"A Mug's Game?" - Is It Time Fight The Equity Bulls?

Authored by Richard Breslow via Bloomberg,

Sometimes you have to struggle to get your emotions under control. At others, you just decide to give in to them. Instinct versus intellect. The status quo or demanding change. Sitting down this morning, looking at the screens, reading the news, reflecting on everything that’s known, unknown, surmised and taken for granted, there was a powerful urge to say enough is enough. To be prepared to fade everything and let the market prove it has the appetite to keep making new extremes. Sometimes it’s prudent to lie down until the urge goes away. The trend is your friend and all. Occasionally, you just decide to throw caution to the wind and take action. Get in the market’s face. This is one of those moments when, perhaps, the case can be made to take the latter approach. Wow, that felt good.

The market heard a dovish Fed Chairman Jerome Powell, with a kitchen sink message. Surely that shouldn’t have come as a surprise. They are also most likely standing down until after the results of their policy review. Window of opportunity to breath and, maybe, markets to have a rest. We know negative real rates are a problem. You can beat an issue to death, as well. How much more needs to be priced in with what we know now?

The dollar has been weak. There may very well be a reluctance on the part of other countries to just let it keep running unchallenged. Maybe versus the euro, somewhere around 1.18 will prove enough for now. A number of technicians think so. The ECB can’t really be indifferent. And the narrative of European exceptionalism does have its limits. Earlier today, Japan’s MOF finally came out and said that its officials were watching the foreign exchange market “with a sense of urgency.” And further yen appreciation may require a policy response. It’s a testimony to dollar weakness how modest was the response to these comments but they may not be best totally ignored. The Dollar Index does like to trend when it decides to, but we are at the extremes of this current move. And it is a popular trade.

The amount of Treasury and other bond supply is only going in one direction. Seeming insatiable appetite versus August markets. And a refunding announcement. This week’s low in the 5s/30s spreads is an intriguing, and obviously close, technical level to consider as a guide if you are looking at steepeners again. It has been a bit of an area of contention a number of times before. Maybe this really is fighting City Hall, but the risk can be neatly defined.

It’s been a mugs game, I know, to fight the equity bulls. There will be a limit, or, at least a pause, at some point in the “bad news is good news” scenario. And, I’m in that mood. Close by resistancezone above for the SPX and nearby moving average support. Something for everyone.

Just leave in your stops. Maybe I’m being overly influenced by how European shares look to have lost all momentum to my eye. But again, the risk in either direction can be defined.

By the way, a couple of other things to set my tone today:

We need the next fiscal relief package sooner rather than later. A bubbly equity market doesn’t properly take its place. Nor prevent evictions.

They need to get on with it. And the Fed Chairman quite correctly stated the obvious that we all, and the economy, remain at the mercy of the virus. I was more than amazed that when running an errand in midtown NYC this week, there was no shortage of people ignoring the requirement to wear masks. That’s not a hopeful sign.