MorningWord 6/20/13: So what’s the smart money doing now with global markets moving in fairly unpredictable ways?? What happened to the great rotation OUT of bonds and INTO equities? They both went up-together, why can’ t they go down together?? Lots of questions this morning and I suspect we won’t have too many definitive answers anytime soon. While the Fed’s statement yesterday had few divergences from the prior, Bernanke’s press conference was loud and clear. There is a certain sense of irony that the idea of the Fed chairman starting to hold press conferences back in 2011 after per-determined FOMC meetings, was that there was a bit “lost in translation” of the statement, and they wanted to increase communication on policy as they went further down the QE wormhole. Well, yesterday may have been Exhibit A for leaving market participants guessing and keeping things as clear as they have always been, clear as mud.
Rather than re-invent the wheel on our current view on the markets and sentiment towards risk assets, I am going to take readers back to my thoughts in this space exactly one week ago:
From MorningWord June 13th, 2013:
MY sense is that there has been way too much complacency by global investors in the face of what could be decreasing effectiveness of quantitative easing while global growth is decelerating. IN this scenario, it appears that the U.S. risk assets would be the place to be. But the next few days’ action could be very telling as to whether we are near an end or beginning.
The SPX closed near its 50 day moving average yesterday, a technical level that it has held 4 times since Dec 31st, 2012, each time seeing higher highs. A break below 1600 today would do some serious technical damage and would likely bring a quick test of 1580 and then possibly 1550.
SPX 1 yr chart from Bloomberg
A central theme of our trading for the last month has been to sell rallies and be long VIX calls (read here), but we have made it a point to make at least one cover of a short position on every sell off (like yesterday here). We have to trade what the market is giving us, and we will look to add longs on an opportunistic basis, while continuing to look for disconnects btwn fundamentals and price action.
So the net of it is that it’s ugly out there, but I do expect some serious support for U.S. equities somewhere btwn 1550 and 1600 and the big money may just let it get there as they like to say, “pullbacks in bull markets are a healthy thing”. We will continue to trade em.
SO here we are right back to the all important level, the 50 day moving average on its way to the massive near-term support level of 1600. What am I looking for most today? First, the sell off from the highs in the SPX has been fairly orderly, unlike the dramatic moves we have seen in commodities, currencies, bonds and emerging market equities, so do we start to see a little panic in the most crowded equity market in the world, the SPX? IF the SPX is gonna hold my sense would be that it does so AFTER a break of 1600, but as Enis mentioned this morning in his MacroWrap, what sort of sell stops lie beneath?? And here is the gazillion question, has the Buy the Dip crowd now started to Sell the Rallies? Given some of the haywire action in global risk assets, we are likely to be in for a rocky summer as investors reposition for a less committed FOMC at a time where global growth, or lack there of may be the systemic headline that 2013 has been lacking.
We will stick to our guns, trim shorts on pullbacks and yes, add some long exposure, we are not in the business of playing for the big one, and we are going to enjoy the new-found volatility on our shores to trade-em.