Of VIX Compression, Stock Bounces, Bond Flows, And Show Trials
Until recently, the only question traders had to ask themselves was "how much more to buy?" The last week or so has left traders across the market now suddenly plagued by numerous questions. Will an Obama speech continue to be the catalyst for selling pressure to resume? Why is VIX 'low' when all around is asunder? When do the BTFD crowd step back in? Where's the 'wall of money' flowing now? From new issue demand to Italy's ratings agency trials and from bounce-buyers waiting for Godot to VIX's complacency, FBN's Michael Naso and Mint's Blain cover some of the conundra.
Via Michael Naso of FBN Securities,
The President opened his mouth again, and after the Fed Minutes surprised no one by hinting that Operation Twist upon its termination next month will morph into unsterilized purchases of longer dated treasury securities, the S&P 500 dropped roughly 1.3% for the rest of the afternoon. I had argued earlier in the week that speeches and press conferences conducted by Mr. Obama pertaining to the crisis only will inflict damage on equities, for the simple reason that traders got paid off shorting stocks last Friday in reaction to his tough talk. One should assume that anytime he leaves the Oval Office to step up to the microphone shares are at risk for another beating.
Only when each side speaks of genuine compromise will this pattern reverse. Leveraging the game theory exercise I outlined in Tuesday’s “Missive” suggests that it behooves both parties, most notably the Democrats, to dig in their heels until portfolios have suffered unpalatable losses and falling off the cliff has become a probable outcome. In short, a more protracted selloff is a prerequisite for both groups to come to the bargaining table in good faith.
The Ball will drop in Times Square in forty-six days, but even if the fiscal crisis takes that much time to resolve, the market does not necessarily have to trend downward for the duration. Eventually, valuations may attract institutions to put money to work especially if investors perceive that ample time remains to hammer out a deal. The current 8.3% retracement in the S&P 500 from its mid-September peak begs the question of whether we have reached that moment of epiphany when managers throw caution to the wind and embrace the too good to pass up prices available to them.
I have received many questions during the week about the VIX and how it stubbornly sits lower than it did on Friday despite the blue chip index dipping nearly 2% during this timeframe. Many have argued that this merely exemplifies the complacency among investors in the face of the recent softness. I would agree with this conclusion only halfheartedly, for with the exception of last Wednesday’s collapse which instigated a 105K spike in open interest for the futures, yesterday’s slide marked the only moment of real fear among traders. Instead I surmise that the decline in the options sentiment index, which merely represents the demand for derivative protection, resulted from approximately a $5B notional value decrease in outstanding November SPY puts struck at 140 and 141.
At one point on Wednesday, the NYSE TICK registered 21 straight and 28 out of 29 readings below -1,000. Overall, the day generated 187 of such instances ranking it among the top 3% most bearish sessions since the July, 2010 lows. This extreme reaction is mindboggling to comprehend and exhibitive of real panic. The tight spread of the daily high and low prints between the futures and the cash index also exemplifies firms jettisoning shares aggressively to offer another classic sign of an oversold environment. Moreover, preliminary reporting indicates that open interest increased by another robust 55K E-Mini equivalent contracts while the intraday range for the prior week, excluding Veteran’s Day, has reached 23 handles to breach the upper bound of the sweet spot for a sustained weakness in share prices.
One reasonably would expect therefore that a simple analysis of these figures along with the S&P 500’s falling to my recent target of 1355-1360 would precipitate my calling for a reversal as early as this morning. However, I will not do so despite the mounting evidence to the contrary. Similar to my absolute reliance on the widening of the session range from single digits to 12 handles in predicting an intermediate term top, I must witness the average monthly NYSE closing TICK drop below +60 before suggesting we have hit bottom. This technical statistic settled last night at +86 as fairly neutral market-on-close orders hinted at some large funds trying to step in front of the wave of selling. In short, we did not have full capitulation.
Even the average monthly intraday TICK’s collapse to -48, a 15 month low, will not override the absence of my most consistent signal. Since 2009, the indicator has accurately picked off every major trough in equity prices, most notably March, 2009, July, 2010, and October, 2011, within a few days of the actual print of the bottom. The 8.6% decline in August, 2010 marks the only greater than 7% dip for the S&P 500 when it failed to trigger a buy signal; however the duration of this pullback lasted less than three weeks such that some of the overbought readings from earlier in the month offset those generated during the heart of selloff.
Extrapolating from the current set of data projects a flipping of the indicator either tomorrow or on Monday assuming the stocks trade flat or continues its momentum to the downside. This does not guarantee that we have arrived at a major positive inflection point, for the average certainly can drop well below +60, but generating these significant outliers almost universally requires a bear market. Open ended quantitative easing, recently released optimistic economic data, record earnings, and a 12 month forward P/E of roughly 12.0x preclude me to expect such a majestic collapse. The risk of trying to be too cute in calling the turn notwithstanding, the average monthly NYSE closing TICK’s falling below +60 inserts patience into my market prognostication that historically has proven quite prescient.
Via Mint: Blain's Morning Porridge
Markets might appear to be caught in the headlights of uncertainty – utterly unsure of what happens next re the US fiscal debt cliff, Europe or the new China faces – but underneath they’re still on fire. Any new issue with a sniff of yield is vastly oversubscribed. Buyers still scrabbling to find elusive bonds. There is a wall of money still to be invested. Every recent price dip has triggered a wall of buyers. I suspect the next few weeks into the New Year run-up will remain fervid in new issues and the search for yield.
The big question isn’t necessarily how much longer the EU holds together, or has the potential of a Greek shock lessened, or the implications of most of Europe’s workers being on the streets yesterday in anti-austerity protests. It’s not about how conservative/dovish the new China leadership is (we think fiscal easing). It’s not just about the likelihood of the US debt cliff. These are clearly vitally important.. but…
Nope the big question is same as it ever it was.. same as it ever was… outlook for 2013 looks like a sustained period of low rates on the back of the “will it/won’t it” global economic picture – how to lock in yields today and when to mount the big asset allocation switch? Perhaps now is the time to be starting with equities after the recent declines – are the global growth doubters over-reacting?
Clearly the US is the critical economy to watch. How Obama negotiates over tax hikes for the rich and steers towards a fiscal cliff solution will be critical for growth sentiment. Upside on that is going to trigger a pretty spectacular price move – but on the other hand the market loves nothing more than to disappoint…
France posted stronger than expected 0.2% positive growth this morning – not by a lot, but is it a sign Europe’s economic woes are bottoming? Temporary uptick at best we suspect – but another thing for markets to be thinking about. I suspect next year will be about mean reversion of core Europe towards where the peripheral yields have settled. When I got back to the flat last night I flipped on the TV to confronted by brutal pictures of a police thug beating the bejesus out a protestor lying on the street? Syria? Nope… Madrid.
On the ratings front I see the Italians want to hold a show-trial of the agencies for destroying the Italian bond market through their malicious lies suggesting Italy is anything else than fiscally and economically sound. On the other hand I am somewhat surprised at Fitch raising Ireland to BBB+ - I do have some doubts if the Austerity poster-bond is anything but fixed. And Moody’s warning the UK’s AAA is at risk is hardly news.