The Jury Is Still Out on Current Market Wobbles

It's all looking more than a little wobbly Wednesday morning. After Tuesday's solid 10 year auction helped stem the bloodflow from the execrable consumer confidence figure, equities managed to put in a fairly "blah" close, which suddenly seems like the new "high volume percent and a half melt-up."

The canary in the coal mine for the current market came from, of all places, Australia. Quarterly CPI was released a bit higher than expected; given the recent AUD love-fest and the swirling focus on RBA tightening, this surely led to a nice rally in the Oz, right? Not so fast, my friend. Of all the flamingos out there, AUD is surely among the biggest, given that there is apparently nothing wrong with it. Or maybe there is. The Aussie banking sector, which has largely flown under the radar during the entire crisis, apparently has a few skeletons (or at least turds) in its closet, as NAB's earnings report was an absolute shocker. The AUD has been spanked as a result, which surely must tell us something.

Meanwhile, European banks have continued their descent down the lift shaft Wednesday morning, with Irish banks grabbing the morning's "limelight." It's been a while since financial stability has been any sort of focus, but it is pretty striking that every morning this week, Macro Man has been serenaded with comments like "ING down 20%" or "Bank of Ireland down 15%." The European banking index doesn't look any better than the BKX; given the relative lack of pain taken by European banks, one could easily argue that the downside for the SX7E is greater. [click images to enlarge]
And w(h)ither the euro? It's hard for Macro Man to figure out whether this just a flamingo-y position squeeze, the by now-usual month-end jitters, a reaction to a possible change of Fed language, or a Leftback-style "Big One."

What's interesting to note is that amongst the cosmic background radiation of the DGDF trade, there have been signs of a vulnerability to a dollar rally. If we overlay EUR/USD with the skew in 1 month 25d risk reversals, we see that for the first half of the year the correlation is quite high. Over the last few months, though, even as the dollar was going down the drain, the riskies came off ; they've actually been bid for euro puts for most of this month. Again, whether that's a canary in the coal mine or prudent hedging remains to be seen, but it is certainly curious.

Overall, Macro Man's expectation of higher volatility trading conditions is looking prescient (or at least more accurate than this week's directional calls). The last several months have seen month-end wobbles, which have swiftly righted themselves once the calendar page flips. With the Fed, NFP, and G20 looming, the jury is still out on the current wobbles. Will markets prove to be Weebles, or Michael Spinks?

Comments

[Mad Hedge F...:]

Not here. In view of today’s dreadful market performance today, I am repeating my GLOBAL RISK ALERT issued on October 14. Every asset class, including stocks, Treasury bonds, currencies, commodities, and precious metals, got slaughtered across the board today. The liquidity surge may be taking a pause. Keep in mind that if you are running big longs here, you are swimming at the deep end of the pool. When everything is working, and my portfolio is firing on all 12 cylinders, I pinch myself and ask “Is this real? What can go wrong?” I’m reminded of the slave whose task it was to remind conquering Roman generals “All glory is fleeting.” Virtually all of my recommended core longs in gold, silver, Canadian, New Zealand, and Australian dollars, Brazil, Russia, India, South Korea, Taiwan, Vietnam, and junk bonds are at or near highs for the year. I called the bottom in Natural Gas within 40 cents, and mercifully baled on my one short in US government bonds, the TBT. What we are seeing is a global surge in liquidity as cash emerges from the bomb shelter, squints at the day light, and then rushes to buy the first thing it can find. Everything is going up, regardless of fundamentals. It is the proverbial tide that is lifting all boats. You can make a lot of money in these conditions, but there is no way of knowing if this will last for one week, or another year. But they can go on much longer than you think. In the last two liquidity driven markets I traded, Japan in the eighties and NASDAQ in the nineties, fundamental analysts railed against the tide for years, claiming that stocks were overvalued, each call getting their office moved ever closer to the elevator and men’s bathroom. When someone finally did throw the switch on these markets, it got dark amazingly fast. Tokyo went out at an all time high on the last day of 1989, and then dropped a staggering 45% in January. NASDAQ plunged just as fast from its 2000 top. The one thing we can all be certain about is that the survivors have vastly improved their risk control after our recent crash. Make hay while the sun shines, but keep your finger hovering over that mouse. The level of risk now is definitely much higher than it was in March. When the next real downturn starts, it could resemble a flash fire in a movie theater.

Oct 28 12:18 PM

[Michael Clark:]

Nikkei, BKX especially look weak. SSEC rally back to old high seems destined to fail and continue bear-pattern decline.

seekingalpha.com/insta...

Oct 28 01:38 PM

[Barking:]

so Mad....Im confused...are you recommending to take profits here....or stay/get fully invested ?


On Oct 28 12:18 PM Mad Hedge Fund Trader wrote:

> Not here. In view of today’s dreadful market performance today, I
> am repeating my GLOBAL RISK ALERT issued on October 14. Every asset
> class, including stocks, Treasury bonds, currencies, commodities,
> and precious metals, got slaughtered across the board today. The
> liquidity surge may be taking a pause. Keep in mind that if you are
> running big longs here, you are swimming at the deep end of the pool.
> When everything is working, and my portfolio is firing on all 12
> cylinders, I pinch myself and ask “Is this real? What can go wrong?”
> I’m reminded of the slave whose task it was to remind conquering
> Roman generals “All glory is fleeting.” Virtually all of my recommended
> core longs in gold, silver, Canadian, New Zealand, and Australian
> dollars, Brazil, Russia, India, South Korea, Taiwan, Vietnam, and
> junk bonds are at or near highs for the year. I called the bottom
> in Natural Gas within 40 cents, and mercifully baled on my one short
> in US government bonds, the TBT. What we are seeing is a global surge
> in liquidity as cash emerges from the bomb shelter, squints at the
> day light, and then rushes to buy the first thing it can find. Everything
> is going up, regardless of fundamentals. It is the proverbial tide
> that is lifting all boats. You can make a lot of money in these conditions,
> but there is no way of knowing if this will last for one week, or
> another year. But they can go on much longer than you think. In the
> last two liquidity driven markets I traded, Japan in the eighties
> and NASDAQ in the nineties, fundamental analysts railed against the
> tide for years, claiming that stocks were overvalued, each call getting
> their office moved ever closer to the elevator and men’s bathroom.
> When someone finally did throw the switch on these markets, it got
> dark amazingly fast. Tokyo went out at an all time high on the last
> day of 1989, and then dropped a staggering 45% in January. NASDAQ
> plunged just as fast from its 2000 top. The one thing we can all
> be certain about is that the survivors have vastly improved their
> risk control after our recent crash. Make hay while the sun shines,
> but keep your finger hovering over that mouse. The level of risk
> now is definitely much higher than it was in March. When the next
> real downturn starts, it could resemble a flash fire in a movie theater.

Oct 28 01:46 PM