composite which dropped to just above 2000 once again, after PBOC governor Zhou saying that China has big economic downward pressure and further reiterated prudent monetary policy will be pursued. This is despite Hilsenrath's latest puff piece which pushed the market into the green in yesterday's last hour of trading and despite initial optimism which saw stocks open higher following forecast-beating EU earnings gradually easing and heading into the North American open stocks are now little changed. It may be up to the WSJ mouhtpiece to provide today's 3pm catalyst to BTFATH, or else it will be up to the circular and HFT-early released UMichigan confidence index to surge/plunge in order to push stocks on any red flashing news is good news.

At precisely 4 am Eastern two opposite things happened: the German IFO Business Climate for July printed at a better than expected 106.2 vs 105.9 in June and higher than the 106.1 consensus: news which would have been EURUSD positive. And yet the EUR tumbled. Why? Because at the same time the ECB provided an update to the chart that "keeps Mario Draghi up at night" as we reminded readers yesterday - the ECB's all important credit creation update in the form of the M3, which not only missed expectations (of +3%) but declined from 2.9% to 2.3%. But more importantly, ECB lending to private sector shrank for the 14th consecutive month in June, and slid to a new record low 1.6% in June, down from a 1.1% in May.

In a day in which there was and will be virtually no A-list macro data (later we get the FHFA and Richmond Fed B-listers), the inevitable low volume centrally-planned levitation was attributed to news out of China, namely that Likonomics has set a hard (landing) floor of 7% for the GDP, and that just like other flourishing economies (Spain, Italy, California) China would invest in "monorails" to get rid of excess capacity, as well as a smattering of European M&A activity involving Telefonica Deutscheland and KPN. In Japan, the government upgraded its economic view for the 3rd straight month and also raised its view on capex for the 1st time in 4 months: who says the (negative Sharpe ratio) PenNikkeistock market is not the economy? All this led to a 2% rise in the Shanghai Composite - the most in 2 weeks - and the risk on sentiment also resulted into tighter credit spreads in Europe, with the iTraxx Crossover index falling 4bps and sr. financial also declining by around 4bps, with 5y CDS rates on Spanish lenders down by over 10bps. Naturally, US futures wouldn't be left far behind and took today's first major revenue miss of the day, that of DuPont, which beat EPS and naturally missed revenue estimates, as bullish and a signal to BTFATH (all time high). On the earnings side, in addition to Apple, other notable companies reporting include Lockheed Martin, Altria, AT&T and UPS.

Are we likely forming a market top? It is very possible.  We saw the same type of market action towards the last two market peaks.  However, it will only be known for sure in hindsight.  The many similarities between the last cyclical bull market cycle and what we are currently experiencing should be at least raising some warning flags for investors.  The levels of speculation, leverage, price extensions, duration of the rally, earnings trends and valuations are all at levels that have historically led to not so pleasant outcomes. The reality, however, is that the current "liquidity driven exuberance" could keep the markets "irrational" longer than logic, technicals or fundamentals would dictate.

In testimony yesterday on Capitol Hill before the Senate Banking Committee, Federal Reserve Chairman Bernanke remarked:

“Gold is an unusual asset. It's an asset that people hold as disaster insurance. A lot of people hold gold as an inflation hedge.  But movements of gold prices don't predict inflation very well, actually. But anyway, the perception is that by holding gold you have a hard asset that will protect you in case of some kind of major problem.

With little going on today besides the just reported GE earnings, which beat consensus EPS expectations of $0.35 by the smallest possible increment but, as expected, missed consensus revenue of $35.56 printing at $35.12, and both the Japanese (which experienced a 500 point drop in minutes overnight) and Chinese (which closed below 2000 again) markets sliding, it is perhaps better to summarize the day that just was: Detroit City files for bankruptcy (send in Detroika!), Moody's take the US off negative outlook, Google and Microsoft miss on earnings and the S&P 500 hits a new record high. As DB says, the above certainly made for an eventful close to the US session after what was a fairly dull second day of testimony and Q&A for Bernanke. He has said all that can be said for now and we're left waiting for the data. And the earnings data so far has been abysmal if mostly on the top line, with corporate revenues now assured to double dip and decline for the second quarter in a row. And if the tech bellwethers all of which have been major disappointments to date and have guided down, are an indication of what is coming, Q3 may and will be even worse.

