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June 30, 2014

5 Bullet Points

Filed under: Forex Strategies — Tags: , — admin @ 4:42 pm

* It’s been a cracking World Cup so far, certainly the best one that Macro Man can recall watching.  The matches have been tense, the football’s been attacking and largely enjoyable to watch, and as one mate said yesterday, there have only been a few truly crap teams:  Cameroon, Honduras, and…er….England.

* One wonders if Mario Draghi had to make some sort of sacrifice to the football gods to save the Eurozone in 2012.  At the time of writing, all core/semi core Eurozone countries are still in the competition (Germany, Netherlands, France, Belgium, plus uber-hard currency Switzerland), while all the peripheral crisis countries (Greece, Spain, Portugal, and Italy) are out of the tournament.

* The good news for US markets is that it’s a short week due to the July 4th holiday.   The bad news is that there is one less day than usual for stocks to rally.

* Remember the equity rotation pain trade?  Macro Man hadn’t looked at its various incarnations for a while, so thought he’d take a peek to see how they’re getting on.   While the ruptures have settled down, the various sector spreads are nowhere near their highs.  It could be a long wait.  (The chart below shows the biotech ETF vs the SPY.)

*  It’s nice of the Fed to concede that they observe ‘frothiness’ in leveraged loans and farmland.  Unfortunately, it seems as if the Fed staffers charged with surveying the rest of the financial markets are actually the “see no evil/hear no evil” monkeys.  Did you know that the one year Sharpe ratio of the Iboxx US$ high yield index is roughly 8?  As the chart below illustrates, the rolling 1 year Sharpe of the HY index has approached that level 3 previous times since the crisis (never having been anywhere close to it before the crisis, mind you.)  On each occasion, the risk adjusted return moved swiftly lower.  Caveat emptor.


June 27, 2014

A cheap vol bet (yeah, right)?

Filed under: Forex Strategies — Tags: , , — admin @ 4:43 pm

It looked for a moment like there might be a flash crash yesterday, as Spooz dropped an almost unbelievable 14 handles in a matter of minutes after the open, representing something like an 8 standard deviation move by the standards of recent history.  (Before you complain about Macro Man’s shoddy math, that number was completely made up.)

Yesterday’s core PCE deflator data ratcheted up in line with expectations to 1.5%, which is still below the Fed’s ostensible (and frankly unrealistic, based on the last 15 years) target of 2%.   Still, it was a step in the right direction, and a higher-frequency analysis clearly shows an uptick in the recent prints, as the 3m/3m annualized chart below indicates.

Still, before we get too excited it’s worth noting that even this higher frequency reading is still below 2%, let alone the y/y changes tracked by the Fed.  As an historical precedent, this measure was 2.4% when the Fed embarked on its previous tightening cycle, having breached 2% only a couple of months previously after the deflation scare of 2002-03.  Macro Man would suggest that you’d need to this measure make a “higher high” than that observed in late 2011 for the Fed to feel comfortable about the inflation situation.

Elsewhere, Shinzo Abe no doubt poured himself a nice sake after Japan’s labour market data posted its best reading in nearly a generation last night.  At 3.5%, the unemployment rate registered its lowest reading since 1997 (pictured below), while the jobs-to-applicants ratio printed its highest reading since 1992.  Regardless of the long term efficacy of Abenomics, you have to give the man credit for trying something new to make a difference, because in the short run, at least, it has.

What it means for the yen is a trifle unclear.   In the old school world, good domestic data tended to be bad for the yen, as it signaled increased risk appetite amongst domestic investors, which usually resulted in yen selling for overseas punts investments.   In the brave new world of QE and financial repression, however, good news can be seen as bad news insofar as it takes away the central bank sugar bowl (or crack pipe, or heroin needle, etc….)  Certainly it is hard to see the BOJ re-entering the equation any time soon with data like this.  Indeed, it’s probably no coincidence that Kuroda and co. are shortening the duration of their rinban BOJ purchases.

It would seem, therefore, that there might be a bit of pressure for the yen to strengthen, at least absent a hawkish out turn from the US.  Interestingly, USD/JPY is on quite an important level on the weekly ichimoku charts (see below.)  Now, this charting technique involves a lot of mumbo-jumbo that Macro Man once tried to figured out in its entirety but gave up on.  It is widely believed, however, that the Japanese love these charts, so you often see gaijin consulting them to get an insight into the locals’ likely mindset on Japanese asset prices.   As you can see, the weekly yen chart is threatening to break into “the cloud” for the first time since the Abenomics trade really got going in late 2012.

