• The S&P short trade initiated at 4272 hit the 4010 take profit overnight.
• This bear market rally that peaked at 4327 is remarkably similar to the bear market rallies in ’01 and ’08.
• EU intervention on power prices is something to watch, but hard to interpret without more detail.
• EURUSD downside opens up after 10am tomorrow.
The only day of the week that
forms an anagram is “Monday”.
What word can be made from
“Monday”?
August 29, 2022
First up, the 4010 take profit on my short S&P trade from 4272 traded overnight. That trade (initiated in this am/FX on August 17) was a good trade. As someone who uses technical analysis but is also kind of skeptical of techs at times, I must say combining sentiment and techs with a macro bearish view on tightening liquidity has been an excellent framework all year. Every bounce in EURUSD stops exactly where it should. The S&P 500 rallies stop exactly where they should.
I continue to believe that Powell was mostly a red herring, and the selloff Friday was more a result of topside exhaustion, equity short gamma, a horrendous macro backdrop, and CTA bootfillage at the highs. Sure, 2-year yields went 3.39 to 3.45 on Jackson Hole, so it’s not 100% red herring, but Powell is simply confirming what has been said many times over the past month or so: The Fed Pivot is extremely unlikely. There is no Fed put.
The real story remains the European energy shock, weakness in China, sticky inflation in the USA, and global central banks hiking rates into economic weakness. Fed policy is important but it’s data that drives Fed policy not their utterances or pre-commitments.
What we just witnessed was a textbook bear market rally that was amazingly similar to the bear market rallies in the same part of the 2001 and 2008 down cycles. In both those bear markets, the SPX peaked, dropped 20-30% in around six months, rallied around 20% in 60 days, then peaked again. Here are the charts:
Data in the table. The main thing to pay attention to in there are the two blue columns. Those are derived from the rest of the data in the table and show the striking similarity of this bear market rally compared to the ones in 2001 and 2008. They feel pretty similar too!! The one in 2008 was kind of different as it had a news catalyst (Bear Stearns bailout), so overall this market feels most similar to 2001.
In 2001, you had a tech bubble burst along with serious concerns about Europe and global earnings driving stocks down and the DXY to the moon. The dollar finally peaked in February 2002 when global growth recovered and the China, BRICs and US dollar diversification stories started to kick in. But before that, G7 FX intervention was required below 0.8300 in EURUSD as the market questioned the stability of the newly-spawned EUR. Note the G7 intervention took place September/November 2000 and the EUR didn’t bottom til 2002.
This headline has introduced a bit of 2-way risk to the euro story this morning and pushed EURCHF and EURUSD higher:
*EU PREPARING POWER MARKET EMERGENCY INTERVENTION: VON DER LEYEN
These sorts of government interventions can be important, especially in the context of a market that has been selling EURCHF for weeks and GBPUSD and EURUSD for a few days, but it’s hard to say exactly what the plan would be here. A continent-wide subsidy or something like that could be a large fiscal stimulus, though perversely that would stabilize or increase demand for energy at the cheaper, subsidized price and exacerbate supply problems. More government spending + higher rates = not totally clear what it means for FX. Until there is some detail on the story, it’s just a question mark. We will try to cobble together the details and implications of any emergency power intervention as they emerge.
In the meantime, the micro story in EURUSD is: Month end corporate USD demand today and real money USD demand now til Wednesday. And large options are expiring tomorrow. The blob plot below shows EURUSD option expiries from 0.98 to 1.02 over the next month. I have labelled it with four key points, which I’ll explain below the graphic.
A. Large 0.9900s come off tomorrow (2.5 billion or so).
B. The only other large strike is 02SEP 0.9900s (around 1.4B)
C. Not much next week. It is severely thinned out.
D. Barely anything at all after 12SEP.
Conclusion: 0.9900 remains sticky until 10 a.m. tomorrow, then it opens up. Tons of 1.00s, too. The low overnight was 0.9914 and the 0.9900/0.9914 area is now a triple bottom in EURUSD. I think we keep going lower but I’m flat for now as it could be super choppy for the next 24 hours. And I reserve the right to change my mind.
The Thin Line Between Bold and Reckless, by Morgan Housel. The article is from 2018 but remains highly relevant in this day of pump and dump crazy billionaire geniuses. Have a dynamic day.
Faraday disk, the first electric generator
Monday is an anagram for “dynamo”
A dynamo is an electrical generator that creates direct current using a commutator. Dynamos were the first electrical generators capable of delivering power for industry, and the foundation upon which many other later electric-power conversion devices were based, including the electric motor, the alternating-current alternator, and the rotary converter.
This piece is mostly for people who are interested in backtesting