We seem to be approaching an inflection point of some complexity. If U.S. economic and earnings hockey stick forecasts are achieved, markets will soon be left without Fed accommodation. If the hockey sticks are not achieved, and growth continues at stall speeds, perhaps all the markets will be left with will be Fed accommodation. We had reached an inflection point in mid-2007, but it was not perceived by most...

As we have exhaustively noted, given the various macro factors bringing influence to bear on the yellow metal, the bizarre price action of the last six months has run counter to most logical assumptions and has been a source of great frustration to many - including Grant Williams. Cyprus should have been a hugely positive tailwind for gold. But it wasn't. The ongoing money printing should have provided support for gold. But it hasn't. The talk of tapering should have had a minor but noticeable effect on gold, given its healthy recent correction. But it didn't. Sustained data suggesting a voracious appetite for the physical metal not only in Asia but in Western countries, too, should have led to a bounce on the COMEX. But it hasn't. The whole thing is as baffling as Kim Kardashian's fame. When the need to own gold jumps again - and it will; this is a long way from over - all the pieces of this jigsaw puzzle of the weird and wonderful forest of gold manipulation that we have dropped onto the table will slot neatly into place. What if, when that happens, there just isn't enough gold to go around?

Wednesday and Thursday of last week were the US 10yr and 30yr auctions.  These auctions (combined with the price action in the secondary market leading up to the auctions) are the best times to gauge demand for UST paper.

Risk assets are not quite (yet) back to the ‘melt-up' of May but equity markets are trading in a confident mood after Bernanke caused sentiment to flip from glass ‘half empty' to ‘half full'. China Q2 GDP data did not derail price action as equity futures anticipate a positive start of the week. The semi-annual testimony of the Fed Chairman is typically a seminal event on the market calendar but do we dare say that the one coming up this week is a non-event following last week's message on policy accommodation? The VIX index dropped 7 points over the last three weeks of which 2 points alone came last Thursday and Friday as stocks roared to new highs and shrugged off the candid observation on the Chinese economy by finance minister Lou Jiwei. If a 6.5% growth rate is tolerable in the future, there is little doubt that commodities and the AUD have further to fall. Chinese GDP slowed from 7.7% to 7.5% according to data released overnight and prospects for the second half don't look much brighter after evidence of slowing credit growth. Data on Friday showed declines of narrow money from 11.3% yoy to 9.1% in May, with broad money growth slowing to 14% yoy. Non-bank credit and new foreign currency bank lending also weakened.

Dispassionate review of some of next weeks important developments.

Bernanke's comments washed out some late dollar longs and they may be reluctant to re-establish ahead of the Chairman's testimony before Congress at the end of next week.  The underlying bullish case for the dollar remains intact.  

Each time the S&P 500 has traded more than 12% above its 200-day moving-average, the following correction has not ended until the average itself was breached by price action. Fundamentally, one can tie 'events' to each of these exuberance spikes - in this case, liquidity-turns-into-a-taper - but sometimes historical prices can be a better guide to the human biases for extrapolating trends and building fragility. Given current levels that would mean a 10% drop from current levels to 1516.

If the worst Chinese trade data in years (and by that we mean unmanipulated, because what was released last night is merely China offsetting blatantly BS Q1 trade data), and yesterday's S&P downgrade of Italy (which has sent BTPs lower although the EURUSD drop was offset by buying pressure resulting from Stolper closing out his EURUSD long) doesn't send the Stalingrad & Poorski 451 to new all time highs, then all the Chairman's efforts to make a complete farce of the "market" will have been for naught. But while the Fed keeps pushing mom and pop into stocks, he may want to tell his friends at the CME to hike WTI margins, because this morning's latest surge in crude to over $105 will really start hurting refiner margins, and due to the overall energy complex roaring higher, gas prices too, which incidentally just crossed $3.50 in the wrong direction this morning.