Week to Feb 5th

Best week since November, Dollar breakout, Gamestop ‘game over’

MY CALL THIS WEEK : BUY AUDNZD

In a week which saw the vaccine rollout continue without a hitch, the collapse of the small trader inspired shot squeeze on GME, and a new Jobless Claims low, equity markets soared to new highs posting the best week since the election, with Oil rising in line and finally, Gold, Bonds and JPY smoothly fading in the risk-on environment. The dollar relinquished its safe haven status, and finally broke out to the doldrums to the upside, and we saw the first hint for months of hawkishness with the BoE dismissing for now the idea of negative rates.

Next week sees the start of the Chinese Year of the Ox, or Bull. Do not underestimate the sentimental value of this in China. There is a pause in earnings season before the retail phase, with only KO and DIS of note reporting. Otherwise, the calendar is light, with only inflation (US, China, Germany) on Wednesday of any significance.

Mon Feb 1

After last week’s pullback, markets recovered today on continued vaccine progress, and some bipartisan support for the stimulus package, and shrugged off the ISM PMI miss. SPX added 1.6% and risk-sensitive NDX outperformed. There may have been some rebuying for the new month. Oil was up in line. The VIX, however, stayed above 30, however, driven by the r/WallStreetBet saga, as GME fell 30%. Having sat in the 90-91 range for weeks, the dollar finally broke out and hit a 7-week high in a fairly even move against all currencies. Paradoxically, Gold ignored both equities and dollar and added nearly 1%. It does this sometimes, clearly bid all day. Bonds were flat on the day.

Tuesday February 2

A second day of rally for the same reasons, and with GME falling a further 60%, an institutional relief sentiment that ‘the mob’ cannot, in fact, break institutional positioning. Small investors collectively lost billions in this GME escapade, and the bulletin boards went quiet. Again Oil was up in line, but this time Gold pulled back as expected, and bonds were down, reflecting the risk-on mood. The dollar was flat on the day except against the antipodeans, which are not part of DXY, both 0.32% up on the RBA stimulus.

Wednesday February 3

News of our old friend Mario Draghi as the new Italian Prime Minister caused a lift in MIB and BTPs, but had little effect on the rest of the world, and SPX took a breather today, with very little volatility, and only slightly up. NDX underperformed and posted a red candle, despite a 7.3% rise in GOOGL after earnings the evening before. Similarly the dollar was quieter, moving less than 0.1% against any of the basket currencies. Gold and bonds were slightly down, but Oil was up for a third straight day.

Thursday February 4
Another day and the rally resumed, with indices posting new all-time highs, after the lowest Initial Jobless Claims since November. Oil was up, and all indices were positive except FTSE, after GBP shot up 1% in two hours after the BoE confirmed that there would be no negative interest rates anytime soon. UK yields rose on the news. Otherwise it was a strong day again for the dollar, which made a new 7-week high, pushing Gold down. Bonds were flat.

Friday February 5

The rally continued again today closing the best week since November. Also, after fully retracing, shares in GME rallied again by nearly 20% after Robinhood removed trading restrictions. After rallying all week the dollar came off sharply after the NFP miss and back into the consolidation range. Gold was up in line with the dollar move, and Oil and yields were up in line with equities.

WEEKLY PRICE MOVEMENT

The best week since October saw all indices rise, with risk-on index NDX marginally the best performer. EURAUD was the biggest forex mover, down 1.22%. Cryptos rallied hard with ETH hitting a new ATH. FANGs performed in line with NDX, except for GOOGL up a massive 14.31% also making a new ATH.

Note we use Google Finance data for daily movements, listing UUP as a proxy for DXY. All references to ‘the dollar’ are based on DXY. The equity and index prices are now based on the cash close each day.

NEXT WEEK (all times are GMT)

(Calendar High volatility items are in bold)

• Chinese New Year
• Earnings Season Pause
• China, Germany, US inflation
• Thin US macro news

Monday February 8

As is often the case, a quiet Monday.

