By Macro Story;
Famous last words I know but something big happened last week. The FOMC does not have the freedom to print at will at least under current circumstances. Chicago Fed President Evans and Chairman Bernanke, two mad men who desperately wanted to expand the balance sheet could not.
So now the market is faced with the reality that bad news is now bad news. Those who bought the dip in the past now have to question will it bounce this time. Will the Fed be there to defend equity prices either with QE or the simple threat of QE? These are the questions longs will now have to ask themselves.
Based on last week’s multiple asset class selloff it appears most investors feel the Fed will not be there. The Fed signaled ahead of the FOMC meeting that Operation Twist would be the extent of their “accommodative policy” yet markets refused to believe them until the official announcement. Then it was too late as markets ripped to the downside. Those hoping to get short also realized how swift this market rolled over making a short entry a very dangerous proposition.
Reading various trader blogs and chat groups this weekend it appears participants still believe in “buy the dip” either as a reason to go long or surrender shorts. Perhaps they will be proven correct once again but I believe they will not. I truly believe sentiment has shifted. The perception of risk has changed. Markets at least until November 1, the next FOMC meeting are on their own.
It’s also important to note that the most recent rally was most likely that of a short squeeze as NYSE short interest rose rather quickly. In other words weak shorts have covered and with the swiftness of the selloff last week I imagine few initiated new positions. This then leaves the market in the hands of highly leveraged “all in” longs (see chart below), strong shorts and far less short interest to squeeze for another leg higher.
As we mentioned this morning, the squeeze set up is here, and we expect the move up to be brutal, as many of the permabulls have now joined the bears. Sentiment indicators are reading extreme bearishness, and therefore we expect the squeeze to continue higher. Every pundit is now talking as if Europe is bust, and that is too late. The squeeze is in, and will kill many of the new “smart” shorts. Below some of our most important charts, as of Friday close.
For all Charts, continue below.
As people have puked everything in early European Trading, assets have reversed, and will put a brutal squeeze on. With Silver and gold reversing big, we expect the metals to continue into positive territory shortly. Europe is outperforming the EZ future at the moment. Below 10 day chart of the EZ future. Expect a big vacuum to the upside shortly as the bulls now all are “smart” bears.
With the extreme bearish sentiment in the market, where the bulls have become bears,where Roubini is calling the collapse of the World on a daily basis, where Biggs wants to be ultra short etc, the set up for a huge squeeze is here. We will present our Chartology later, but for now, beware of the squeeze coming up. First squeeze of the day, Stoxx 50.
Gold is continuing it’s liquidation, as Operation Twist and the Friday CME Margin Hike continue to pressure the metal. Gold currently -6,3%.
Asian shares and the euro fell on Monday, Reuters reports, as investors reacted cautiously to reports that European leaders were working on new ways to stop the fallout from the euro zone sovereign debt crisis wreaking more damage on the world economy. Gold extended losses, http://ftalphaville.ft.com/thecut/2011/09/26/685061/equities-continue-slide-on-eurozone-fears/
China’s yuan may become a fully convertible currency in five years, Li Daokui, an adviser to the People’s Bank of China, told a forum in Washington. Bloomberg reports Li said flexibility of the yuan will increase over coming years, http://ftalphaville.ft.com/thecut/2011/09/26/685036/yuan-convertible-in-five-years-says-pboc-adviser/
The government of Mongolia is seeking a bigger stake in Oyu Tolgoi, the biggest undeveloped copper mine in the world, the FT reports, in a surprise move that underlines the challenges ahead for Rio Tinto and Ivanhoe Mines as they develop the country’s flagship mining project. The government of Mongolia has asked to reopen discussions over the 2009 investment agreement for Oyu Tolgoi,http://ftalphaville.ft.com/thecut/2011/09/26/685001/mongolia-presses-for-bigger-stake-on-key-mine/
US investment banks are facing losses on financing commitments for buy-outs and other deals struck before the recent market turmoil, as they sell down about $25bn in loans and junk bonds, the FT reports. Banks have had to make concessions to entice a broader range of investors to buy loans linked to mergers and acquisitions, http://ftalphaville.ft.com/thecut/2011/09/26/684976/us-banks-face-losses-on-loan-commitments/
All news continue.
Guest Post by MacroStory. Last week he was on vacations, and maybe he will give us an “objective” view.
Having been on vacation through possibly the most volatile week (yet) of 2011 this week’s macro view may be better served as a recap of various asset classes to get a sense of where the equity market stands right now. From credit to commodities to forex a lot of technical damage was done.
First though it appears an important change in perceived risk has occurred. In the past bad news was good news as it would bring further accommodative monetary policy such as QE1 and QE2. Market participants always believed the Bernanke put was alive and well and equity values would be defended. In other words the perception of risk was less severe.
The Fed is not done with “free market intervention” though and like a child in the toy aisle will go down kicking and screaming trying to get what they want. The recent emergency action such as globally coordinated swap lines are such proof as are the eventual TALF programs where US and EU banks can access Fed capital in exchange for any “collateral” they can find.
Like the famous line from Rocky IV “You see? You see? He’s not a machine, he’s a man, he’s a man” the Fed showed its ability to print at will is constrained though, it too is not a machine. Whether it is political pressure, rising inflation, dissention among members or the simple reality that QE1 and QE2 actually harmed the economy market participants are realizing perhaps the Bernanke Put has a massive theta burn, an expiration date. The next Fed meeting is not until November 1 and beyond any emergency programs equities are now on their own. The training wheels are off.
The market’s reaction to this shift in risk perception was made clear this week as demonstrated by the multiple charts below.
With majority of markets crushed last week, many indices now trade deep in bear markets. Last week we saw some rather extreme moves, like the Hang Seng down almost 10%. Several indices are down around 50% from the start of this millennium. Long term investing, with poor risk management, is a dangerous game….Below charts, courtesy DShort;