In theory, USD/JPY should either bounce sharply from this level or crash down to at least the bottom of the cloud, which currently resides at 96.14.  Either way, the theory goes, USD/JPY could be due for a recent range-breaking move in short order.

And yet here we are with 1 month USD/JPY vol at all time lows, on a 4 handle!  The one month straddle should retail for roughly 120 USD/JPY pips, which does not seem particularly cheap given the exceptionally low realized vol of the last few months but does look quite a bit better when you consider the inchimoku level noted above.  Indeed, Macro Man has had reasonable success over the years taking long vol punts on assets that rest on critical technical levels, particularly those with at least some fundamental justification to move.  With the 2 week straddle priced at roughly 70 pips, you can still recoup more than half your money even if nothing happens over the next couple of weeks (including any gamma scalping.)

It’s hard to get excited about buying vol in the depths of summer with the business end of the World Cup about to start…but as potentially asymmetric bets go, this doesn’t look like a bad one.

June 26, 2014

Key day reversals, part II

Filed under: Forex Strategies — Tags: , — admin @ 4:42 pm

As he was cycling yesterday, it occurred to Macro Man that he had left out a fairly obvious component in his analysis of key day reversals and the S&P 500- namely, how they work to the upside.  Wednesday’s rally in the face of an abject GDP revision suggested that his caution about Tuesday’s reversal was warranted….but what would the data say about bullish reversals?

Obviously, some tweaks to the study were required, as he’s fairly certain that he won’t find many key day reversals off of the all-time low in his sample.  In lieu of the “all time high” filter in his bearish reversal analysis, Macro Man substituted a 6-month low to capture a reversal off of a defined trend.  Otherwise, the definitions were simply (ahem) reversed from yesterday’s study (i.e., a reversal was defined as prices making a lower low than the previous day’s, only to close above the previous day’s high.)

On the face of it, bullish key day reversals appear to work a bit better than bearish ones.  As the table below suggests, in the 225 observations since 1982 stocks fare marginally worse than average over the week following a bull key day reversal, but comfortably better than average on 20- and 60-day horizons.  On the rare occasion when you get a key day reversal off a 6 month low, stocks crush it.  Perhaps the Fed should order key day reversals the next time they wish to implement unconventional monetary policy!

Of course, with only five observations, the results of the pattern off of 6 month lows is by definition fluky.  In fact, there are so few observations that we can examine them one-by-one:

June 1984:   Frankly, this is long enough ago that even Macro Man cannot recall exactly what was going on…after all, he had just finished the seventh grade.  Although the reversal pattern was good for a short-term kick, the SPX subsequently made a fresh low a month later before subsequently exploding higher a few days thereafter.   You’d have been hard pressed to feel comfortable holding a long position then, and you’d be hard-pressed to explain that rally on the key day reversal now.

July 2002:  Stocks suffered badly in the summer of 2002 as the corporate accounting scandals that took down Enron, Tyco, Adelphia and Arthur Andersen claimed their biggest scalp in Worldcom.  The latter declared bankruptcy on July 19, sending stocks spiralling lower until they put in an impressive reversal on the 24th.  The reversal worked well for a month or so…until it didn’t.  Still, you’d have to say that it nailed a tradeable bounce.

October 2002:  Corporate credit got crushed in the late summer/early autumn of 2002, taking stocks with it after the optimism fostered by the previous reversal.   Sharp-eyed readers may have noted a subsequent October reversal on the previous chart, which worked just as well as the previous one.  Indeed, even better, as the gains held up for longer…though stocks did subsequently swoon late in the winter in the run up to the invasion of Iraq in March 2003.   (Sobering thought: junior analysts during the Iraq invasion are now MD’s in their 30’s.)

January 2008:  Ah, Jerome!   Markets dumped in January 2008 for no obvious reason, forcing both the Fed and (put your headphones on) some punters to freak out.  The Fed delivered an intra-meeting cut on January 22nd, and when it emerged immediately after that rogue trader Jerome Kerviel was behind the selling, markets regained their footing rather quickly.  Regained it, that is, until they had a look at Bear Stearns’ liquidity position, at which point we were at fresh lows less than two months later.

November 2008:   Ummm, nope.   (Twentysomething holders of limit long positions in assorted low-quality risky assets are invited to consult the scale on the right hand side of the chart.)

So there you have it.   Bullish key day reversals off a six month low are normally good for at least a short-term bounce….unless they aren’t.    The track record in nailing significant trend reversals is dubious at best, however.   This is a prime example of why Macro Man uses technicals as a piece of the puzzle, but almost never as the whole puzzle unto themselves.

