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Trader: Everything Looks Rosy In Stocks “Until The Short-Covering Runs Out Of Steam”

Courtesy of ZeroHedge View original post here.

Authored by Richard Breslow via Bloomberg,

Trade alert. There are a lot of markets closed today. It’s August and no big numbers are on the economic calendars. Volumes have been thin. The news has hardly been encouraging. And the price action has seemingly had little probative value. Yet that really isn’t the case. Traders are being punished for trying to maintain hedges and we continue to follow the pattern where things look rosy until the short-covering runs out of steam and then prices sag.

Source: Bloomberg

Reality is once again very much confronted with central bank expectations.

There is a lot of time legitimately spent worrying about how much transmission mechanism is left in monetary policy engines. The official, and sadly predictable, response has been to open up a Pandora’s box of more extreme possibilities. And encourage continued irresponsible risk-taking. Because they don’t know any other way out. Yet if you follow how the markets have responded to the will-they-or-won’t-they debate in Germany about fiscal spending to finance a climate protection plan, it’s obvious that they do know. And choose not to act. There isn’t a need for an academic study to prove that point.

Chinese equities were up today. Their regulator eased margin requirements to encourage trading. The New Zealand Treasury followed up last week’s uber-dovishness by the RBNZ by putting a number on how negative interest rates could go. Once you open the door, going through it is a lot easier. Italian bonds are bid. Can the ECB be far behind? The ratings news was welcome but not a surprise. One headline includes “Italian Government in Chaos.” Another recommends staying overweight BTPs. Including the advice that, if you don’t like their politics, get over it.

Meanwhile, keep a close eye on emerging markets. They are off to a quiet, bad start. Carry is cool. It sometimes only goes so far. Just be aware of over-trading proxy currencies as the Argentinian market waits to open.

Source: Bloomberg

The dollar is a tough trade, but for all the nay-saying about it, it remains above its average year-to-date price. That’s not irrelevant. The politics makes it hard, but it is sneaky bid.

Equities look like they want to test lower but the shorts just don’t appear to have the wherewithal to stick it out. The big institutional and official buyers seem to be a great deal less price sensitive than the sellers. Which tells you who’s who. And the relative depth of pockets. It certainly raises the question why sellers continue to be willing to sacrifice trade location.

And that leaves bonds. The trade that longs have been able to stick with and consistently been rewarded for doing so. It sure felt that they had overdone it last week. It had all the earmarks. But only if you are being tactical.


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