From Nic Lenoir of ICAP
The Market Is Hurting For A Squirting
Was this the latest case of buy the rumor and sell the news after QE 2.0 proved to be pretty much the lows in yields (for now at least)? The market started the day bright eyed and bushy tailed after last night's announcement by Washington that a tax deal is close: Republicans win, Democrats win, America loses! The conversation probably went something like this: Republicans: "If you don't extend the tax breaks we will roll back your health-care plan"; Obama: "But this is my place in history at stake here! Ok you get the tax breaks, but I am going to add my own twist with social security tax cut (it's so far under water it doesn't matter anymore) and extension of unemployment insurance, this way the folks hurting out there know I am looking out for them and I don't look like I just got owned"; Vigilante: "That's 900Bn over 2 years, who's going to pay for this?"; Republicans and Democrats: "Ha ha ha."
Now however, there are a slew of VERY nasty charts that I would like to highlight following on the heads up I gave last night.
1/ S&P futures touched the 61.8% retracement of the sell-off since the 2007 highs to the tick at 1,235 and posted a bearish hammer on the highs (meanwhile we have not even retraced 8% of the rise in the unemployment rate since 2007... food for thought)
3/ VIX posted a bullish reversal (usually a bearish sign for equities). Granted the reversal did not happen outside the Bollinger bands, but it occurred at the market lows since April and the flash crash
Individually they are quite powerful technical reversals, together they are very very very important. I can't stress it enough, I have not seen a set-up like that in a long time. In Fixed Income I expected one last dip possibly, but I must admit, I did not expect that big a move at all. Now we need to see how tomorrow trades after the huge reversals in risk. The Bund is exhibiting huge divergence of momentum indicators. Maybe a gap down at open overnight and we close up to post another hammer, this one bullish for German Bunds? If we trade lower tomorrow and get a bad auction it could mean we are in for a complete wipe-out across asset classes. Washington and the ECB earned it so I won't cry over spilled milk. The political class and central bankers have been cruising for a bruising for some time now.
Be very cautious ahead of tomorrow, year-end is approaching, nobody will want to gamble their year and if things start sliding it can get out of control as no one will really have incentive to step up and provide liquidity.
Good luck trading,