Powell delivered exactly what we outlined last week. We argued among other things that Oil was a big input for the Fed to pause:
“Given the continuation in oil prices, we ask ourselves when will the market start to realize Fed can´t be tightening as aggressively as (still) priced in”.
Last eve the Fed news seemed to catch many by surprise and equity markets rallied hard. We warned about a possible the Santa rally, so many have forgotten about on Monday. We wrote;
“Maybe it is time for a contrarian Santa rally set up where equities bounce higher and volatilities come down. After all, the same guys that were awfully wrong and short the VIX in early October have now reversed the aggregate short VIX trade to being actually long VIX.”
Price action in pretty much any asset has been extreme since early October, and continues catching people off guard, further damaging p/l. Investors trade in a “chase the tail” fashion, ending up exhausted, but with negative p/l. The theme of crowded trades continues blowing up as investors focus on “guessing the market direction” instead of focusing and managing their risks (full reading on Risk Management here).
So what´s next?
Below are the main index charts worth reviewing.
S&P has been bouncing over past days, and put in a huge candle yesterday. Note the negative trend slightly higher. 200-day average is flat and the 50-day average trades slightly below the big 2800 level. With Christmas approaching and main events ebbing out, we wouldn´t be surprised to see markets enter some sort of consolidation, with volatilities taking a breather (the DNA of VIX has “calmed” down lately).
NASDAQ bounced massively as well, but trades within the negative trend. 7000 is a huge level to watch. This space has probably caused most of the p/l pain among investors over past 2 months. In order to have a proper move higher that is sustainable in NASDAQ, we need to have Apple join the bounce. We outlined the logic regarding an “Apple Revenge” bounce a few days ago and it seems to be playing out well so far.
Eurostoxx 50 trades rather boring. 3100 is the big support and 3200 the first bigger resistance. Europe has it´s problems and they will take time to resolve, if they ever get resolved. Regarding the equity markets, the best “cure” would be a consolidation for investors to sober up after all the violent moves we have seen. Should we take out 3200, the next big important level to watch would be the 3250 ish area.
The DAX is, if possible, even more dull than the Eurostoxx 50, continues underperforming. Best guess is a continuation of a 11000/11500 trading range.
US 10 year is moving lower and trading right at the huge 3% level. Inflation is gone, at least for now. Given the fact this is an extremely crowded space, don´t be surprised violent moves should yields move below the 3% level.
As Oil trades sub the 50 USD level (white) for the first time in ages, US 10-year yield (orange) surely looks to have some downside. It seems a few more crowded positions need to be washed out before Santa comes to town.
Source: charts by Bloomberg