Tuesday, September 25, 2012

Where IS the rebound?

Haven't posted in a long time.

I will try to write a quick one, so bear with me if the ideas don't fully combine into cohesion.

- On the SPX we're at high RSI levels on the daily, weekly and monthly charts.
- On the SPX daily MACD, Stochastics look bearish to me.
- On the SPX daily the RSI trendline has been broken and from a very high RSI level.
- On the SPX Bollinger we're still very close to the upper-bands on daily, weekly and monthly basis
- Implied volatility is very low in Equities and FX
- Credit spreads (corporate and sovereign CDS!) are very, very low.
- Realized volatility has been very, very low.

Now fundamentally:
- When we had QE1, QE2, OpTwist 1 SPX earnings growth was on average healthier. Right now we're looking at 3Q12 YoY being negative
- When we had QE1, QE2 and OpTwist 1 markets were oversold, multiples were compressed (higher earnings and lower asset prices)
- Top-line revenue has missed in the last 2Q12 earnings season 64% miss / 36% beat, while bottom-line actually beat ~62% x 38% miss or so (can't remember). Trailing trend doesn't look too sharp.
- European austerity wasn't as deep as it is running right now.
- Chinese growth was better than it is right now.
- There was no US Fiscal Cliff, as large as it seems right now, being expected.

My thought process here expected better economic indicators for August and September considering the rally started in late July after Super Mario's bumblebee speech, FOMC's very dovish posture, BOJ's attitude and all the easing that already occurred in many regions/countries, but so far I am not really convinced the rebound is firmly in place that warrants buying at current market levels.

Let's go through a few economic indicators now instead of focusing on market price signals:
- recently released Dutch producer confidence hit fresh new lows. This is a very open economy, trading hub in Europe. Like Belgium whose confidence numbers are struggly to leave recent bottoms.
- French composite PMI made new lows, bringing the Eurozone composite downward with periphery's PMIs even though we saw a large uptick in the German data.
- The German PMI rebounded sharply, but curiously enough, the IFO made fresh new lows, including its expectations component.
- US Jobless Claims 4wk average is at 7-week highs.
- US Emergency + Extended Benefits, YTD, are down around 1.4mln while 2012's NFP additions total some 1.014m. So far not a lot of income growth can get out of that.
- The latest US Industrial Production, Core Retail Sales and Employment #s were very poor.
- Markit US PMI was lower than the previous even tho we saw a major rebound in financial assets and reduction in risk-premia, etc.
- The Chinese Markit PMI budged only 0.2 and is still in deeply negative territory. Output reduction was barely offset by important New Orders and New Export Orders which showed better readings.
- Yes, Taiwanese Industrial Production in August was pretty strong, better than expected. That's a plus as this is a very open and cyclical economy.
- But grobal growth has still to improve. August exports in Brazil, South Korea, Eurozone, China and many other spots are yet to show strong signals of a rebound.

OMT in Europe, QE3 in US, greater easing by the BOJ, etc helped a great deal bringing markets to current levels.

What I am now afraid is that pushing it higher will cost more, much more than market expect unless there's a pullback or a longer period of consolidation that will leave time for economic growth to show its teeth.

But I wonder how fragile charts look and how brave will be dip-buyers in case markets fall another 2-3%.

I can easily spot a 2-3% drop in equity prices making people uneasy and actually bringing all the squeezed-out bears out there.
I can easily see a much larger drop in risk-asset prices if the next ISM comes lower than expected and below 50 or the US Non Farm Payrolls come in below 50k, with weekly Jobless Claims climbing above 400k or so.

There isn't fiscal ammunition in Europe to actually turn around much of their depressive economic state and in a balance sheet recession downward spirals are very dangerous.

Food for thoughts.
Only had 15 minutes to write this as I am now heading to a spanish bar for a few drinks. And am late already.

Sorry for not being able to update trades/portfolio, but that won't be possible in the foreseable future as time has been as scarce as deposits in spanish banks.

*Disclaimer: charts and data are presented as I receive/see them. Sources are usually not checked for validation and my own calculations are of 'back of the envelope'-type. I am aware that some math that I do myself might be wrong and/or misleading to some extent. In financial markets the rate of change of economic data is often more important than the actual level and the perception of 'what is priced in' is more important than 'what is actually going to happen'. This is actually the way people pick entry and exit points. So... yes, sometimes you might say 'This guy is an idiot, this is way wrong!' with a high conviction, being right. Not to worry. Markets are made of expectations and the clash of conviction between its participants. Portfolio managers know that being an idiot is sometimes profitable and being smart is often a bad choice. It is all reality, sometimes good, sometimes bad. By the way: corrections to my analysis and intelligent debate is welcome. theintriguedtrader AT gmail do com

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