Aside from an opening short-squeeze that saw 'most-shorted' stocks surge 0.8% in the first 15 minutes of the day, stocks did very little for the rest of the day. Ranges were extremely narrow with whatever lift stocks got based on small AUDJPY (carry) sparks but the Dow and S&P end the day red (Nasdaq and Russell 2000 green). Nasdaq was driven by AAPL exuberance (what no a new iPhone model??) which grabbed the Tech sector to the best peformance on the day. Utes were the biggest losers as rates reversed early gains and Treasury yields (especially 30Y) surged 6-7 bps from their per-open low yields. The big story was precious metals as Silver and Gold surged on the day. Silver is now up over 9% in the last 3 days - its best run in 22 months. Interestingly, VIX was pushed notably lower on the day (but it appears investors are moving hedges further out in time - to September). Credit notably underperformed. Today was all about pre- and post-Europe (as normal).
A bearish take on U.S. stocks is about as fashionable as a beehive hairdo at the moment, which makes it a decent time to think like a contrarian. Sell-side strategists with a sense of reality are few and far-between but as ConvergEx's Nick Colas warns, the most important reason for caution currently is, obviously, valuation and complacency. U.S. stocks currently reflect, both in price level (16x current year earnings) and implied volatility (an 11 handle VIX), an economic acceleration which has yet to fully flower. In addition, Colas adds, domestic equities look good in part simply because everything else – Europe, Japan, emerging markets, etc... - look so bad. Wouldn't an accelerating U.S. economy spill over to other regions? So what is lurking around the corner for the next lucky Fed head? And what about the three main memes for why the 'bull' can keep running?
S&P futures volume was the lowest of 2013 for a non-holiday-related day (35% below last year's volume and 40% below recent average volume). NYSE volume the second lowest of the year. Tech and Staples managed small gains on the day but homebuilders and utilities underperformed as bond yields rose 3 to 5bps on the day. The 'anxiety' in stocks showed itself with another appearance of the Hindenburg Omen (which has signaled short-term weakness in the last six months). The Russell closed green and thanks to AAPL, the Nasdaq eked out a small gain. Trannies were down 0.8% in their now-ubiquitous schizophrenic manner as 'most-shorted' names outperformed significantly. The USD slid lower from the US open ending -0.1% (with JPY strength dominant) but commodities were worse down 0.5% (WTI) to 1% (silver and gold) on the day. VIX was clubbed lower (to 11.8% - its lowest close in 5 months) right at the close to ramp stocks into the cash close.
If there is an investment theme shaping up for Q3 2013, it would appear to be "Go big or go home." As ConvergEx's Nick Colas notes, that means being maxed out long U.S. stocks, but how broad a net do you cast? If you only go with the S&P 500, then your July 2013 return was 5.0%. Not bad, Colas scoffs, until you consider that the small cap universe of U.S. stocks, as measured by the Russell 2000, was up 6.9% this month. Before you load up on four letter symbols and/or small cap ETFs though, Nick warns that investors should consider that there are several important differences between these alternative universes. Among the most important (discussed below) are sector weights are very different, with Russell short Energy and Consumer Non-Cyclicals versus S&P; and, the S&P 500 is heavily overweight its top five names (APPL, XOM, JNJ, GE and CVX), which represent 10.7% of the index. The corresponding weight of the top 5 names in the Russell 2000 (CGSP, ATHN, CVLT, FMER and AYI) is 1.3%. Be sure you know what all-time high you are buying...
UPDATE: All Change; now the knee-jerk rally in bonds and stocks is fading rapidly (and the USD is bid). S&P 500 and EURUSD have now retraced all gains.
It seems the markets are as confused as the Fed members. The initial knee-jerk bid for bonds, stocks, and gold was retraced soon after; only to be ignored for another push higher as we post. Interestingly FX markets are 'less' undecided - it is taper-off as the USD is being offered everywhere with little retrace. As the Russell 2000 hits an all-time intrday high, equities still feel unstable (and VIX dropped to 14.06%). It seems the "if confused buy" meme may just hit a wall today?
The volatility of recent weeks is but a mere small taste of the volatility in store for all markets in the coming months and years. The global debt crisis is likely to continue for the rest of the decade as politicians and central bankers have merely delayed the day of reckoning. They have ensured that when the day of reckoning comes it will be even more painful and costly then it would have been previously.
