With stocks erasing yesterday afternoon’s plunge, the hope (and the hype) is back that the worst is behind us. As the turn of a page on the calendar has its usual ‘bullish’ impact on newsletter writers and sell-side analysts, self-reinforcing anecdotes are running amok (despite the fact that FANG stocks are sliding today as The Dow surges).
And while it is is easy to quickly jump to fading yet another dead cat bounce, we have seen how far these short-squeezes can run before, and as former fund manager and FX trader Richard Breslow notes, “it’s time to respect the market, not disdain it,” although he’s not buying the f**king dip yet…
It’s a new month and a loudly proclaimed surge of renewed optimism is being exhibited all over my screens. Equities, emerging markets and global yields are up. Traders are espousing newfound faith that solutions will be found. Doesn’t matter to what. Everyone is saved. If you believe that, you should be chasing the market rather than just getting stopped out of what has been working.
It’s tempting, I know, to want to fade these bounces. It was the first thing I thought of. After all, I haven’t changed my opinions on anything. But it feels like a low-probability trade. The market just doesn’t feel like it’s ready to reassert itself and the longer it takes, the greater will be the pull to lock in any profits that remain. And the feedback loops get stronger and stronger.
Levels like 1.13 in EUR/USD and 7 in USD/CNY, which felt like they were just begging to be taken out, may remain close in terms of pips, but a little too far away given positioning and traders’ risk averse state of mind when it comes to ceding P&L.
And if both these levels hold, there is a strong possibility that the allure for carry will prove strongly, even if fleetingly, more than can be resisted. Old habits really do die hard.
The economic news in South Africa has been bad. Just this week headlines have highlighted a bad government bond auction in response to a poorly received budget. A trade deficit that yesterday sent the rand to a new three-week low. And today a manufacturing PMI which was a train wreck. What’s the currency doing? Flying. Strongest performer on my launchpad.
If you eyeball it with the price action of China’s offshore yuan, you would be hard-pressed not to think they were twins. It took S&P 500 futures a little time to wake up, but then they quickly followed suit.
Should this carry on, commentaries will take a very different tone in sympathy. Compromises and truces will out word count seeing reason and intractable differences. And this will last until October becomes a distant memory. Which could be anywhere from this afternoon to sometime in January when the world is bulled up for the new year.
It’s important not to change your world view based on short-term asset price movements. But it’s also folly to ignore them or not take them seriously. Snowballs have been known to cause avalanches. Sticking with your guns has been a discipline that should be selectively employed. Because it’s hard to do that with tight draw-down constraints and market flightiness. I think the U.S. economy is strong. Europe and China are weak. But that is irrelevant for the moment.
The latest string of liquidity measures from the PBOC is getting a lot of attention. Forgotten for the moment is how many previous policy shifts have yet to kick-start things for them.
And if they come at the expense of deleveraging efforts, that is long-term quite negative. Compare European and U.S. numbers and it really is a stretch to trade based on some spurious argument that the relative economic growth will converge to the euros advantage. That’s some form of mean reversion run amok.
I’m usually an advocate of getting in there and seeing how it feels. That is what we get paid for. But there are times when patience really is a virtue. Even if it is just to wait until the rest of the market comes to what you think are its senses.
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