The Market Is More At Risk Now Than Ever. Oh And Bitcoin May Be Worthless

Originally published by AxiTrader

Market Summary

Stocks in the US rallied in the last couple of hours of trade Friday to end the day firmly in the black but heavily in the red for the week. That late charge higher also impacted other markets with the US dollar and yen losing ground while ironically the stock rally also allowed bond rates to rise again.

Ahem, keep watching bond rates across the globe folks.

Anyway at the S&P 500 was up 1.5%, the Dow Jones Industrial Average rose 1.38% on Friday but both were down around 5.2% for the week on a Friday to Friday close basis. The S&P did bounce from a significant support zone Friday, see below, so the rally might have some legs early next week.

Europe had another bad day having missed the late US rally so the FTSE, DAX and CAC were all more than 1% lower while Asia had a terrible day Friday to end the week. Chinese stocks, in particular, came under heavy selling pressure with Shanghai Composite and CSI 300 off more than 4% while the Hang Seng lost 3%.

The ASX's loss of 0.89% Friday wasn’t too bad really. But even with the US bounce SPI traders still have a fall factored in Monday with the March contract down 28 points Friday. Worth noting for the ASX copper, oil, and iron ore were all lower.

On forex markets, the Aussie gained 0.42% on nothing more than the fact the world didn’t end. Sure it bounced from near an important support zone. But there was certainly an element of week’s end position squaring in the move back above 78 cents. I could say that about most pairs, as well as stocks, so it’s not really a great guide to the outlook other than to say Monday should open in a better mood. And with that in mind USD/JPY bounced from a low T 108.05 back to 108.80, euro held 1.22 and the pound was the only major loser as Brexit worries weigh again.

On commodities, oil continues to collapse as position unwind and recent ebullience ran headlong into the biggest uptick in US rigs since 2013 with Baker Hughes reporting a lift to 791 for a gain of 26 on the week. So WTI and Brent closed out the week with a greater than 3% fall each to sit at $59,23 and $62.80 respectively. Copper lost another 1.2% and looks headed back into the $2.90’s while gold is relatively unchanged at $1317.

On the day its really quiet and after last week the incentive for traders in Australia or Asia to do anything without the lead of the US is likely to be lacking. That said, the bounce in US stocks means some catch up is possible.

Here's What I Picked Up (with a little more detail and a few charts)

International

• It’s been a very poor week for sentiment in global markets as stocks have collapsed, volatility risen, and investors previously lulled into a stupor by speaks volumes for the complacency that overcame markets and the lack of historical perspective many participants have. Anyone who knows of the economic folly of belief in the great moderation at the beginning of this century and which pre-dated, perhaps pre-empted, the GFC, knew the period of low volatility was likely an apparition. Indeed I wrote last year that I sensed a me-tooing of strategists calling the market higher on the back of momentum – nothing else. That spoke to FOMO as much as January's buying did.

• Where this ends I do not know. But here’s the thing. Behaviourally the market is more at risk now than it has ever been. Not because of the economy, it looks good. But because of the move from active to passive investing and indexing. I say that because what the move has done is amplified the impact of dumb money cashflows into, and potentially out of, the market. I don’t mean dumb money as in the investors are stupid, simply money that just flows blindly into passive and index funds/etfs without regard to value. I have long understood the behavioural aspect of this. If active managers often struggle to beat the market, especially after fees, and if there are simple ways to get market exposure cheaply, then why not simply put your money in passive/index management. The problem exists if a market dislocation happens and folks who are ostensibly in for the long haul get panicky and pull the money out on mass. Index and ETF managers have no choice but to sell and the lack of active/value managers and the global banking regulations on trading mean there is not a shock absorber to take the other side of those trades. So we end up a bit like me going down a hill on my skateboard too fast – the market gets the death wobbles. And if you’ve ever had the death wobbles on a skateboard going down a hill you know there is a difficult decision between staying the course and bailing out.