At the end of the day, Friedman jettisoned the gold standard for a remarkable statist reason. Just as Keynes had been, he was afflicted with the economist’s ambition to prescribe the route to higher national income and prosperity and the intervention tools and recipes that would deliver it. The only difference was that Keynes was originally and primarily a fiscalist, whereas Friedman had seized upon open market operations by the central bank as the route to optimum aggregate demand and national income. The greatest untoward consequence of the closet statism implicit in Friedman’s monetary theories, however, is that it put him squarely in opposition to the vision of the Fed’s founders. As has been seen, Carter Glass and Professor Willis assigned to the Federal Reserve System the humble mission of passively liquefying the good collateral of commercial banks when they presented it. Consequently, the difference between a “banker’s bank” running a discount window service and a central bank engaged in continuous open market operations was fundamental and monumental. In short, the committee of twelve wise men and women unshackled by Friedman’s plan for floating paper dollars would always find reasons to buy government debt, thereby laying the foundation for fiscal deficits without tears.
- 550,000 SPY shares
- 10,000 June 2013 eMini futures contracts
- 1,400 Nasdaq 100 futures contracts
- 800 Dow Jones futures contracts
- 350 Russell 2000 futures contracts
- 125 S&P 400 Midcap futures contracts
- 300 Crude Oil futures contracts
- 900 Dollar Index futures contracts
- 800 Gold futures contracts
- 10,000 10yr T-Note futures contracts
- 2,500 5yr T-Note futures contracts
- 3,500 T-Bond futures contracts
- 5,000 Eurodollar futures contracts
- 750 Japanese Yen futures contracts
- 600 Euro futures contracts
For all those curious why all real money managers (and not those who spend 18 hours a day on the modern day Yahoo Finance known as Twitter, "trading" with monopoly money while selling $29.95 newsletters) are furious at what Bernanke and company are doing as shown in the most recent Ira Sohn conference, we present the chart below from Goldman which confirms what most have already known: the Federal Reserve has made hedge funds a thing of the past, whose investors are sure to keep underperforming the S&P until the moment when it all goes tumbling down.
Up until today, the narrative was one trying to explain how a soaring dollar was bullish for stocks. Until moments ago, when Bill Dudley spoke and managed to send not only the dollar lower, but the Dow Jones to a new high of 15,400 with the following soundbites.
- DUDLEY: FED MAY NEED TO RETHINK BALANCE SHEET PATH, COMPOSITION
- DUDLEY SAYS FISCAL DRAG TO U.S. ECONOMY IS `SIGNIFICANT'
- DUDLEY: FED MAY AVOID SELLING MBS IN EARLY STAGE OF EXIT
- DUDLEY: IMPORTANT TO SEE HOW WELL ECONOMY WEATHERS FISCAL DRAG
- DUDLEY SAYS HE CAN'T BE SURE IF NEXT QE MOVE WILL BE UP OR DOWN
And the punchline:
- DUDLEY SEES RISK INVESTORS COULD OVER-REACT TO 'NORMALIZATION'
Translated: the Fed will never do anything that could send stocks lower - like end QE - ever again, but for those confused here is a simpler translation: Moar.
Out of the gate and then again soon after the EU close, shorts were forced to cover this morning but in the last few minutes, the 'most shorted' names in the Russell 2000 have plunged...
As reported on Friday, the most recent example of a breach in informational Chinese walls was confirmed at Bloomberg, where it was discovered that reporters have the same degree of client surveillance as workers on the API/terminal side. The reason why this is problematic is that since Bloomberg is a monopolist in the financial terminal industry, with such competitor attempts as Reuters' Eikon being massive failures, virtually every finance professional needs a terminal (even if the rate of sale of such terminals is slowing down as a result of the ongoing financial margin headaches). Which means that Bloomberg journos, an increasingly competitive service to the likes of Dow Jones, Reuters and AP, may have had an unfair advantage when it comes to tracking their "pray" - Bloomberg's own clients. And now, following the original Goldman complaint which Bloomberg said ended such informational commingling, it is the turn of the Treasury and the Fed (certainly very heave users of the BBG Trading terminal) to complain. What is left unsaid in all of this is the simple question of just why is it material information what the Fed, arguably an entity that at least in a normal world should not have any day to day trade interactions with financial markets, looked up on its trading terminal.
There is a term for when asset prices become detached from fundamentals, it’s called “A BUBBLE.”
The market is beyond overstretched at this point on a short-term, intermediate term, and long-term basis. The sheer number of warning signals is staggering.
In the last five days, the 'most-shorted' names in the Russell 2000 index have surged over 7.3% from their lows. During the same period, the index itself has managed a still-impressive 2.4% gain. The epic triple-beta dash-for-trash continues to rage and tear the faces off every short who dare use reasonable valuation (macro- and micro-) perspectives to make investment decisions. When will it end?