U.S. equities bounce from initially being down 15 handles, but volatility is expected. However, is recent move expected? Yes, in my opinion, as markets are ultimately forced to re-price growth and inflation .
Step back from the earnings headlines because that's literally old news. Although Q3-18 earnings growth is up nearly 20 percent, over 60 percent of companies that have reported are seeing negative FX impacts (i.e. rising dollar). There is also a solid concern on Q4-18 negative guidance going forward.
That's not to say earnings will be horrible. Too early to tell, but the rising DXY will impact overseas earnings (remember 2014-15?). Furthermore, late cycle increases in wages and other employment costs will continue to crimp margins.
If we look at D-R-I-P (disinflation/reflation/inflation proxy), the inflect is clear and largely impacted by the commodities and FX components and diverting from yields.
This proxy is important when considering SPY/TLT ratio in terms of "risk-on/risk-off" market mentality. D-R-I-P has a strong intra-day correlation to the ratio r=.78 and intermediate-term correlation of r=.72.
Given this, if we put up the proxy to the test of the TACVOL range, there is a strong probability of a 3.52 to 7.33 percent decline versus 2.5 to 4.92 percent to the upside.
The ratio has been able to work off most of it's oversold move, but another three percent lower is in the cards.
The COT data shows 209,584 contracts net-long of SPX, the second largest position of crude oil's massive 500,000+ contract net-long (bad idea). Compare this to the 30-year bond's net-short positioning of 118,924 contracts.
If there is any disappointments on the macro front, this will get fuglier quickly.
Step back from the earnings headlines because that's literally old news. Although Q3-18 earnings growth is up nearly 20 percent, over 60 percent of companies that have reported are seeing negative FX impacts (i.e. rising dollar). There is also a solid concern on Q4-18 negative guidance going forward.
That's not to say earnings will be horrible. Too early to tell, but the rising DXY will impact overseas earnings (remember 2014-15?). Furthermore, late cycle increases in wages and other employment costs will continue to crimp margins.
If we look at D-R-I-P (disinflation/reflation/inflation proxy), the inflect is clear and largely impacted by the commodities and FX components and diverting from yields.
This proxy is important when considering SPY/TLT ratio in terms of "risk-on/risk-off" market mentality. D-R-I-P has a strong intra-day correlation to the ratio r=.78 and intermediate-term correlation of r=.72.
Given this, if we put up the proxy to the test of the TACVOL range, there is a strong probability of a 3.52 to 7.33 percent decline versus 2.5 to 4.92 percent to the upside.
The ratio has been able to work off most of it's oversold move, but another three percent lower is in the cards.
The COT data shows 209,584 contracts net-long of SPX, the second largest position of crude oil's massive 500,000+ contract net-long (bad idea). Compare this to the 30-year bond's net-short positioning of 118,924 contracts.
If there is any disappointments on the macro front, this will get fuglier quickly.