June 25, 2014

A key day reversal from the all-time high: how worried should you be?

Filed under: Forex Strategies — Tags: , , , , , — admin @ 4:44 pm

It seemed like business as usual yesterday morning, with the SPX marching to yet another all-time high on news that the day of the week ended in “y” but did not start with “s”.  However, just as the referee decided that Claudio Marchisio was worthy of sending off but not Luis Suarez, Spooz decided to visit the dark side, taking a rather nasty tumble to close below Monday’s low print- but not, of course, falling 1% or more, as price action of that magnitude is now banned by administrative diktat.  Still, it was a key day reversal from all-time highs….perhaps Italians were the only ones trading?

There are a number of interesting talking points about yesterday’s price action.  The legend of “Super Tuesday” is once again dying a slow death, much as it did last year, as the outperformance of the second trading day of the week has faded markedly since the beginning of last month.   Perhaps “sell in May” only applies to Tuesdays?

However, the key day reversal is the thing that really grabs the eye.    After a long, steady, low-volume/low-volatility grind higher, such a reversal certainly rings more than a few alarm bells.  It is sort of taken as a given that this is a trend reversal signal, if only temporarily, which would certainly fit with both the skepticism over the current rally and concerns from sources as diverse as the squeeze in energy prices and the eventual end of the taper, etc.

Macro Man decided to put the data to the test.  He identified all past key day reversals in his dataset and checked the subsequent returns on a 1, 5, 20, and 60-day horizon.   He performed the same analysis on a sub-set of reversals on days when the index made an all-time high.  For a control group, he calculated the same returns for all data points in his sample.  The results are set out in the table below.

As you can see, while generic key day reversals produce marginally worse than average returns on the day after the reversal, on horizons of a week and longer the returns are substantially better than average.  The negative short-term impulse from a key day reversal off of the all-time high would appear to be slightly stronger, though with just 23 observations it could easily just be noise in the data.  On longer horizons, the subsequent returns are even stronger than those following generic key day reversals.   The moral of the story, evidently, is that markets at their all-time high are bull markets, and it takes more than a little technical reversal to derail a secular bull.

Unfortunately, the Bloomberg dataset only includes daily high/low data since April 1982, a date which coincided with the starts of a rip-snorting 18 year secular bull market.  True, the sample also includes the small matter of the GFC, but a look at the price of…err…anything suggests that that is now merely a distant speck in the market’s rear-view mirror.  It would be interesting to perform the same analysis on a much longer data set, perhaps using the Dow rather than the SPX, which only came into existence in 1957.  If anyone has access to such data that they’re willing to share, by all means pass it along and Macro Man will do the study.

On the basis of the available evidence, however, the key day reversal looks to be more of a curiosity than a legitimate threat to the market’s trend.   Of course, you cannot control for other factors which might impact the market…but then again there’s almost always a reason to worry about one thing or another.  While your author cannot, of course, provide investment advice, he can observe that of all the reasons out there to sell equities, yesterday’s key day reversal would appear to merit a spot somewhere close to the bottom of the list.

June 24, 2014

Trading places

Filed under: Forex Strategies — Tags: , — admin @ 4:43 pm

As England prepare to play their final, meaningless World Cup match against CONCACAF titans Costa Rica, Macro Man has unearthed why their defence has been so shambolic thus far in the tournament:

(The whole story is here.)

In a related story, Jan Hatzius at Goldman has just released a paper placing the blame for the stop-start US housing recovery on John Terry.

June 23, 2014

Summer Lovin’

Filed under: Forex Strategies — Tags: , — admin @ 4:44 pm

Macro Man is somewhat lacking in inspiration, though how much of it is the disappointing final result of the USA-Portugal match and how much of it is fatigue after a glorious summer’s weekend is difficult to say.  To be sure, the market itself is the source of much of his lethargy; much like the USA’s pedestrian “talisman” Michael Bradley, it entered this year full of hype and has thus far failed to live up to expectations.

That’s not to say that there haven’t been interesting sub-currents, of course.   The strength in energy prices has been a notable talking point, though 9 month highs in WTI haven’t managed to push at-the-pump gas prices above their April levels…..yet.  If and when that happens, it’s probably worth taking notice.

