We are on the cusp of a possible regime shift post-CPI but until we break some of these 200-day moving averages, I’m keeping an open mind.
EURUSD and SPX are the main ones but there are plenty of others within a day’s range or two.
Khalil Gibran as a kid
November 16, 2022
Many important markets are tickling their 200-day moving averages. In a year where trend following has done well and most markets have trended, this is important. I have bene highlighting the 200D in EURUSD but note the 200-day is coming up in stocks at 4074.75. The 200-day is exactly where stocks peaked in August after the mega short squeeze mid-year. See here:
S&P futures vs. 200-day moving average
The overall picture for macro can often be summarized by what side of the 200-day most markets are on. With the USD and stocks both on the tightening FCI side of the 200-day, one can still reasonably argue the trend is still that way and we don’t know for sure yet whether this is a major regime shift post-CPI or simply a correction. A daily close above 1.0420 in EURUSD and above 4071 in SPX invalidates the bearish trend in both and significantly raises the odds that this is a major macro regime shift to a weaker dollar, lower yields and an end to the powerful trends that dominated 2022.
The US economy continues to hum along, bolstered by nominal gains in spending and robust government and service sectors. The tech wreck is getting a lot of press but it’s worth noting that, as Sam Ro points out here, tech is a tiny contributor to US employment. While it could be a lead indicator, it often is not, as you can see here:
Remember in April 2022, when Amazon said they had overhired and there was a run of layoffs at unprofitable “tech” companies like Carvana? Tech layoffs can sometimes be headline-grabbing but then fail to show up in the overall data as the service sector labor market remains in shortage. Then again, this could be 2000/2001 all over again as bubble-driven madness lead to malinvestment and overhiring. For now, the jury is still out. And GDPNow is comically high as you can see in the next chart. Note the economists down there and the GDPNow way up there.
It’s the time of year when banks start to publish their “Trades of the Year for 2023.” Here’s one I like: Long NZDCAD. For an audio/visual explanation, you can watch my YouTube with Alf and Andreas filmed last Tuesday. Summary:
But whatever the caveats, the China credit impulse picking up right in time for reopening is a positive, procyclical global growth factor and helps any bullish Asia ideas on most extended time horizons. In the short term, it means nothing.
The entry point is annoying here because NZDCAD has rallied 5% in a straight line since that video was recorded. Then again, if you’re thinking on a 6-month or 12-month time horizon, it’s fine. The 2022 high of 0.8800 is a good target for a 6-month view with 0.9200 more ambitious. If you’re patient and would prefer to buy a dip, 0.8000 is the support now. 1-year 0.8700 digital call is around 25% or you can do 0.84/0.88 call spread.
Another strategy would be to wait for some bad news on China reopening and use that selloff to enter at better levels. Or, use a simple above/below the 200-day strategy in spot. It looks like we could close above that today. The risk with the above/below strategy is you get chopped up if bad news comes out, but the benefit is that you are long above 200-day and flat below, so you won’t get hurt too badly unless spot jiggles around for a prolonged period. And you don’t miss it if it continues moonward. I am not putting the trade in the sidebar because it’s rather big picture (6-month to 1-year time horizon).
As the primary question for macro remains “Have we switched out of the dollar-bullish, tightening FCI regime?” another variable to watch is EURUSD option skew. First, here’s the chart of the 1-month, 25-delta risk reversal. It shows the market’s preference for EUR calls or puts.
You can see in the chart that we have been in a persistent regime between -0.75 and -2.00 where the market is paying a premium for EUR puts. A break up to the old zone (closer to zero, where puts and calls are the same price) would be another sign that the EU Energy crisis, bullish USD, war fear regime has expired.
Speaking of “what regime are we in?” This table of the top 10 companies in the world by market cap makes for an interesting scan. The dominance of US Megatech is reminiscent of Peak dotcom and even peak Japan when one industry and one country ruled the table. Trees do not grow to the sky. The Great Rotation out of tech and back into the real world (energy, health care, etc.) could run for years. Meta, Tesla, and Nvidia could be the Cisco, Lucent and Intel of this cycle. Stocks that were “of the moment” but wildly valued and facing heavy competition or falling demand.
The 1990 and 2007 leaders are pretty much all gone at this point while some US stalwarts like Microsoft have maintained dominance for decades. Anyway, it’s a fun table and a good reminder that companies come and go.
Have a profound day.
By Khalil Gibran
—
Your children are not your children.
They are the sons and daughters of Life’s longing for itself.
They come through you but not from you,
And though they are with you, they belong not to you.
You may give them your love but not your thoughts.
For they have their own thoughts.
You may house their bodies but not their souls,
For their souls dwell in the house of tomorrow, which you cannot visit, not even in your dreams.
You may strive to be like them, but seek not to make them like you.
For life goes not backward nor tarries with yesterday.
You are the bows from which your children as living arrows are sent forth.
The archer sees the mark upon the path of the infinite, and He bends you with His might that His arrows may go swift and far.
Let your bending in the archer’s hand be for gladness;
For even as he loves the arrow that flies, so He loves also the bow that is stable.
—
From “The Prophet” (1923)
The book is in the public domain and can be read here.
