RISK APPETITE BEING SUCKED HIGHER
By Rohan at Data Diary
Risk appetite has been ticking higher this past week. The price action in isolation looks pretty positive. The question that is troubling the synapses is whether equity markets are poised to thrust higher once more – egged on by the monetary cattleprod of the US and a seeming stabilisation in China’s growth dynamics.
Certainly the penultimate rejection of the S&P500 off 1040 set the scene for a short squeeze of material proportions. Given the ramp up in volumes that accompanied the selloff from the April highs, it’d be reasonable to expect that there’d be a block of nervous ‘shorts’ at levels not too far from here. It’ll be interesting to see what the tea-leaves say about who sold/bought in the Flow of Funds data next week, but the 1130 level is looking like a pretty tasty target.
For the moment, it’s probably wise to respect the price action. It’s a reasonable probability that we run through 1130 while under the influence of that big can of nitrous oxide. With declining participation, any buyers ‘on the break’ will be that much easier to suck in. Witness the ever vanishing activity in CBOE equity options.
Still my read of the bigger picture has this run-up as a position driven head fake. Momentum has turned lower since the April high that marked the exhaustion point for global stimulus mark I. It’s looking increasingly unlikely that successive rounds of government intervention will be as wildly successful as the first. While the leading indicators are tracking lower, so will the market.
The other factor tugging at the market’s tail is that the logic for risk spreads to widen remains compelling. The Fed may be the fat kid sitting on the longer end of the Treasuries market, but ultimately the other end of the risk plank can’t join in as the economic malaise works its way through earnings forecasts and default probabilities. This rally should meet its maker over the next couple of weeks – just a matter of whether it can convince him that all those calories can’t be good for you.
Financial assets are utterly divorced from real economic activity. I am simply in awe. It is like watching NASDAQ 2000 all over again. The only explanation I can come up with is that most financial assets are professionally managed in long only vehicles, and they gotta get paid this year. It’s sooooo close to year end…..
My favorite is amazon. Pe of 60. Cat is also pretty shocking. Pe of 30. Maybe all the new infrastructure stimulus that won’t get passed will be used to buy earth movers on amazon?
Tell me what shock is out there that will materialize to derail equities or cause a major downward swoon. We have had lackluster economic data for months, European sovreign debt issues are well understood and China appears on the surface to have avoided a hard landing….. and the market will not break lower and it actually inches higher. Just asking what you think is the greatest risk that market is missing….
I agree that the market has taken a lot of fundamental “shocks” in relative stride, and has managed to rebound more strongly than I anticipated. But maybe that just goes to show that the market is driven by technicals and not fundamentals. Cause you know that as soon as the markets have two down days in a row, the gloom and doon crowd will clog the airwaves again.