Below courtesy of extract from a.m. edition of Rareview Macro’s “Sight Beyond Sight”… MarketsMuse Editor note: notwithstanding the ‘caveat’ immediately below re: focus on FX, for those who are chewing on Apple ($APPL), MarketsMuse editorial team recommends a full read of below
An astute friend and mentor once said: “Deciphering the tea leaves of macro is an art developed over time, not purchased in an online tutorial”. In our humble opinion, today’s edition of Sight Beyond Sight is a good example of reading the tea leaves.
The majority of today’s note is related to Foreign Exchange but has implications across all assets going forward. If you are not a dedicated FX investor and not interested in making or saving money read no further.
On a risk-adjusted return basis the overall trading ranges across regions and asset classes are narrower than normal. This is prime example of indecision or neutrality after a strong relief rally in risk assets, especially in Equities.
The one outlier is the US Dollar, which continues its march higher towards regaining its status as an “asset” currency once again. The US Dollar is stronger relative to 9 of the 10 currencies in the G10.
The Dollar-Yen (USD/JPY) and New Zealand Dollar (NZD/USD) both broke key technical levels overnight – the Yen as a result of Japan’s trade deficit widening by more than expected, on an unexpected rebound in imports, and the Kiwi because of another disappointing milk auction that will weaken the country’s Terms of Trade, as well as negative Producer Price Index (PPI) data, and a growth downgrade by its Treasury yesterday. Continue reading →
Below are two charts of the ratio of the S&P 500 (symbol: SPY) to the Russell 2000 (symbol: IWM).
The first chart shows the performance of the ratio (i.e. long SPY vs. short IWM) on the top each time the relative strength index (i.e. 14-day RSI) reaches ~70. This ratio is currently overbought.
Going back to 2009 there have been ~10 points in time where the RSI reached ~70 (i.e. overbought) using the standard 14-day period. The average gain in the ratio is ~7.7% vs. the current gain at 6.6% off the July 2014 low.
The second chart shows the Fibonacci retracement levels following the GFC. The 61.8% FIB level is 1.2%. That happens to coincide with the average gain (i.e. ~7.7%) of the last 10 times that coincided with a ~70 RSI.
We have placed an order to buy $20 million of IWM and sell short $20mm of SPY at this 61.8% retracement level. Out stop is the 76.4% retracement level which is ~2.7% above the 61.8% retracement level. That would equate to a loss of ~$540k or ~50 basis points of the NAV. As a reminder, we refer to 50 basis points as one unit of risk.
It was in early 1849 that the director of the Mint at Dahlonega, Dr. M. F. Stephenson spoke from the steps of the mint building in a futile attempt to convince the miners to remain in Georgia to mine rather than to flock to California to chase what might be an impossible dream. “There’s gold in them thar hills, boys,” he shouted as he pointed at the hills surrounding Dahlonega.
Below excerpt courtesy this a.m.’s edition of macro-strategy newsletter “Sight Beyond Sight”
Today is the first time in recent memory that investors are waking up to a meaningful gap down in US equity index futures.
By virtue of the fact that S&P 500 futures were down ~1.0% at one point this morning, the 57-day streak with no 1% up/down move in the index level has finally been broken today and that is clearly a talking point.
The other interesting observation for US equity participants is that Russell 2000 futures (symbol: RTAU4) are currently down -2.2%. That is much more than the German DAX -1.6%) and commensurate with the weakness in the Spanish IBEX (-2.5%) and Italian MIB (-2.15%) indices.
Given that investor sentiment is also very fragile at the moment, and despite this being a very immature approach to investing and nearly always misguided, the fact is a 2-3% move lower in the index always triggers calls for a larger 7-10% correction.
“Despite bold central bank decisions over the last 48 hours, the real narrative is not what most investors walking into their offices today believe it is.
After opening up over 2%, the Turkish stock market gradually moved into negative territory, while the Turkish Lira (USD/TRY) has reversed almost the entire move lower observed following the greater than expected interest rate hike.
This is very important to recognize and highlights that there is a full blown attack now underway on the Turkish Lira.
Speculators will not be deterred by a 12% interest rate, especially as history is littered with these kinds of opportunistic events and the monthly cost of funding a short position is marginal relative to the risk-reward of making a profit of multiple percentage points in a day. Here is the next issue and what you need to know. Before dismissing this thought process you should note that this will be repeated at the upcoming Brazil and Mexico central bank meetings, despite completely different monetary policy profiles. This is a classic sign of how indiscriminate emerging markets are at the moment. ”