Most equity indices are in a nice uptrend with some moving into extreme overbought territory, which combined with the collapse of the VIX sets up the potential for a nice little correction, or, at least, a period of getting horizontal. Google’s miss and stock tank and the ugly action in Apple on Friday may be a leading indicator of some future weakness. Or it could be just some big stock rotation, into Mr. Softee, for example.
Nevertheless, the markets have been trading like they’re extremely short and long only money significantly under allocated. Unfortunately, the new market microstructure — i.e., lack of liquidity – does not allow those offside to easily square up and get to where they need to be without much pain.
Take a look at the 60 minute chart of the Euro last week, for example. Very few red bars to allow the shorts to cover. Just a nutcracking grind higher all throughout the week.
Ditto for the S&P500, which traded in a similar pattern, opening on its low Tuesday and closing at the high on Friday. Earnings have been a disappointment but investors want yield and stocks over zero percent cash. The Power of Zero is winning the battle over fear, at least, for now. As it has been said, “John Bull can stand many things, but he can’t stand
two zero percent.”
The dollar is looking a bit wobbly around the trend line and crude oil looks like its rolling over. Nattie continues its epic collapse.
We’ll be buying equity weakness, especially on Greece and Portugal noise. These restructuring deals are never easy, and, of course, there will be some vulture funds holding out. We’ll worry if we start to see a sustained blowout in Italian spreads.
Remember, it’s the Year of the Draghi! 恭禧發財
(click here if charts are not observable)