Yellen, Are You Fully In The Price?

Includes: DIA, QQQ, RINF, SPY
by: Polemic Paine

Yesterday started well for this born-again bear. Commodities continued to roll over with oil and copper indeed leading the way, with European markets not taking long before they got the hint and headed south. The FTSE hit levels about 100pts below its overnight future equivalent highs. Oil was off 3% when the US markets opened, and the US markets opened on a down wave. But the subsequent price action in US stocks was not really melting. Of course, we then had that Yellen speech which stamped a great big dove over the recent hawkish tweakings of various other FOMC members.

The one takeaway from Yellen, more than her being hawkish of dovish, is that she was decidedly "stockish".

I'm now going to say something sacrilegious amongst us macro folk - I did not listen to nor read one word of what Yellen said. I just watched the price... well, I watched lots of prices. And here's why. I just cannot compete in speed of comprehension, analysis or action against the rest of the players in the market. It's not that I am too old and senile - it's because I am a human and not able to keep up when the actions in the market are conducted by robots. These players can parse text at near the speed of light, deduce the tone using key word sampling and then act on it. So, what chance have I to get ahead of the price before it reflects the new information? Very little, if the information is binary or relatively simple. So instead, I watch the price, and that tells me most of what I need to know. I will, later on, probably read what was actually said and see if there is any undiscovered discarded morsel of germ in the chaff discarded under the dining table of the algos, but let's be honest, there probably won't be.

The "beat the algos" game is easier when it comes to the ECB. The complexity of the "unconventional" policy actions does need a human mind to unravel the non-price dependent linkages to the economy. Here, we stand a chance. But with FOMC type statements, it may be easier to play the counter-moves to the knee-jerk ones.

In the case of today's new Yellen information, we had the spike, we had the second spike and then I assume the information is in the price. Granted, there are good old-fashioned funds which will it down at their monthly asset allocation meetings and discuss the new information and act upon it with respect to rebalancing, but they are now in the minority and normally have missed the bulk of the price move. I would be happy to say that any modern-day player worth their salt would have reacted to the Yellen information by now. So that's done.

So, I examine the price of stocks in the context of the other factors that appeared to be driving them in the morning and deduce that, not suprisingly, the bulk of the action was in the US markets. No genius involved in deducing why. But it was interesting to watch the response of oil, copper, European stocks, and FX.

Oil ripped higher off some new lows, but couldn't hold it for long, and still looks offered. The same with copper. As these are the two puppies that have been so influential in the original market woes and the subsequent comfort bounce, this is notable. AUD and AUD/JPY meanwhile caught me out through the morning's down moves by really not joining in. A counter-clue there. FTSE made new recent lows but bounced, yet is now looking as though it's the higher part of a new lower range, rather than the base of a higher range. DAX is caught in an EURUSD versus global stocks move, and is not really showing any general love from Janet. The rates markets have liked it, though, with USTs and Bunds both enjoying the ride.

So here I am thinking out loud. The markets and relative inputs into price were looking shakey into Yellen's announcement. Since then, stocks have rallied, and the US ones are threatening recent highs again. This I take on board, as it challenges my "things are rolling over", "born again bear" theory of last week. In these markets, you can be as dogged as you like about your fundamental theories, but at the end of the day, you are paid by price not on academic peer group review.

But against this, all the risk ducks are not lining up. The peripheral ones I am watching could well turn and join the flying formation, but as yet, this doesn't look like a full set. Being so close to my stop levels on my medium-term positions, I am not going to towel-chuck to the upside just yet; instead, I am going to leverage up some larger short term shorts with tight stops. As I consider us at "do or die" levels, that justifies "do or die" trading. Well, not die, but larger risk than is usual for relatively small moves.

By the time you read this, my stops may well be done, and you'll have have started laughing long before you reached this line, which was written with SPX at 2051 (market price, not my stops - they are above 2060 and dependent upon other indicators being in line too) .

One last added factor to the short loading rather than longs - the market, especially the US market commentary, cannot cope with grey (as we saw with their interpretation of Europe a few years back). It has to be black or white, and the Fed only looks at the last thing spoken by anyone. So last week was tending more hawkish than the FOMC, and now we are back to expectations of total dovishness. The truth lies in between. But market narrative doesn't do "in between". That's actually one reason I chose the short side to load up on rather than the long, on the belief that the next oscillation of Fed expectation has to be back from this current uber-dove puff.

And finally, having embarked upon the series at last, I ask fans of House of Cards - Does Yellen have a Tusk?


Addendum 8.30 am London Time, 30th March, 2016.

That didn't take long. An explosive European open leaves me stopped out of all shorts. I will sit back and watch the fun from a distance as I de-stress and spend time in pursuits that don't involve staring at price-covered screens all day.

Have fun out there, I'm planning a long lunch.