Wednesday, 17 February 2016

Short squeeze or base, or both?

You have all seen the charts and you have all seen the distance that stocks have bounced in the last four trading days. A near 10% rally in FTSE and CAC and not far off that elsewhere. The journalistic biases towards hyperbole have been running rife over the last two weeks as the headline writers pursue their favourite sport of tagging together ‘not since {insert last time}’ lines designed to shock and awe, but these have absolutely no predictive powers whatsoever making them completely and utterly meaningless. As are the ‘$bio wiped off market’ statements.

Six days ago we were about to head into price driven armageddon where the faith in central banks was said to be shot, credit was about to take the banks down, recession to bite the world in the back side and NIRP to cause the financial world to vanish into a quantum monetary singularity.

And yet this evening we are back at price levels that have the curious scratching their heads and the stubborn screaming that either the prices will fall again or 'I told you so’.

The news flow was telling too today. Twitter streams, well mine, appeared to turn away from the rally in some form of denial and reverted to in depth quant economic stuff or political news. There was a distinct lack of 'shouty screamy' that would have accompanied an equal move lower. This could be because I have a fair number of journalists in my stream who due to their jobs express the 'shouty screamy' biases explained above as they fight to have their headline gawped at more than their competitors. Or it may have been because everyone was long and relieved that things were going up again (the last thing I believe), or it could have been because they were short and doing impressions of ostriches. Or they where too busy trading to express anything at all, leaving only the professional scribblers to scribble.

I was not surprised to see a plethora of ‘this is a normal retracement in a bear market’ type charts with most of them referring to 2008. Now I am a great fan of charts but there comes a point where a chart is no longer relevant because it is of somewhere else and not where you are. Sure, 2008 patterns can be overlaid and extrapolated but they are not of these parts. 2008 was completely different. The banking system had frozen up and economies were collapsing. Now of course if you wish to follow that chart whilst we have no problem or anticipated problem of money transmission (shhh now in the cheap seats. We don’t),  nor do we have a collapsing economy despite the markets trying to tell us we should, you can. But US data is far from recessionary and it doesn’t look as though Europe is in trouble either. Certainly not to the extent that would justify modelling the current markets on 2008. Following the chart of 2008 is like trying to navigate London using a GPS loaded with the Shanghai road map from 1946.

The tone until today appeared to be 'sell sell sell' on falls as it was doom (attach story to fit) and any rally was a 'sell sell sell' short squeeze. Great if you have deep pockets. As mentioned yesterday the frequency of rotation at which bear toys were being pulled out of the bear toy box to substantiate shorts was rising as none appeared to be whipping up enough fervour, with some even denying each other. Then there was one of my favourite indicators - the pushing of a long term reason to sell short term back out into the long term. This was classically seen during the Euro woes of 2011/12 where the imminent doom call for Euroland was pushed back to ‘well it will happen sometime so I’m right to be short still’. But as with gold, you’d better hope it happens before you need the money to pay for your nursing home. This is a classic symptom of the wall of worry.

So the weighting of ‘short squeeze’ opinion to ‘it's based’ opinion being pretty important as a clue towards future stressed position unloading  I conducted a really basic non-scientific Twitter poll and so far at time of print  this result

Which was weighted more towards 'based' than I expected. Hats off to the 'Don't knows' though

Now for the ever important back-fitted stories to justify this move. Market opinion has done a volte face and is now touting the central banks to launch stimulatory policies and they have accepted that maybe the US wont be in recession by next month thanks to the data of last couple of days. Yet I would suggest that the real trigger was the Chinese lending data showing a dramatic increase in credit supply suggesting that they will follow old paths of inflating the housing market for that all old feel good factor. It started in China, it may end in China.

The oil deal is pretty irrelevant apart form one observation. The Russians and Saudis agreed on something. That is pretty impressive considering that before too long they may well be on opposite sides of the trenches in Syria.

But overall, yes, it was a gargantuan short squeeze and not just from leveraged speculators but long term real money who as the BAML survey has shown have been record long of cash.

There is nothing worse for a portfolio manager than to be forced to chase benchmarks against their core view, but I would suggest 10% moves are enough to force anyone's hand who is looking at a 5% annual performance as being good.

One indictor that many have cited for the panic not having been over on the down side was that stock option volatility has never really risen. the VIX never really showed any sort of panic but I would counter that with the a suggestion that if you are already underweight the cash you are don’t need to buy the hedges.

So where from here? Not easy as the we are more balanced at these levels but the path of pain is set for higher, though there are certainly more people than a week ago thinking the base is in. My overriding fear though is that the last week has seen expectation of central bank policy swing so dramatically from ‘they’ve screwed it’ to ‘they will save us’ that we are now opening up for disappointment. As we have seen so far, central bank policy is oil tanker like in comparison to the jet skis of market expectation.

 It is normally fatal to tell people what you are doing with respect to trades as there is no upside in it. But here goes - With it looking as though the source of central bank hope is China then that would appear to be the logical place to buy. So H-shares, Hang Seng, SHCOMP etc and any knock on regional EM is in play. On the FX side I'm looking for Abe not to disappoint and his recent negative rate move to see a reversal from the ‘Whoops that shouldn’t happen JPY rally’ and a move back to norm. Also I’ll tie in a move in US yields higher pulling USD/JPY up and Mrs Watanabe seeing the dust settling and heading out to off shore yield. And the counter? The poor beaten up Aussie. It’s a favourite for Mrs Watanabe yield hunting, it should get a direct lift from anything positive in China re stimulus both directly via commodities and indirectly from a lift of global doom. If commodities do recover enough it will also nudge the path of RBA rate expectations.

So I am thinking that the recovery FX trade is Long AUD/JPY (That’ll be the kiss of death to it), but this is in no way a trade recommendation!


Post script 8.30 GMT 18 Feb.

Having stayed up to watch the Chinese markets open it was apparent pretty swiftly that the momentum that had started to fade late yesterday evening was not getting another boost. AUD was undermined by unemployment data, though that should be separated out as being old data relative to the latest  market bounces. India did little to support the idea of continued up moves and the open in Europe saw the likes of Rio and small oil producers promptly lower despite indices looking OKish to start with.

With all of that in mind it feels as though the 'just a short squeezer's are going to be creeping back out of their bunkers and selling, but short term whippiness is set to continue as we resolve new direction from these key levels.

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