• And it seems that investors are bailing. CNBC reported Friday that US stock funds have suffered record outflows of $23.9 billion over the past week. “Exchange-traded fund (ETF) outflows alone constituted the bulk of withdrawals, at $21 billion, while mutual fund outflows made up $3 billion of withdrawals, according to data from Thomson Reuters' Lipper unit. It also showed that tech stock funds suffered $1.1 billion in outflows in its worst losses since 2016,” the report said. Pat Keon, senior research analyst for Lipper (the company which prepares the data), told Reuters "we're seeing a flight to safety here, money leaving equities, a lot of money going to money markets". He added, “The market’s overbought. It’s due for a correction and looking for a reason, and I think it kind of found it with this”.

• Which is the point of my ramblings above. If investors get spooked and we hit a tipping point of panic then we could see a big unwind. That’s the behavioural risk. Luckily though the global economy, the US economy especially, is in fine fettle. That should stop fear rising too far and become self-reinforcing.

• The next big question, of course, is how to tell where the bottom in the S&P, and thus global stocks might be. On that note, I have a different slant for readers today. As you know I usually write when a market goes vertical it’s a sign of froth and will come back down to Earth. So I offer you this chart of the S&P 500’s trend since the low of March 2009. The green line is the linear trendline for this rally. The current level is 2,515 just below Friday’s low of 2532. The question is whether we need a period below the line to properly adjust. But there is further support for the S&P 500 from a little double touch trendline starting at the February 2016 low which comes at this week’s, Friday’s, low. So there is a chance of a bounce from here. Alternatively, a break of the zone identified could be catastrophic.

• What happens with stocks is clearly going to be important for other assets. The funny thing is that when stocks stop falling bonds can start rising again. That’s especially likely to be the case given that the US President signed the new 2-year budget deal overnight. It’s another stimulus for the US economy and as a result, JPM upgraded their outlook for economic growth from 2.2% to 2.6% for 2018 and 1.9%, from 1.6%, in 2019. Equally the Atlanta Fed’s GDPNow also upgraded the Q1 growth guesstimate to 4% this week. Something I forgot to mention in the maelstrom earlier this week.

• BoE Deputy governor Broadbent reiterated Friday that futher rate hikes over the next 12 months shouldn’t be a shock. But sterling fell out of bed because of ongoing Brexit tensions. Readers know I’ve been banging the drum over how the Poms are screwing up the negotiations in the mistaken belief they have hand. Well they seem to be getting a dose of reality lately and especially this week as I’ve reported. The latest pop came from EU negotiator Michel Barnier who warned the Brits that a post-Brexit transition is “not a given” because of differences between Brussels and London. “If these disagreements were to persist, there will undoubtedly be a problem,” he said. Barnier also noted he was surprised by the disagreements saying, ”in demanding the benefits of the single market, the customs union ... the United Kingdom should logically accept all the rules and obligations until the end of the transition”. As Jerry Seinfeld once told George Costanza, “We all want the hand. Hand is tough to get. You gotta get the hand right from the opening”. It seems to me that either Mrs May, nor Mr Davis has achieved that. No wonder sterling fell out of bed and is back down near 1.38.

• ICYMI – BoJ governor Kuroda has been reappointed for another term.

• And (Bitcoin) may be worthless. Now don’t start sending me emails about I’m too old to know about this stuff it’s the New York Fed which is suggesting that. Frankly, though I agree with them 100% and for exactly the reasons they highlight. “Cryptocurrencies arguably solve the problem of making payments in a trustless environment, but it is not obvious that this is a problem that needs solving, at least in the United States and other advanced economies,” NY Fed researchers said in a blog post. EXACTLY! The blog added “If we lived in a dystopian world without trust, Bitcoin might dominate existing payment methods,” Martin said. “But in this world, where people do tend to trust financial institutions to handle payments and central banks to maintain the value of money it seems unlikely that Bitcoin could ever be as convenient as existing payment means”. CORRECT AGAIN. It doesn’t mean you can’t trade it. But this is the point I keep making to Bitcoiners…I just don’t buy their dystopian case that supports Bitcoin (or other cryptos) heading to the moon.

