Wednesday, 24 February 2016

Correlation of fear and the Sterling short squeeze.

Before we start, here is a little primer for my non-Brit friends as to how UK foreign policy works towards Europe and is possibly the best case for staying in, though of course David Cameron can't put it as bluntly as Sir Humphrey did 30yrs ago.

GBP- The shock with which everyone was shocked at the not at all shocking news that BREXIT would be a close run thing appears to have caused a kitchen sinking of all possible reasons to sell GBP being chucked at the current Brexit inspired move lower. Seeing Deutsche Bank and their ilk now citing debt overload and diminishing current account balances due to FDI seizure smacks of 'chase the dragon' muck chucking or (now I'll put on my conspiracy tin foil beeny here) a deliberate besmirching of the mighty Pound for Euro political reasons. Smash it hard and show the British what even the threat of leaving EU will do to their markets.. right I'll take the beeny off now.

But this kitchen sinking and sudden OMG from distant shore traders does have me thinking that maybe phase one of 'Pound crushing' may be over soon. Back in the old days before algos took over the market, your decent honest and 'ahem' truthful cable trader only knew two positions to hold. Short and VERY short. So I can assume there are some old lags out there finally going 'told so'. But when that happens you normally want to buy it. Cable, for the uninitiated, is GBP/USD and derived its name from the first trading of it over the transatlantic cable (‘Wire' became the nickname of the Irish pound because it was a small ‘cable’). Cable then mutated to ‘Betty’ as in cockney rhyming slang Betty Grable - Cable. But I digress.

It strikes me as odd how the press are suddenly referring everything to Cable and not EUR/GBP, when the later is the one that we should really be watching. Of course it isn't really that odd. Cable is performing 'not since [insert last time]’ new levels whereas EURGBP is only really where it was not that long ago, so effectively not a headline story.

It is also strange to think that not long ago everyone was decrying the EU and ECB for being complete idiots when it came to handling crises and how the EU was as doomed as the Titanic, yet now, having one of the more stable entities threaten to leave and Whooo . 'EU is the strong battleship and sanctuary that you would be mad to desert'. Not that I’m declaring a hand either way, but the narrative doesn't half swing with perspective, so it's advisable to stand as far back as you can, taking in the widest view, so as not to be fooled by that tricky perspective thing.

It's not only sterling that has been trounced but UK stocks too, with the FTSE falling about 6% in the last few of days in USD terms. USD based commodity companies such as Rio have been torched in USD terms even though one would expect GBP falls to give their stock price a lift. But then about 5 hours ago it looked as though all global risk asset prices were about to melt again. The ‘it’s just a short squeeze’ camp were out selling again confident that a top was in. Even Mr Demark (the technical chart soothsayer of old) has been on the wires calling for a 7% fall ’should stocks fade'.

A momentum formula employed by the DeMark Analytics LLC founder that compares closing prices with levels four days earlier would issue a bearish signal should the advance fizzle this week, he said. Specifically, it would foreshadow a decline should the S&P 500, which ended at 1,945.5 Monday, slip at Tuesday’s open and close below 1,926.82. Those conditions were met today.

So much for that then. Wednesday has seen the SPX has put in a 40 point reversal from the lows and that is pretty spectacular on a no news day.  But the move in credit is confirming that this is not a stand alone equity silliness. It was across risk as oil went up, credit went up and stocks went up.

Charts courtesy of Eric Burroughs (@ericbeebo) with whom I have been chatting about this.
 Credit and stocks.

I have been looking for one of the gang of 10 bear factors to break ranks and show some lead. Perhaps a forgotten bear function that has quietly started to recover and will lead rather than just correlate. Oil - Credit - Stocks? I will still have my chip on China leading the way out but it doesn't look as though the 'correlation of fear' has broken yet.

Why the 'correlation of fear'? Well a simple analogy is that the different asset classes are like ducklings. When there is no danger they can wander off, never too far though, exploring their environment. But come a sign of trouble and they race back to mother duck and follow her as closely as possible whilst fleeing the danger. At which point the location of all the ducklings correlates perfectly.

Trades from here? The 'Just a short squeeze camp' must have been sucked in over the last two days' falls and I imagine are squirming, but we are not yet clear of this resolution zone so I am still flat and waiting for better confirmation. Perhaps it will be a late night watching China again. But as for GBP, I will join the 'just a short squeeze' camp on that, the only difference being that the short squeeze hasn't started yet, but I expect it to, hence the overconfident title of this post!

1 comment:

Hotairmail said...

There has been quite a lot of the 'just a short squeeze' meme of late hasn't there. Certainly, a thought experiment would alert you to the fact that a 'short squeeze' must occur whether there is a genuine change in overall direction or not. So, in fact, looking at the advance of the short index versus the overall index as Thompson Reuters does, can surely add no information at all. Indeed, without understanding this fact, the publication of such data must lead to incorrect decision making. And, if you like, you could construct a whole tin foil hattery of theories about whether that is deliberate or not. ;-)