Guest Post: Changing Risk Perceptions Across Multiple Asset Classes

Tyler Durden's picture

Submitted by Tony Palotta of

Changing Risk Perceptions Across Multiple Asset Classes

This week saw a lot of technical damage across multiple asset classes as demonstrated by the charts below. The biggest shift though appears to be that of perceived risk. In the past bad news was good news as it would bring further accommodative monetary policy such as QE1 and QE2. Market participants always believed the Bernanke put was alive and well and equity values would be defended. In other words the perception of risk was less severe.

The Fed is not done with "free market intervention" though and like a child in the toy aisle will go down kicking and screaming trying to get what they want. The recent emergency action such as globally coordinated swap lines are such proof as are the eventual TALF programs where US and EU banks can access Fed capital in exchange for any "collateral" they can find.

Like the famous line from Rocky IV "You see? You see? He's not a machine, he's a man, he's a man" the Fed showed its ability to print at will is constrained though, it too is not a machine. Whether it is political pressure, rising inflation, dissention among members or the simple reality that QE1 and QE2 actually harmed the economy market participants are realizing perhaps the Bernanke Put has a massive theta burn, an expiration date. The next Fed meeting is not until November 1 and beyond any emergency programs equities are now on their own. The training wheels are off.

The market's reaction to this shift in risk perception was made clear this week as demonstrated by the multiple charts below.

Copper: There is no better place to start than the leader and that is the role copper plays in the equity market as a signal of both risk aversion and global economic health. Not only did the bear flag fail so did the multi-month trend. A retest of this trend line in the 3.55 area is highly probable but the selling appears far from over (see COT data below).

Commercial Net Copper Position: The weekly COT report (Commitment Of Trader's) is extremely insightful in understanding where copper is headed next. It foretold of this most recent move lower in copper and once again is signaling further weakness ahead.

SPX: The bear flag has broken with a downside target of 1015 as well as the head and shoulders with a target of 1042. Additional support comes in at the 2010 lows of 1010-1040 which very well will serve as a bounce as shorts cover and longs initiate new positions.

VIX: The bull flag failed and the next target is 48. If this breaks it will signal a level rarely see beyond 2008 and 2001 when fear was prevalent based on economic and geopolitical risks. Current market risk and the bull flag failure favors 48 not holding which should lead to further equity selling pressure and confirmation for shorts on the sidelines to initiate new positions.

US Dollar (DXY): Rather surprising to see the USD breaking above key resistance. The chart below is a five-year weekly that shows a break to new highs, three weeks closing above the 200MA and close above resistance. 87 is now a possible target which would put further selling pressure on equities.

Commercial Net USD Position: Similar to that of copper commercial net positions are anticipating a big move higher in the USD which supports the technical view as well. This data supports the 87 target in the DXY as discussed above.

Margin Debt: Although margin debt is coming down it is still historically high and at levels that preceded major selloffs such as September 2008. In fact margin debt is now higher than that of the dot com boom.

As long as stocks like AAPL continue to set all time highs I believe there is no real fear in the equity markets and thus no forced equity liquidations yet. AAPL may be the best company out there but there is little to no short interest to support selloffs and with everyone all in on the long side and leveraged once selling begins it will be fierce. Remember AAPL is the ATM and when people need to raise cash to meet margin calls they are forced to sell their most liquid position.

30 Year Yield: The 30 year yield continues to signal further equity selling pressure to come.

Investor Sentiment: The one warning sign facing the short term bearish argument is the rather large shift towards bearish sentiment. There is still room to move more bearish but it should serve as a warning to those looking to add or open short positions. Markets don't have to reverse simply due to historically low bullish readings and it is quite possible the next data set shows a shift away from such high bearish readings.

Bottom line this market is very dangerous right now. As witnessed in August when the SPX appeared "oversold" it still managed to sell off another 200 points and take out support levels as if they never existed. The most recent short covering rally has taken away buying pressure and flushed out weak shorts. With leverage still at multi year highs it appears selling pressure remains the bigger risk to equities.

Most important though is the diminished threat of the Bernanke put which is analogous to a pick up game between a group of guys on the weekend. The "bears" begin to show an ability to outscore the "bulls" only to see Michael Jordan (the most famous Bull) come in from the sidelines and reverse everything. Perhaps Michael Jordan is sidelined for a while finally or at least limited in his ability to score at will.

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oogs66's picture

all hell is about to break loose?

falak pema's picture

it already has if you are a greek...

