The inside-out market
Courtesy of Rohan at Data Diary
The inside-out market is one that wants you to be bullish at the top and bearish at the bottom. It hurts those that succumb to the sirens’ call.
We can see the swings in mood in our risk appetite index – that has whipsawed back and forth and, in the absence of a near term selloff in risk, is likely to be in the ‘one too many drinks’ range over the next week.
The allure of a break of 1130 is tangible from here and, as noted earlier (here), would make a lot of sense from a market position perspective. But with volume continuing to drop while we still rattle around well below the April highs, the chances of nervous longs emerging from their caves must be increasing.
Equities and gold have been bid up on the whiff of new money – both real and anticipated. The paper money diaspora can be clearly seen in the Commitment of Traders reports – open positions in gold took off from the moment that quantitative easing was announced. They are now threatening to make new highs – which ultimately may leave gold vulnerable to a near term pullback. (Question – How are the bullion banks covering all these shorts?)
Perhaps more promising is the view from the pit, notwithstanding that volume has fallen to new lows in the S&P Futures, positioning is more supportive than not. The ‘non-reportables’ that have been on the right side of the market more often than most during recent years have turned net long once more:
Conclusion
It’s not out of the realms of possibility that the market pushes through the obvious resistance and has a few more days in the sun. But for mine, risk markets remain broken. Volume is evaporating for a reason – and no amount of intervention can forestall this. There is a darker side to this as well.
In a market where the hand of government is so very prominent, moments of policy failure have a cumulative effect on government’s credibility. This is the effect that we see with the ECB, IMF and EU all sticking their fingers in holes while failing to stop credit spreads pushing wider. Similarly, the market’s reaction to the Japanese going it alone in the currency depreciation game is reflective of the same effect.
My sense is that the positive sentiment of the last two weeks has more to do with expectations about another round of quantitative easing than ‘better than expected’ economic data points. If the Fed fails to deliver on this front, think we can expect the market to lurch lower on a pickup in volume. For the moment the inside-out market prevails.
