Market Journal: Classic Bear Market Action
Ignore the squeeze crowd and focus on the cross-asset market signals.
Discussion
Today’s gap & crap move in equities is classic bear market action. Big move up at the open that leads more Santa Rally bulls to accumulate more bags, followed by an ugly reversal in breadth with defensive sectors bid and VOL/CDX sticky. Meanwhile, FICC continues to get whipped around by hawkish central bank policy (high and sticky rates) and risk-off jump-risk from Israel-Hamas (proclivity for long rates to drop on risk-off market action) - today rates are up on the BOJ providing a preview of its tweak of YCC to above 100 bps on JPY 10s, and the USD is down as a result of a stronger JPY, pressuring oil and gold and thus skewing the message from war hedges on the current state of Israel-Hamas. On top of all of that, the QRA is due at 3pm EST. Given everyone and their brother is now focused on the QRA it’s unlikely to provide the major surprise that it did in July, but it’s also unlikely to do what bulls need it to do to underwrite a Santa Rally.
Bottom line: Today is a thick stew of mixed signals ping-ponging off each other. Critical to zoom out and look at the bigger picture, which is what I tried to do in this morning’s note. In short, nothing about today’s cross-asset price action suggests this correction is over for more than a handful of hours or at most a couple of days. If anything, the longer the market takes to reach a fully oversold condition, the more bag-holders that are sucked into the market and the more violent the move down to the tactical low will ultimately be.
Exhibits
Mechanical move up in equities today driven by the VOL market.
Breadth is weak, has faded, and is led by defensive sectors.
CDXs remain high and sticky and have not confirmed today’s move in equities with any sense of heavy endorsement.
A hawkish BOJ policy preview is the story of the day.
And lastly, TIPS break-evens remain the single biggest bugaboo in the market today. If there is anything that guarantees hawkish central bank policy no matter what is going on in the world, it’s inflation expectations. Even if Israel-Hamas fades into the background a bit, the fact oil will trade at an otherwise elevated premium means inflation expectations will remain that much stickier. Not good.