Ancona's picture

Watch the Asia open tonight for a picture of what will hit Europe later on, and the USA even later.

Time to put on some big boy pants because shit is about to get real, and we'll be able to watch it all burn down in vivid technicolor.

Oh regional Indian's picture

I'll tell you this, margin calls are already coming in to the small guys, who alre always in the deepest when the shit hits. If we see continued weakness over the early part of next week, it feels like a lot of panic selling will happen here..... and so I presume around the world. 

That giant sucking sound is hot money rushing......back. Not good for any of us....


And it Gets Weirder

MisterMousePotato's picture

You know? ... I read through all the comments on this thread (and others), and I am of the opinion that all of you are taking all this financial stuff too seriously, and are needlessly upsetting yourselves, really about nothing. Life is a lot easier than you all seem to recognize.

I'm passing this on because it worked for me today. A Dr. on TV said to have inner peace we should always finish things we start & we all could use more calm in our lives. I looked around my house to find things I'd started & hadn't finished, so I finished off a bottle of Merlot, a bodle of Vodka, a butle of wum, tha mainder of Valiuminun scriptins, an a box a chocletz. Yu haf no idr how fablus I feel rite now. Sned this to all who need inner piss. An telum u luvum..

Oh regional Indian's picture

Haaah! Awesome...thanks for that....


freeasabee1's picture

i'm going to follow your lead, i have a few bottles of my Bi-polar meds, zyprexa which i stop taking a while back...strong shit has a big punch in large douses

ZippyDooDah's picture

I do feel like I need an inner piss.

oldman's picture

You are correct: LIFE IS EASY!
Even without the chemicals and the adrenalin rushes of constant mental and physical activity to which all of us are addicted.
But this does not imply that we will not go bust
Peace and harmony, time and space are riches as long as one enjoys good health
ENJOY!!!!!!!!!!1 om

Nobody For President's picture

Good timing, I was getting a little tense, and Europe ain't even open yet...

Inner piss is upon me.

Kyron95131's picture

i still blame the snow storms of the east coast in 2010 for this...

falun bong's picture

Nah for me it's that Caroline Hyde on Bloomberg...the blond with the purty little mouth and torpedoes in her blouse...

max2205's picture

'short cover rally' ?!

Did I miss something?

11b40's picture

I think he meant the one week before last....back before the Bernak pulled the put.

unum mountaineer's picture

lets see what happens later this evening

Edward Fiatski's picture

Lots of people will get ass-rammed by huge cocks when the support breaks across all boards.

RSloane's picture

That is a most unattractive visual image.

Kina's picture

So I guess its hold USD huh. My PMs are valued in USD.


So kick the AUD in the guts some more please.

Theta_Burn's picture

 Dipshit rumor mill getting just hrs. of wiggle room. Oh how they long for the rumors to last days/weeks.





Cynical Sidney's picture

macro speculation set the market on fire. however as an individual trader this is the best time to

leverage your positions and make a killing. sucks to be a long term investor right now, we need more haircuts and write offs

stock trout's picture

For a day trader it's always a dangerous market so I don't really get the use of this adjective unless you're long for the long term. If it weren't dangerous we'd all be millionaires. I can say with authority that the market will go up or down. If you place your bets long term (long term being more than one day) then it could be dangerous; otherwise it's a dream market.

reader2010's picture

We've just been given another once-in-a-lifetime opp to buy low, and no one is welcoming that?

Sequitur's picture

I do. People will always need food, oil, and the utilities (water, electricity, etc). Always. And I am buying the companies that furnish them. Not quite at these levels -- we will fall further. Then it's time to load up for the investment period of our lifetimes.

Deflation will absolutely destroy debtors and banks. For those who were prudent and saved, we may finally, at long last, have a level playing field, if not the upper hand.

bugfixx's picture

But what if it's all headed much, much lower?  Who trusts balance sheets or earnings forecasts anymore?

spiral galaxy's picture

You're right! But 2008/09 are still very fresh in the ol' memory.  E.g., thinking that Dow 8000 was 'bottom' and the Dow continuing to sell off to 6000.  So 'no thanks' on celebrating just yet.  Perhaps when this mess stabilizes and the smoke clears. in two or three years from now.

Edward Fiatski's picture

This Mess won't be stabilised for a very simple reason: the hundreds of millions of unemployed and/or unproductive cuntsumers.

After 2008 redux comes a World War between Asian nations, involving US; between Israel and the whole shabang in that region, involving the EU; and in Africa, well, they will keep on eating people there.