Australia

• It could have been worse. The ASX’s performance Friday with a fall of 53 points, 0.89%, was well off the lows of 5,786 with a close of 5,838. And that weakness, coupled with the swoon then bounce in US stocks to end the week means the SPI has perfectly satisfied the Fibo target I talked about yesterday. The low of 5,602 was in fact 4 points off the 5,598 target level but I never pick exact levels – I’m always in front on buys and below on sells because markets are hardly ever perfect.

• Anyway, the chart tells you all you need to know. And when combined with the last hour bounce in the S&P 500 and the chart above of that important support in the S&P 500 the chance of a positive start to the week on the ASX are high. It should be a good day. But whether it lasts depends on US markets.

• The RBA’s SoMP didn’t really add anything to our knowledge of where the RBA sees the outlook given the governor spoke the day before. But in seeing the forecast table it’s clear in the unemployment and inflation forecasts the RBA is unlikely to be in a hurry to raise rates unless or until both outlooks improve.

Source:RBA

• Looking at the Aussie dollar now, and it managed to rally back to 78 cents after the turnaround in US stocks. The low of 0.7760 was 15 points above the 0.7744/5 level which is the 61.8% retracement level of the rally from 75 cents with the 200 day moving average sitting at 0.7748/9. This is the big support zone. A break would see a potential round trip back to 75 cents. For the moment though that break and run has been forestalled by the bounce in US stocks. NAB business, Westpac consumer confidence, and January employment data are all out this week and should be supportive of the other. But I have to add the caveat all other things – including more stock market funkiness – equal.

Forex

• Stocks turned around and then so too did the US dollar. Sure it’s higher in US Dollar Index terms at 90.43, and the euro is a little lower at 1.2233. But overall its strength was sapped as the safe haven bid disappeared. Except against the yen of course which traded down to a low of 108.05 before bouncing back strongly with stocks to head back toward 109.

• What’s important here, for forex traders, is that the Aussie, euro, and yen – among others – have all respected important technical levels. Euro is holding above the 1.22 level, the dollar bounced off the bottom of the USD/JPY range, and the Aussie held above the important 200 day moving average and Fibo support of the rally from 75 cents to 81 cents. So the best we can say about the US dollar is that it is stabilising within a downtrend. We can’t yet say that in a broad sense it has turned. Indeed the big turn around in the USD/CNH and USD/CNY levels even though Chinese markets fairly tanked Friday is a sign the US dollar is not yet out of the woods. So we may open the week with the Buck on the back foot and require another catalyst for dollar strength.

• That will help sterling which is otherwise suffering the slings and arrows of the recognition the BoE might be hiking rates into a deteriorating economic outlook as Brexit negotiations hit the skids. When I look technically though I see an exchange rate which looks biased lower in GBP/USD. 1.3645/55 seems like a reasonable ST target.

Commodities

• Boom. The rig count in the US has gone through the roof in the past week Baker Hughes reported on Friday. The increase of 26 in the week’s numbers was the largest jump since April 2013 while the outright count of 791 was the highest since April 2015. And, as Christophe Barraud, pointed out on Twitter Saturday morning based on the historical relationship between rigs and WTI prices the trend is unlikely to reverse anytime soon. Here’s the chart he shared.

• Now that trend does of course have a little chicken and egg in it. But it does look like rigs follow price not the other way around. That’s added to the bearishness in oil markets with both WTI and Brent lower by more than 3% Friday. That’s taken Brent closer to the level I’ve been pointing to recently as my target. $61.13 is the 38.2% retracement level of the rally since mid last year and as such is a level that could see buyers step back in.

• Also worth noting Friday was that the Chinese announced their yuan-denominated oil contract will begin trading on March 26.

Have a great day's trading.