Wednesday, 13 April 2016

'That shouldn't happen' - The most dangerous type of move.

There is theory and then there is price. At the end of the day those of us who trade in the markets have our performance judged against price, not intellectual peer group review. No matter how bad you see Japan, Europe, global monetary policy, commodities, China et al, nor how well your intellectual case is argued, if you are running short positions because of them in the main indices then the scoreboard isn’t looking too pretty.

Whilst SPX had been oscillating around 2050 my attention had been drawn to more exciting things, namely Japan. My last post was looking for a turn in Nikkei and JPY and we have been amply rewarded with Nikkei now 7% higher on last weeks lows and USD/JPY slowly grinding back up through 109. But the lack of commentary associated with the rises has me feeling that we have a setup much like the lows in SPX in February that saw the moves higher start with accompanied reasoning of 'just stops’ which then became ‘this shouldnt be happening' to finally end with a 'this is mad, it'll happen one day' grumpy squaring or pushing of losses from the short term book to the long term book. Until we see the weight of opinion move from 105 USDJPY expectations and associated Nikkei dumps, we still have plenty of room for pain on the up side. Meanwhile this is the worst type of reversal for bears, one that just happened without intervention or big news to pin it on, leaving the theory unchanged but the price hurting. Theory 0 - Price 1

But this has become a really potent move higher in everything 'risk' .

Oil flew over the past few days but is now stabilising ahead of oil supply talks.
European banking worries are up 7% with European Bank index SPX7 up over 5% with Deutsche Bank shares up 7%.
FTSE - has finally broken up through 6230 breaching the 100pt range its been in for the past month
Copper - Screamed higher yesterday and is still running.
US stocks are just under the start of month highs
Credit and EM? Just fine thank you.

The European bank scenario has been drawing much attention recently and the debt load of Italy in particular. Europe is a slow burn disaster I agree, but the game is, as ever, timing and regional disruption. Debt and its distribution around the zone is of course the problem but as long as ECB throw everything they can at the problem, ie keep lending to the regional subprime, then we can't yet see that implosion. Economic ‘OKness' will mean that bears could get ground out of the position. It's very much like carry creep where we have that saw tooth price action of creep and dump. European banks may be in a mess but the likes of Dax is approaching recent highs again. I’d rather play a Eurocrisis by waiting for it to happen rather than trying to catch a top and be beholden to disaster happening now rather than next year.

So yes, Europe has pile of problems right now and holding Euro is pretty risky. General stopping of positions along with the fall in USD in general may well, in my mind, be coming to at least a temporary end. I would be happily selling EUR, especially against USD which has seen a position squeeze and with the next phase of the Fed expectation oscillator swinginging towards 'higher' again after Yellen has convinced everyone that she is willing to be behind the curve. Selling Eur/Usd here, waiting for the 1.1000 magnet to do its work again, is the plan.

I know that Italy is the junk du jour but we must keep an eye on Greek seasonality and the farcical act on stage as the EU try to keep the PR positive as we head into a UK brexit referendum. If I were the Greeks I'd be pushing the limit with demands as Greek trouble, or Italian come to that, before the Brexit vote could really swing the vote.

I note that the IMF are now out warning of Brexit being a major threat to the global economy and this is being used as further reason to vote to stay. But if Brexit really is that great a threat, isn't that incentive enough for the rest of the World to renew trade agreements along the lines of existing EU ones as fast as possible to defuse that threat. On one hand the EU us threatening that trade agreements won't be renewed as UK shouldn't get special treatment but then say its UKs fault if they exit and the lack of trade agreements messes with global economic security and destabilises the EU. I have had it pointed out to me that there hasn’t been a case of a trade agreement ever being swiftly agreed and EU bureaucracy is the slowest on the planet, but one thing we do know is that when it comes to the wire and the life of the EU is on the line, then they can act. We have seen it with Greece and numerous country debt problems, but only when the existence of the EU is at stake. So if a Brexit really is a death scenario for the EU and the economic world, it wouldn’t be beyond the wit of the powers in charge to whip out the photocopiers are replicate existing trade agreements as they stand through EU membership. This is more a game of chicken.

The snap higher yesterday in everything occurred at a time of day we have often seen things take off namely 3.30pm London (10.30am New York). Back in March there were a few such cases which drove right through the day leaving me wondering which model type accounts are triggering this as there when these 3.30 lift offs occurs, no macro or data reasoning to pin it on. Another nasty ‘that shouldn’t happen’ in the macro player’s hand book.

The skill is to to be able to trade against your core long term view and not be clouded by a dogmatic long term view, even if it does turn out to be reality. In the end we will all be dead but that doesn’t mean we buy coffins and dutifully lie inside them waiting for the day to arrive. There is fun to be had in the meantime.


Hotairmail said...

Quite. I take my guidance from that famous (infamous?) television favourite "The Price is Right". Always right. No ifs, no buts.

I put on a short when things were starting to look weak, price fell a little but other stuff did not confirm...I closed. I don't really like having to do that but, y'know.

As I said on MM's blog just now, it does look strong as per your post. However, I prefer to wait than to chase right now, even if one loses out. For me that is part of building a position I can beleive in.

Polemic said...

Hotair.. Quite right . Multiasset confirmation is key to generla moves and I too look for the one that seems out of line to trade and working out which are the fashionable leaders and which the tail end Charlies is key. I'm with you to be honest I don't know what to do at these levels. What I have been looking for trading wise has been achieved in most markets and I ddon't know what happens next though it is always the doom-meisters that scream loudest. But then they have all the way up. You really have to put a corrective bias filter on news and opinion and that strength of that bias can be gauged through the theory vs Price ratio.

Leslie Crowther .. price is right .. Crackerjack.

Hotairmail said...

Well, I will admit to registering early comments of yours re non confirmation from oil and copper. That sowed doubt in my mind early on and initially I cursed your intervention to turn my hands weak. Now, I'm happy sitting on my hands. ;-)

Boris Kurgan said...

wouldn't short Gold be a better expression of short EURUSD? maybe a bit more on the table for your buck. Stocks're holding up more or less, so no need in the "safe haven", gold's up around 20% in Q1 (too much, too fast?).

Polemic said...

Boris - Not really because I have some Europen short term structural worry built into the short theme for eurusd and if there was any of that it would be a stressy buy gold type of situation. Short gold is more a 'everything is ok and dollar is rising' trade. But I get where you are coming from.

Anonymous said...

Good post and good trades.

The perma-bears who were screaming so loudly for the end of the world, and regaling everyone of their huge profits, have now had said profits vaporized while they sit on huge losses. As you say, they are stuck with their bias and unable to adapt to changing market conditions.

Well done on your trades.