A workable scenario, it did work in the past - functions of war are irreplaceable, if one wants to change society (whether into an Utopia, or a serfdom/prison planet - that's another question)

DeadFred's picture

Good luck with defining what 'low' is. Low is at the bottom and you'll be able to see it clearly a year after the fact.

RSloane's picture

Exactly right. We won't know until its happened, and that is the piece that frightens people.

Cursive's picture


I already know.  I am from the future.  ;)

deadcatbounce's picture

AUD/USD went as low as .65 in 09' why should now be any different?

Edward Fiatski's picture

EUR can see 1.28 next month if this circus continues, and parity if Greece defaults. :):)

hammondo's picture

yes my little pretty....go down....go down like the filthy pacific peso that we all know you are!!

Quixote2's picture

Some comparable market performance values expressed as annualized returns through Sept 23, 2011 are:

Year to date: Silver +0.09%; Gold +23.4%; and S&P 500 -13.0%.
One year: Silver +46.2%; Gold +28.2%; and S&P 500 +1.05%.
Three year: Silver +32.5%; Gold +22.9%; and S&P 500 -1.64%.
Five year: Silver +22.6%; Gold +23.0%; and S&P 500 -2.87%.
From 1/1/2000, 11.7 years: Silver +16.2%; Gold +16.0%; and S&P 500 -2.17%.

Which would you prefer to be invested in? (even including the last two days carnage.)

Edward Fiatski's picture

Dollar has been devalued by 16.2% since 2k, damn those bitches. :/

CapitalistRock's picture

It's been devalued a heck of a lot more than that! Something tells me your are comparing the dollar to other currencies and pretending those other currencies have a fixed value.

Edward Fiatski's picture

Of course not, I was referring to gold price. Au went up a whole lot more in Mexican pesos, than it did in dollars, but, of course, the Fed has been busy at work since 1913, when the fate of the Republic of the United States of America was sealed - destruction of the Rule of Law through democracy of ignorant masses, and subsequent iterations in the form of Free Shit Army.

Still, the dollar is 'better' off, for now.

Quixote2's picture

That is 16% per year, or 571% total increase from $290 to $1657.  Or the dollar has been devalued by 82.5% since Jan 1, 2000 when evaluated vs gold.

High Plains Drifter's picture

have the hedgies been all but kicked out of the precious metals markets now?

Sequitur's picture

Hardly. GLD is shit paper, look at the options interest. Hedge funds are going to burn people in GLD.

Also, look at the double- and triple-play short etfs like ZSL and DZZ. If anything, interest is peaking.

Quinvarius's picture

Looks like a new crop of ZSL bags has sprouted.  How do people keep getting tricked into that POS?

cosmictrainwreck's picture

I presume the "POS" you refer to is ZSL? dude, it's no bigger pos than any other.... TIMING, TIMING, dude. Sure glad I had some ZSL in my back pocket last week = KA-CHING for me, baby ( buying - carefully - AGQ)

RSloane's picture

I wonder what the reaction would be if you told people that their quality of life can be measured in the prices of copper and oil.

Edward Fiatski's picture

They don't wear 1k suits, rather prefer unisex Gaylord clothes, so they wouldn't know how much an ounce of gold was worth 40 years ago. Or 2000 years for that matter.

YesWeKahn's picture

Keep your powder dry, start shorting again if it rallies on rumors, and buying some when Greece defaults.

Implicit simplicit's picture

The aging bull market is analagous to Jordan. The market needs fundamental support which is not there. Michael found support outside of round ball with underwear support briefs. The young players playing for real wear jock straps. Just as Bernanke can't risk getting kicked in the balls yet, he will wait until WallStreet and the media beg for oxygen on the sidelines while they whimper like baby girls. It will still be risky bringing in the used up, old trick Jordan- the results might get winded quickly from overuse, and lack of real protection for a downside kick in the nuts. This the NBA, not street ball.

SparkySC's picture

Things are a lot less risky than they were. Let the DOW pop 700-1100 pts then it's be risky again.Then you strike.


ZH will doomsay it all the way up.


Longrun I agree, but it gets a bit silly. Like golf will after the Tour Championship. The Silly Season.

YesWeKahn's picture

I woudn't put Bernanke's name next to Michael Jordan's. The former is a disgrace.

buzzsaw99's picture

Yah, everyone knows joos can't play round ball worth a damn. Off to watch football. Toodles.