What a great success seeing the Dow surge post Fed yesterday. As we all know, last time Trump tweeted the similar Dow (in)famous 25k tweet, markets decided turning abruptly lower. Powell’s put is back as Trump calls the markets. Who knows, maybe the next thing is Powell for president?
For now, futures are trading higher, approaching important levels, but even more “impressive” is the reaction in credit. European main credit, iTraxx main, is gapping sharply lower and trading at levels last seen in early November, actually close to pre-October “crisis” levels.
The below chart shows the credit (inverted white) versus the Eurostoxx 50 futures (orange). Last time credit was this bullish, the Eurostoxx50 traded at 3215, , some 1.5% higher from here. Note we saw credit get too optimistic in a similar fashion back then.
The Eurostoxx50 has bounced some 300 points from late December lows. Impressive to say the least. The capitulation logic was explained back then in our post “High Yield Credit Capitulation”, and we are slowly starting to get the inverted “feeling”.
The index is approaching the big 100-day average as well as the big negative trend line at the 3200 level. Watch the coming days carefully.
US credit sold off sharply as well post the Fed. The entire massive move higher from November is almost all reversed.
The US credit (white inverted) trades more in line with the SPX futures (orange) compared to the European credit chart above.
The mighty SPX continues moving higher, but is actually only up 0.5% from January 18th highs, despite everything “feeling” so bullish. We remain humble, but note that the SPX is approaching the huge 2700 level, the 100-day average as well as the trend line from October highs. If you believe in the Fibonacci series, the retracement from October highs and December lows has the “magical” 61,8% level right around the 2700 area.
Why not an overshooting, get the short CTA crowd back in and then a reversal? After all recent market action has frustrated most investors as the crowd continues chasing moves too late.
Source; charts by Bloomberg