There were plenty of mixed signals to end the holiday-shortened trading week. The most important, however, was the somehow unexpected non-farm payroll decrease of -465k and new unemployment claims of 614k.
|Unemployment Rate||NF Payroll Net Change||New Unemployment Claims|
There is a serious cognitive dissonance in modeling and reporting of employment statistics. Reality lost 107,000 more jobs than predicted, yet the unemployment rate was 0.1% better than expected, all while the new unemployment claims were essentially as forecasted. Seriously? The numbers are essentially meaningless on their own. The forecasting bias has more economic and trading value.
10-day global index returns have turned positive. Most markets were open on Friday. European equities were mixed, but in Asia, they were mostly up. The winners were the developing world, and the losers were the developed world. Expect this trend to persist.
China continues its torrid pace of growth and recovery. It is up +85% since its October low. We’re going to need China to perform like this to drag us out of the abyss.
Still, since June the 1st, only 9 of 22 major global indices have posted positive results. The results are top heavy, though: the big gainers were a lot larger than the big losers (+15.74%, +8.23%, +3.14% vs -5.69%, -5.23%, -4.11%). This is decoupling. That said, decoupling won’t occur if the entire world is in the toilet – everyone will suffer in that case. The process will be most evident when you compare performance over a long stretch of time. Daily beta is still typically 1.0-1.5.
I will continue to not argue with China. Its price has been riding at the edge of 2 stdevs, and it has now closed twice in a row above its 2 stdev bollinger band. This means that China’s gains in the past few days are even more rapid than what is normal in the contemporary. The question is: can we expect China to maintain this? I suspect not, but the answer likely is in liquidity theory. It probably explains the performance difference between China (+15.74%) and the Dow Industrials (-2.91%) since June 1. I cannot easily verify this, as I can’t find Chinese equity supply on a cursory search. Think about it like this: money base globally has been skyrocketing. As all of the dollars, yen, yuan and euros try to find homes for themselves, if they went into global equities equally — ignoring everything else — prices would go up as a function of supply. Equities world-wide boomed. As the developed world banks needed to raise cash, they added a tremendous amount of new supply with new stock issuance and competed with the demand by new bond issuance.
Trimtabs founder & CEO Charles Biderman says that sideline cash seems to be nearly exhausted. What about in Asia? The massive saving rates in China and Japan, they theoretically could maintain very significant demand on their equities. This trifecta of extreme savings, rapidly developing economy and favourable supply conditions make China the place you want to park your money while it is on the up-swing (which will likely be the majority of the next 10 years). On the same token, I really doubt the Chinese economy and stock market will continue to boom if the developed world is completely falling off a cliff.
My prognostication is that China is a great momentum play on both sides, and right now, they’ve got upward momentum. Maybe they’ve got a little too much for the moment given that nobody else does. Watch this carefully, and be ready to jump off the train.
Implied volatility as measured by the VIX is now 27.95 while the S&P 500 is at 896.42. Consider that it was 32.68 while 911.97. Options participants clearly think that equities pose less of a risk than they did on June 16th. They’re usually right. Max pain on SPY is at $92.00. These things make me modestly bullish about the very near-term.
Building upon my arguments on Saturday, global markets have become even more opaque for me. Despite cash gaining against assets all around the board yesterday, the number of global indices with a positive 2-week return has turned positive (the first time since the 15th). That said, this is not a short-term timing indicator — rather, it is measure of momentum globally. It also does a much better job of predicting high-beta markets than US stocks.
Volatility indicators outright are telling us to buy. I discount the VIX for past movement, however, and the reality is that we still have a very large risk overhanging priced into options. Additionally, as I mentioned in my previous article, the VIX is at the same level it was just before the Lehman and Bear collapses. No-one knew what was going to happen, and volatility measured at tops is always massively understated.
The Birinyi OB/OS indicator, which measures how many S&P 500 stocks are more than one standard deviation above or below their 50-day moving average, started June at +413. In the past few days, it’s gotten as low as +5, but it snapped back yesterday to +275.
Charles Biderman, the founder of Trimtabs, had a great interview on NBC on June 18. His statement was that insider selling and corporate actions were all adding a glut of new supply to the market. At the same time, sideline cash seems to be close to exhausted.
That we have had a pause in the market is no real surprise, as a consequence. Reggie Jackson wrote this morning in his fantastic newsletter about the growing influence of programme trading. The people left holding the bag are almost always retail investors, and the market seems to have been given enough bid support to be kept high to get them in on the action. Now that they are committed, add in the new supply, and we are trading on very thin bid support.
Prices are set at the margin, but when the bid depth at the margin is very thin — which it is — things can move very quickly. Momentum has dried up on the upside, and the bid support seems largely maintained by — as Zero Hedge likes to put it — some SPARCstations in the closet of some investment banks.
I leave you with some Oscar Peterson.
- Bitumen & Bolts
- What do new believers buy?
- Birth of the Perma-Bear
- Fundamental Playbook for 2010
- Reflecting on Obscure late 19th and 20th Century Composers
- End of Year Strategy
- Global Market Overview
- Themes & Forces for 4Q
- Observations & VIX Interpretation
- State of the Global Markets
- Another Bounce To Buy
- Answer Unclear; Try Again