At the same time, it feels like the market kind of wants to have a go at the dollar after a Fed announcement that was broadly perceived as a little more neutral than some had forecast.  True, the euro (and by extension DXY) aren’t really going anywhere, but that’s more of a function of the ECB , than the dollar.  For those countries that are not actively trying to submarine the value of their currencies, however, it feels like the market may just be in accumulation mode.   Cable north of 1.70 is an obvious signpost, as is Kiwi at 0.87, a mere 2% from its all-time highs.   While Thursday’s ramp in gold may or may not mean anything in the long run, it certainly raised a few eyebrows.   The pair that epitomizes the dollar downdrift, however, is USD/CAD, an erstwhile macro favourite.

It was only a few months ago that BOC governor Poloz was dropping heavy hints about the loony and monetary policy- it seems much longer than that. Last week’s CPI more less confirmed that the worm has turned, with the core figure printing way above expectations at 1.7%.  Suffice to say that rate cut hopes have vanished, and with them a major reason to be short CAD.   As the chart below illustrates,  USD/CAD has broken all notable supports as it takes a drive lower on the Boulevard of Broken Dreams.

(The HSBC China PMI has just crushed expectations as Macro Man writes this; cue another round of USD selling…)

Ultimately, Macro Man would be leery of putting too much stock into current dollar weakness.  Like it or not, the Fed will be in play in a few months’ time, which should offer some decent support to the buck.  That having been said, summer romances may not last, either, but it doesn’t mean that they’re not a lot of fun whilst they do.  If the market wants to romance dollar weakness, it would be rude to interject and force a premature break-up.

June 20, 2014

School’s out for summer

Filed under: Forex Strategies — Tags: , — admin @ 4:43 pm

School’s out for summer today, so Macro Man’s taking the day off from watching markets to take the Macro Boys to the beach.  Normal service resumes next week.

Here’s hoping the market treats readers as gently as the England defence treated Luis Suarez….

June 19, 2014


Filed under: Forex Strategies — Tags: — admin @ 4:42 pm

Well, it all played out pretty much as expected.  The best you can say for yesterday’s Fedapalooza is that Janet Yellen has clearly had some coaching on her presentation; while it’s far too late to do anything about that screeching Estelle Costanza accent, she was clearly more deft at answering questions without really answering them.  If you looked closely, moreover, you could see the infamous dot distributions for 2015, 2016, and the long run clearly printed on her jacket.  A gift from Professor Woodford, perhaps?

 In terms of the substance of the announcement, we duly got a downtick in growth and unemployment forecasts, the faintest increase in the inflation forecast, and an upward shift in the 2015-16 dot medians.   That the long-run median declined slightly was not altogether a surprise given the way the wind was blowing, either.   This was generally the expectation sketched out in this space yesterday, and markets duly took the lack of surprise in stride, increasing the price of seemingly every financial asset but puts.

Macro Man half suspects that Ms. Yellen harbors a secret admiration reggae artist Shaggy; given her disavowal that the Fed is responsible for any misallocation of capital or repression of volatility, he can only assume that “It Wasn’t Me” features prominently on her iTunes Favourties playlist.  One wonder if she’ll still be listening when it all goes a little Boombastic.

And make no mistake, things eventually will go boom.  It might be a few years away, but given the contortions (mental, of course) that Ms. Yellen appears willing to undergo to rubbish any notion that data is less supportive of Zirp, it’s close to impossible to see this ending well.  Of course, there will be mini-episodes in the interim as markets try to come to grips with an eventual normalization.   Sadly, though, it looks like for the next few weeks/months those thoughts might need to stay on the backburner.  Or, as a commenter yesterday put it somewhat less charitably, best to act like “28-year old brainless muppets, permanently fixated on the ‘buy all’ button.”

With the World Cup on, there are worse times to not have to think too hard…well, unless you’re Spanish.   Even there, though, the news isn’t all bad.  Decades of footballing under-performance finally ended in 2008, just as the economy imploded.   The three tournaments of dominance coincided with fairly execrable economic conditions.   This year’s return to footballing disappointment clearly marks the country’s official exodus from crisis.  Mucho gracias, Roja!

June 18, 2014

What’s in the price?

Filed under: Forex Strategies — Tags: , — admin @ 4:42 pm

42 and counting….will there be a 43?  History says that equities typically rally on Fed days, but as noted previously there seems too be some complacency out there.  Liquidity is by far and away the most powerful argument in favour of buying stocks here, so if the Fed does anything to suggest its withdrawal, there could be a reaction.

Most readers will have access to ample previews of today’s meeting elsewhere, so Macro Man need not rehash the exercise here.  Suffice to say that he expects the growth and unemployment forecasts to be nudged lower, with inflation perhaps ticking slightly higher.  As for the godforsaken dots, he reckons they are broadly stable or perhaps tilted very slightly higher (on financial stability concerns.)  He wouldn’t be surprised, incidentally, should the Fed decide to dispense with them altogether one of these days.