23:50 Japan Current Account (Sunday)

07:00 Germany Industrial Production

Tuesday February 9

Another day with no significant US news. Tech firms TWTR and CSCO report after the bell.

02:00 China Imports/Exports/TB

07:00 Germany TB

23:30 Aus Westpac Consumer Confidence

Wednesday February 10

The main news day of the week, with Chinese, German and US inflation. Dow staple KO reports before the bell. There is a rate decision in Sweden (SEK is 4.2% of DXY).

00:00 Aus HIA New Home Sales

01:30 China CPI (YoY p0.2%)

07:00 Germany CPI (YoY p1.6%)

13:30 US CPI (YoY e1.6% p1.6%)

16:30 BoC Lane speech

17:00 BoE Governor Bailey speech

19:00 US Monthly Budget Statement

Thursday February 11

Entertainment giant DIS report before the bell, with only a single significant news items. There are rate decisions in the Philippines and Mexico. Markets are closed today in China and remain closed until next Thursday, as the new Year of the Ox…or Bull. Hong Kong reopens on Tuesday. Markets are also closed in Japan for one day.

13:30 US Jobless Claims

Friday February 12

Focus is on the UK today with second GDP reading. There is a rate decision in Russia. 

07:00 UK Manufacturing/Industrial Production

07:00 UK Prelim Q4 GDP (e15.8% p16%)

10:00 Eurozone Industrial Production

15:00 Michigan Prelim CSI (p79)

WallStreetBets and Triangles

WallStreetBets and Triangles - Diamond Hands don't mean this time is different!

Triangles are linked to volatility, so where would a good place to look—cult stocks, where sentiment explodes without any fundamental or technical reason at all. Until recently, the obvious place to look was the cult of Bitcoin, which recently entered its second period of crazy volatility, and sure enough there are triangles everywhere, all of which follow the main theory except the huge 2017 move, where the degree of overboughtness (the speed of the move) was enough to turn a bullish symmetrical triangle bearish.

If the current triangle plays out like 2017, we would expect a low of around $23k before the next move up. It’s strange how there is not the noise around Bitcoin today as there was in 2017, despite it being around double the value of that time.

The current cult is the reddit r/wallstreetbets, which is certainly doomed to fail, sadly leaving a sour view of trading to thousands of new people in the market. And make a few dozen people who timed it right, almost certainly professionals, very happy!

Unlike Bitcoin, shares have a set of fundamental rules, and if you’re going to short-squeeze something, you wouldn’t pick two firms who are trying to physically sell (games and movies) something which can be bought instantly online. Unlike general apparel and housewares, which still have a ‘touch and feel’ aspect, there are no firms growing in the physical retailing of media.

GME

 

The primary target GME ‘game’ is now ‘over’ as the price reverted to mean this week, but is an instructive example. Overall the chart is a near-perfect Rodrigue Bubble, but the squeeze has three clear triangles. The first and third were followed by a series of days of constant movement, which produces a weekly candle with virtually no tail, a marubozu, the ultimate one-way sentiment candle. Note how as the pattern completes, the move up starts again.

AMC

 The second loss-making target AMC, has not finished, and the price stands at writing at $7.25, still 45% over the pre-raid price of $5.00. The WSB game on this one has been more subtle, and the pattern has been a single, slower, descending triangle. The pattern should play out with a final, fast, marubozu-type drop to the $5 mean (following the lower hypotenuse) however the upper part of triangle allows for a squeeze back up to $12.50 (but no more).

The WSB community has also been flirting with other stocks, BBBY (a profitable specialty retailer), NOK and BB (the losers in the smartphone wars, but still alive and profitable), and now loss making REIT, mall-owner MAC. These are all of course, also institutionally shorted.

