Fear of Falling

  • Currencies rally on the fact
  • Stocks unwilling to show weakness
  • Market ignoring fundamentals

PERPLEXING EXCEPTION - I honestly have no clue what the stock market has been thinking this week. While it's true the FX reaction post yesterday's FOMC Minutes is somewhat counterintuitive, at least the reaction can be attributed to some 'sell the fact' price action. Indeed, the Minutes continued to point to a December rate hike, but it seems the Dollar has been comfortable selling off a bit despite the Minutes, with the market possibly already having priced this and now taking a bit of a breather. But the same can not be said for stocks. Short of some extreme short-lived pullbacks in recent months, this market has failed to retreat and continues to track near record highs.

SHOULD WORK BOTH WAYS - The Fed's strategy all throughout the financial markets crisis has been to artificially support stocks to record highs, incentivizing dangerous one way buying, with the hope that a strong stock market will send a positive message and help stimulate the economy. Whether this strategy has worked or not is a conversation for another day. The point here is that if free money Fed policy fueled a move to record highs, shouldn't the removal of such policy inspire the opposite reaction? I believe this to be sound logic and have positioned accordingly. Technically, stocks are overextended on a longer-term basis and also beg for a more meaningful, healthy correction. And yet it seems, the market is desperately trying to stay bid out of fear for what might happen if we actually do see sustained weakness. But how much longer can this last? I suppose it may just take an actual rate hike to finally get the stock market's attention.

If Fed policy has fueled stocks, shouldn't the removal of such policy weigh? Via @joelkruger

STRATEGY - All other asset classes have responded to the prospect of Fed normalization and yet stocks have been unable to price in this eventuality. One thing's for sure - If the Fed is worried about the impact higher rates will have on stocks, current price action should dispel such fear, as stocks remain elevated. So the Fed won't have the excuse of lower equities to keep it from raising rates. On the strategy front, nothing new for me. I am mostly positioned short risk by way of USDJPY, GOLD and the SPX500. Even my AUDNZD long position has the ability of benefitting in a risk off environment, though the correlation is less relevant here. Otherwise, I will be watching the Pound today, as it looks to maybe carve out that next lower top below 1.5500 against the Buck. UK retail sales are out and could offer a catalyst for a decent short. Let's see.

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