Yesterday I highlighted the violent upward reaction in global equities and the Euro following the ECB’s announcement of monetary easing measures. By the end of the day European equities had traded in a 5% range, closing on their lows, and the Euro in a nearly 4% range, near its highs. My particular focus was the Euro Stoxx Bank Index, which 24 hours ago was up 7%, only to close up less than 1% yesterday. But this morning it’s up a whopping 5.5%. If you are confused, you are not alone, this sort of intra and multi day volatility is NOT normal:
And the Euro move in many ways was far more important. It indicates that traders do NOT know what to do with the combination of increased QE, a lower than expected rate cut, and hints that cuts might be done. While the activity yesterday was frenzied, I think it is important to note that at 1.112, it’s just above its 200 day moving average, for the better part of the last two years between 1.05e and 1.15e:
The extreme volatility across the pond has for the most part been ignored over here.
Crude Oil has made a fairly orderly push to prior technical support, broken the one year downtrend, and feels like it has a date with its 200 day moving average just above $43:
The S&P 500 (SPX) has consolidated in and around the nice round number of 2000, after a one month 10% rally, just below its 200 day moving average:
And the yield on the 10 year U.S. Treasury above its 50 day moving average for the first time since early January, is actually a good thing in a counter-intuitive way for holders of U.S. stocks, as it speaks to the fear that has abated in credit markets:
Does the relative calm set up for a rally into Tuesday’s BOJ meeting and Wednesday’s FOMC meeting? Possibly. Remember, don’t fight the Fed. The only problem is all this calm and seemingly steady economic data in the U.S. points to another rate increase. Fed Funds futures are now pricing a 50% chance at their June meeting, with the potential for at least a more hawkish tone next week. And that new hawkish tone could dramatically increase the 23% current pricing for a raise at their April meeting.
The dramatic sentiment shift is risk assets in just a month is a bit shocking. While my intermediate to longer term view of caution towards stocks has not abated, I’m well aware that a consolidation period after tons of data and policy could cause lots of problems for traders like moi et toi in options and so will try to be very disciplined if we look like we’re entering an exhaustion period following high volatility.
As for what specific areas I’m looking at now for signs, defensive U.S. equities like Telcos, Utilities & Consumer Staples trade near 52 week highs, as does Gold which should cause some to think twice about chasing stocks for the fear of missing out.
After months of being on the U.S. Telco and Utility parade, they could set up for a decent short term bearish trade opportunity in a market that falls into a complacent calm. At least on a relative basis they should under-perform if the broad market does in fact go up, and I’m not sure how much longer investors are going to be willing to pay 13.5x for T & VZ and above a market multiple for Utility stocks.