2016/10/07 Commentary: Shock Without Surprise
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COMMENTARY: Friday, October 7, 2016
Shock Without Surprise
Is it possible to be shocked yet not surprised? In the real world this would likely relate to crime scenes in areas where the social order had already deteriorated, or revelations on environmental problems on sites since abandoned by industries dealing with toxic substances. In the markets extreme volatility can still shock where the overall Evolutionary Trend View for a particular instrument is still thoroughly consistent with a significant short-term hyperactive price swing. Even in those instances where the market quickly reverts back to pre-disruption price levels there is no reason to believe the wild activity should be any sort of surprise in the context of the trend targets.
In this instance we are obviously referring to the overnight ‘flash crash’ and relatively significant recovery in the British pound. While we will also be providing our concise assessment of the US equities and govvies in the wake of this morning’s US Employment report, the most interesting overnight developments were in the UK currency. It is neither every day, nor every year, that a European currency suffers a six percent fall in early Asian trading, even if it subsequently recovered approximately two thirds of that decline.
However in this case there was a clear ‘macro’ trigger in the form of French President Hollande’s aggressive stance on UK Brexit negotiations. Add that to UK Prime Minister May’s similar comments last weekend that had already significantly hit the pound. It is therefore not necessarily a surprise there was an acceleration of the currency’s weakness even if the degree might have seemed shocking.
Yet even in that regard, the Evolutionary Trend View technical structure left the door open to a more aggressive selloff once GBP/USD breached the interim 1.2500 support below the more major 1.2800 area violated on Tuesday (after 1.3000-1.2950 failed on Monday.) As we noted in all recent Market Observations as well as the opening section of Wednesday morning’s Pounded post, “The next prominent support is not until 1.1850.” And while it has regained a good deal of the overnight loss, there is worse news for the bulls on the intermediate term trend.
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NOTE: Back on the evening of December 8th we posted our major Extended Perspective Commentary. That reviews a broad array of factors to consider Will 2016 be 2007 Redux? For many who believe that the US economy is really strengthening and can once again lead the rest of the world to more extensive recoveries, this may seem a bit odd.
Yet there are combined factors from many areas we have been focused on since the early part of last year which are less than constructive for the global economy and equity markets. We suggest a read if you have not done so already.
We pointed out in December in the face of another likely Santa Claus Rally this was not an actionable view during the year-end equities rally. Yet it was (and remains) important background to utilize into 2016. This is much like our major late 2006 perspective on Smooth Rebalancing? …or… The Crash of ‘07? In that instance the economic factors built up, but the actual crash was deferred into 2008. It is starting to feel this one may be deferred as well.
▪ When the technical conditions in US equities along with some aggressive algorithmic trading precipitated the May 2010 ‘flash crash’, the rebound was also very impressive in that case. The DJIA dropping over 1,000 points from up around 11,000 to into the 10,000 area in approximately 30 minutes had never been seen before. However, on the day on May 6th it rebounded to the 10,500 area, and even rallied to retest failed support near the 11,000 area into the following week. Yet here is the bad news for the British pound bulls: the DJIA ultimately fulfilled the more orderly trend weakness down into and below the 10,000 area that was indicated by the failure below 11,000.
And there is little difference between that analog and the macro-technical picture for the British pound at present. There are certainly fundamental reasons why it should be weakening as certain European markets (especially for the UK financial services industry) are going to change across time. As the exact nature of that change is to be determined in lengthy negotiations, there will be extended uncertainty. And much as it relates to the equities in general, there is something to be said for the old cliché, “The market dislikes nothing quite so much as uncertainty.”
As such, we suspect the pound will continue to attract selling over the intermediate term. Much like the DJIA May 2016 failure, any trading back up near the failed 1.2500 interim area or the more major 1.2800 area at best is likely the upside limit for now. To exceed the higher of those levels would require a psychology that indicates someone believes it is possible to also push above the major failed 1.3000-1.2950 area. As that area held on previous hopes that both the UK and some European governments would be interested in a ‘soft’ Brexit, there is no basis for that in the wake of this week’s pronouncements.
The trading down around that GBP/USD 1.1850 area was so thin and erratic that we have seen various credible sources cite the trading low anywhere between 1.1980 and 1.1700. In spite of that we suspect at least the 1.1850 area will be retested over the near term now that the market has indicated weakness to that low a target is possible; much like the DJIA revisiting the 10,000 area back in May 2010. As also noted in the Market Observations as well as the opening section of Wednesday morning’s Pounded post, “While there are further interim supports at 1.1550 and 1.1250 congestion, the more major support below that is not until the 1.0463 February 1985 all-time low.”
▪ As far as the US Employment report is concerned, with Deutsche Bank’s travails and the previous improved economic data now priced in, the US Employment report Nonfarm Payrolls coming in as expected at up 156,000 was a bit of a disappointment. There was a sense from the economic bulls that there could easily be an ‘upside surprise’ after the weaker than expected August payrolls number.
Yet in essence this is another ‘Goldilocks’ number in its less than aggressive gains. The Fed hawks who have been reinvigorated by the recent upbeat data will note it is a ‘good’ number because it absorbs the workforce growth. The amusing part is that the Fed doves will also cite it as ‘only’ absorbing workforce growth without providing any additional spur to the economy of stubbornly low inflation.
As such, we believe this report keeps the equities trend up on a “bad (or at least somewhat soft) news is good news” central bank psychology. That will be tested later today by the further extensive Fed-speak from this morning right through late afternoon. Unfortunately for bulls, the doves speak after the US Close.
On the Evolutionary Trend View (ETV) we have already reviewed at length the importance of the lead contract S&P 500 future 2,160-55 area due to the swings out of mid-July through early September. And the December S&P 500 future has stalled on recent rallies from not too far above it, and again this morning.
As far as lower supports, we once again note the previous December S&P 500 future violation of nominal early August 2,141.50 trading low support was telling, leading to the early September test of the more prominent 2,120 and 2,105-00 congestion areas that remain major lower supports. Yet more recently that 2,141.50 (with a bit of Tolerance) has proven to be more critical, as evidenced by it even holding on the Deutsche-driven selloff last week and again this week. As such, it remains the key support this side of the lower levels noted above.
▪ All the rest of the ETV remains much the same as the Market Observations updated that evening in the lower section of Wednesday morning’s Pounded post. That includes the Govvies holding in at lower supports after their recent selloffs, and the US dollar holding its recent gains for the most part on the stronger recent data in spite of the partial disappointment with this morning’s US Employment report.
Thanks for your interest.
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