Of more interest, of course, is what might be priced into markets.  As noted above, stocks do not seem to worried about any challenges from los Federales.  The performance since just before the last quarterly Fed meeting has been solid, notching a 4.5% total return.

What about bonds?  Obviously Treasuries have performed very strongly for most of this year, including much of the recent period of equity out-performance. More recently, however, they’ve rolled over a bit, suggesting the pricing of at least a modest risk premium that the Fed turns hawkish.    Well, either that, or it’s a reaction to the perception of a greater inflation threat (which in a sane world would imply a hawkish Fed!)

The short end is perhaps even more cognizant of the risks of a hawkish out turn.   EDZ5 isn’t anyone’s idea of a long-duration eurodollar contract, but Macro Man finds it useful as a benchmark to gauge the timing and magnitude of the early part of the tightening cycle.   Although the contract does still not fully priced the median of “the dots”, we do know that Yellen kind of wants us to ignore them.  Tellingly, however, Z5 is now priced lower than it was the day before the hawkish surprise in March.

What about FX?  Given the lack of volatility it’s hard to know if anything has been priced or if FX punters have simply nodded off a la Abe Simpson.     Looking at the DXY or EUR is problematic because of the ECB’s  recent activities, so Macro Man plotted USD/JPY.   Back to sleep, Grandpa!

Finally, Macro Man checked out the price of oil.  Unsurprisingly, it has displayed the most impressive price action, rallying 9% or so since just before the March Fed meeting.  On the face of it, one might think it would therefore be ripe for a correction, particularly in the even of a hawkish Fed.   Of course, the Fed isn’t the reason it’s up here, so it’s not altogether why anything the Fed does should take it demonstrably lower, either.

So there you have it.   From Macro Man’s perch, stocks look most vulnerable to a hawkish Fed, and some fixed income instruments could be most impacted by a dovish one.  Not exactly earth-shattering, admittedly, as there will clearly be a reaction across all assets in the event of a skewed surprise.   Good luck!

June 17, 2014

Abandon All Puts, Ye Who Enter Here

Filed under: Forex Strategies — Tags: , , , — admin @ 4:43 pm

Bloomberg ran a very interesting story yesterday, which unfortunately does not appear to be anywhere online, entitled “Puts Abandoned in Calmest Stock Market in Two Decades.”   The gist of the article, as discerning readers can no doubt glean from the title, is that realized volatility is exceptionally low, so no one wants puts.  The statistic cited was the somewhat remarkable fact that the S&P 500 has not registered a daily move of 1% or more in either direction in 40 trading days (41, now that yesterday’s 0.08% rip-snorter is in the books.)  That’s the longest stretch since 1995.

Being a sucker for these sorts of stats, Macro Man went ahead and double checked using a much longer data set.  Unsurprisingly, the Bloomberg article was correct.  However, the current period of lassitude has nothing on the early 60’s, which once saw a full six months go by without a single 1% daily move.  Thank god this was before Black and Scholes published their paper!

Observant readers will no doubt note that we have only recently passed a similar period of quietude in late 2006 (the year that vol died) and early 2007.   In the unlikely even that anyone has forgotten how that episode resolved itself, the chart below shows the same metric from late 2006 through the end of 2009.

Ah, for the glory days of 2008, when there was a three month span in which at least every other day was a one-percenter.  Wednesday’s Fed statement, SEP, and presser are an obvious potential catalyst to break the recent skein of lassitude, particularly if Yellen decides to suggest that “well, we might, y’know, eventually hike rates, that sort of thing” in her best Carney imitation.

More prosaically, the recent deterioration in Iraq has put a firm bid to oil.   Although the rest of the commodity complex has not exactly exploded higher in sympathy, the y/y change in the CRB index remains close to its highest level in two and a half years.  While the nefarious Professor Woodford and his army of egg-headed minions would likely scoff at the notion that this represents “inflation”, financial markets tend to react to the headline figure rather than the trimmed mean market-based deflator for personal consumption expenditures excluding food, energy, education, rent, insurance, transport, amusement, clothing, health care, pet supplies, communications, and personal hygiene services, the Fed’s preferred measure.

So while current market conditions might well suggest “Abandon all puts, ye who enter here”, Dante eventually left the Inferno, and volatility eventually will, too.   Without a Vergil to guide us, however, it’s hard to know whether that day will come today (Super Tuesday?  Pshaww!), tomorrow, or the end of the summer.   But come it will, oh yes.

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