A Simply Complex Market
What is really driving the current market
In a Thanksgiving week there was perhaps little for Bulls to give thanks for: US/China tension at the APEC Summit, Apple’s reduced iPhone orders creating a domino effect through the whole market, Oil having its worst week for over four years, and Bitcoin falling over 20%. But then the medium to long term uptrend in stocks, Dollar, commodities and yields has become bit of a pilgrimage just like the Black Friday sales. The question in the near to medium term is whether these represent cheap bargains into Christmas. Historically the answer is yes. This week saw US indices combine both the 1929 and 1987 templates, Yields consolidated in the projected corrective range, the Dollar continue its analogy with the post 2006 tightening phase as indeed does Oil. Why are markets so weak from a 2018 perspective when US fundamentals remain sound and markets are in a seasonally strong period? Sentiment! This week’s newsletter outlines our FITS framework for what is driving global stock markets into year end which is surprisingly simpler than it may first appear. But also introduces an evaluation of what really moves the Forex markets which is much more complex.
The complex FITS answer to recent stock weakness is that the rate of fundamental improvement is slower, intermarket relationships weak, technicals erratic (in ranges) but sentiment dominant yet flaky. The simple (sentiment) answer is because the market knows this is a seasonally strong period full of opportunities for stock and the USD to rally and is therefore front running traditionally powerful rallies … too early.
Indeed, Bank of America’s Global Fund Manager Survey shows funds remain overweight US stocks but slightly distrustful (cash) and underweight Europe and particularly the UK.
“The November FMS shows investors bought Oct correction & increased exposure to US & EM stocks, REITs, and healthcare…but allocation to global tech sector collapsed to lowest level since Feb’09…ominously no signs of investor rotation from tech to “value”, i.e. banks, small cap, industrials, EAFE.” Rotation has remained relatively strong even if the market is starting to show sporadic signs of greater correlations. The reason again is the level of distrust caused by that important deterioration of economic improvement combined with strong yields and therefore sentiment. A characteristic of the last three months has been the ‘unwinding of front-running.’ That is traders and investors have over-anticipated good (or in some cases bad) news and liquidate positions when there has been no follow through. Many of the beat and miss corporate earnings releases actually traded counter-intuitively. The net result is the projected two-way volatility into a stock and yield blowout and a grinding USD top. The market has rightly expected good US earnings and similarly a strong year end most particularly the Thanksgiving to Xmas period and most notably from Black Friday.
Is this Black Friday any different? The shopping event was first named in Philadelphia in the 1950s. Traditionally, the holiday season starts, and retailers offered one-day discounts to kick-start Christmas present purchases. The name is believed to refer to the fact that toy and gift retailers only move into profit (from the red to the black) on this day. However, since the advent of online buying, the event has extended into Thanksgiving Thursday (when happy families make group decisions), and earlier, and in 2005, shop.org invented a new day, Cyber Monday, to extend the special discount period further.
Its importance is not overstated generally within the economy or indeed markets. 35% of annual sales coming in holiday season. Implied volatility in option pricing is, according to Goldman Sachs, too low in many retail stocks, given the likely wild swings as the Black Friday winners and losers become apparent.
Unlike the Chinese analogue, Singles Day on Sunday Nov 11th, where BABA reported a very clear one-day turnover increase of $30.8Bn vs $25.3Bn in 2017, and the stock added 6.39% in a week when NDX fell 2.45%, without any such positive reports, the traditional post-Thanksgiving rally certainly didn’t start on Friday. And although our fractals suggest a bottom is set the following week it remains to be see whether this will happen this year. Adobe Analytics, which monitors the top 80% of online retailers, have now this weekend reported sales 23% up on last year. Indeed an early report from AMZN in the UK (five hours ahead of NY) said they were “on pace” to beat on units, but no further reports were received, and the e-commerce giant fell 1% on the day.
Is this sell off into Black Friday unusual then and hinting at a likely retail outcome or telling us that the market is turning into a much larger decline or crash? This price action is actually normal and fitting neatly into the 1987 ‘Marker’ templates. Traders remember the November-December as do often front run only to be wiped out before seasonality kicks in. This evidenced by the typical short term price action we saw into Thanksgiving that is sufficiently close to suggest the outcome will be the same.
Scope then for a bottom this week in US indices.
… and Gold consequently to range back down.
But it is the Dollar that is less clear cut as a basket showing little cohesion as the Dollar Index ratchets into a top and EURUSD grind out a bottom.
Given the traditionally strong correlation between risk appetite/aversion, USDJPY and US yields the Thanksgiving template supports our Stock, yield and general USD view.
But why? What really drives Forex markets? Talk to a trader and they will tell you yields or rather interest rate differentials as evidenced by USDJPY in the longer term.
Ask an economic student and they will you Trade Balances and they wouldn’t necessarily be wrong as reflected by AUDUSD.
But both of these are not a just function of, but also an influence upon relative inflationary growths.
So who is right? They all are. Just as we focus on FITS for stocks but also forex and commodities, the complexity of comparing two economies side by side in an exchange rate requires a further, arguably deeper, level of analytical framework. It partly explains why more traders arguably use technical analysis more for foreign exchange than other market because it attempts to reduce if not remove the complexity. But keeping it simple is not always easy.
Understanding what is moving a market often appears simple after the fact as we suspect it will appear in a month’s time. But for now it remains simply complex.
Here’s to making the very best.