Short EURUSD

Stocks

A few technical setups are forming that suggest caution on equities. I don’t think it’s quite time to get short yet, but as this week progresses, it might be. First of all, yesterday we saw a VIX UP, SPX UP day, and that tends to be a moderately bearish indicator.

It generally reflects a scenario where call buyers are getting busy and paying the highs. It’s a sign of ebullience. Note, of course, that Mondays often see the VIX rise due to calendar effects. The VIX is a rolling 30 calendar day calculation and there are more trading days in the 30-day window if today is Monday than if today is Friday.

Still, whether you include Mondays or not, VIX UP + SPX UP on the same day leads to worse forward performance than the other three quadrants. Average 20-day performance of SPX from 1990 to now is 0.7%, while that figure is 0.3% after VIX UP + SPX UP days. Not bearish, but less bullish.

Also, we are making new all-time highs even though only a small group of stocks is making new all-time highs. We had 79 52-week highs yesterday and 57 52-week lows for a net of +22. The average reading on all-time high days is +150.

The table here shows forward performance data of SPX after it trades an all-time high, conditional on the 52-week highs minus lows. Note that while buying stocks at the all-time highs is known to yield excellent 12-month returns, the 20-day returns are below average. This is made more extreme when the 52-week high/low figure is well below average. I used a filter of <50 (current figure is 22) and the degradation of performance is somewhat linear as you lower that bar.

Again, median performance is flat, so this isn’t a raging bearish equities situation. But the two factors combine to make me think selling calls against longs or selling call spreads on things you believe are overbought/stalling makes sense.

I hesitate to go short as we tend to rally into May expiry and mid-month, then sell off after, so I want to be prepared to go short but not yet. Maybe Friday.

It is common for stocks to rally into mid-month on expiry and 401k payrolls flows (many people get paid on the 15^th of the month and have automatic payroll deductions that go into stocks).

Below is the average performance of SPX by day of the month back to 2000.

To summarize all of the above: I am ready and able but not yet willing to go short stocks. If you have any particular names you think are good setups for shorting into Friday, let me know! I always like ideas.

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Inflation and EURUSD

We have been in a regime where 3% is the new 2% and with the release of today’s CPI figure, I figured I would have a quick look at the Fed situation. PCE is the target, but since we got CPI today, I figured I would have a look at all four of the major inflation indices and their behavior compared to target since 1980. Here is the chart.

I suppose you could say that the average inflation targeting approach has been a success as there is symmetry between missing one way for seven years then missing the other way for six. Or, maybe the reality is that Federal Reserve monetary policy has much less impact on inflation than they think and really inflation is driven by fiscal. And they didn’t push back on the fiscal in time, so here we are.

This chart captures the regime shift nicely. I just added the monthly misses over time.

As mentioned yesterday, the most interesting regime shift for markets and macro traders will be if the market starts to price in Fed rate hikes. This will light a fire under the USD and FX and bond market volatility.

I think this is an interesting and unambiguous comment from a relevant Fed member.

*GOOLSBEE: WE HAVE AN INFLATION PROBLEM IN THIS COUNTRY

I suppose you can argue (see next chart) that we are on the front edge here of pricing Fed hikes. The numbers are tiny but we are certainly on the hike side of zero now. Also see chart further below.

So is it time to get long USD? I think so. Short EURUSD here with a stop at 1.1867. Simple spot trade, I think. I have outlined in past notes why I think EURUSD is best: U.S. stocks outperforming and U.S. economy substantially outperforming Europe. And now maybe, just maybe, the market is going to start pricing Fed hikes.

Is this chart definitive? Not really. But I don’t want to wait around for it to be definitive because by that point EURUSD will be 1.1650.

Have an ice cold day.

Patrick

A Canadian team has not won the Stanley Cup since 1993. That is absurd.

good luck ⇅ be nimble