BBBY

 

The squeeze was unusual as it came in two waves, resulting in a fade of a bullish ascending triangle, the reverse of the norm, followed by a conventional symmetrical triangle (pennant) which did work as expected. It has now reverted to mean, touching the pre-squeeze high of $24.40, and again there is an approximate Rodrigue pattern (with a strongly extended beartrap) suggesting it is now a reasonable candidate to buy, and at a P/E of 22.9 not particularly expensive. Although physical store expansion is very unlikely, their online proposition, with an Amazon Prime-style 20% off all orders for $29/yr is as good as anyone else. Over half of online shopping is not Amazon. There were three chances to exit this squeeze at a profit, so people may try again, especially if there is a rally through the $30 light resistance point.

The point is that this company, unlike GME and AMC is fundamentally okay, and if it doesn't squeeze again, you may still not lose money.

NOK

 

A minor WSB target which played out as a single symmetrical pennant, which followed the 100% drop ‘rule’ perfectly. The stock has nearly fulfilled the drop and returned to mean ($4.20), leaving the way for normal growth. Although 2020 was a bad year, their guidance is positive. We could perhaps see another run on this one, which would also be in line with the bullish descending wedge which followed the gap drop. Here are the estimate forward financials, and as you can see they have been in trouble before. NOK of course used to own the cellphone world, and holds many patents, so a possibly takeover target.

BB

This Canadian firm is other ‘loser’ in the smartphone wars is more interesting as it doesn’t seem to be over yet. There was a strong unexplained 66% move up on Dec 1. The volume faded immediately as did the volatility, and half that gain was lost and then recovered. The real action took off on 25 Jan and in a day formed a symmetrical pennant, and then accelerated again, to even more, to add more than 100% to the pennant height, although volume came off slightly before the top. On the way down a bearish descending triangle is still playing out. The price dropped but Friday’s action has broken above the triangle.

So there is further to go here. The company is profitable, but does not really deserve its current PE of 80, but there is no reason that it may not go back to the $15 area before it eventually returns to the pre-December $6 price, a necessary move before a long-term rise. Selling the current $13 with, say, a $3 stop is not for the faint-hearted but should pay off in the end. Again, like NOK, they have IP which may make them a takeover target.

MAC

This mall-owning REIT is the latest WSB target, and another one which is following the Rodrigue pattern well. The run started on Jan 2, from a $10.60 base, and a late 2020 high of $12.50 to $15.00, at which point the short squeeze took off. This collapsed in a descending triangle, and the expected further drop, at 100% projects the pre-squeeze $10.60 point, and so is a good short at $13, although once again it has recovered today (5 Feb). The forward guidance indicates even further decline, and we are already in the middle of the 2020 range, so best avoided as it could range $10.50 to $15.00 for a long time.

SLV

  

There was a brief attempt to squeeze Silver amongst the WSB group, but it was very quickly realised that futures open interest is far too large for a retail activist group to take on and a brief history lesson on Nelson Bunker Hunt made the activists realise this was not a stock (or a ‘stonk’ as they call it) and the activism was quickly withdrawn. Neverthless, the rally produced a couple of triangles on the way up, and pushed silver into the next level, previous resistance at $26 becoming support (Darvas theory), above which is it likely to remain. $30 holders will probably break even if they hold long enough, and the current chart suggests a buy, although only to $28 in the near-term, again following Darvas.

Note particularly how silver volume hardly moved during the 25% price move up and down, a sure sign that your plan is going nowhere.

SUMMARY

The key point about this activism, the proletariat WSB ‘retards’ (echoes of Hillary’s deplorables) is that they want to break a heavily shorted stock by squeezing out bourgeoise hedge funds and then selling at the accelerated top. Given the right stock—it would have to be a fairly low public issue, market cap and liquidity choice, and a very narrow range of funds holding the shorts, it’s possible that the plan could work, although very unlikely because the activists are not really homogenous. Playing this game, unlike being QAnon or StopTheSteal, can cost you a lot of money, meaning that the mildly committed (which is the majority) will jump ship causing the squeeze to fail. This is especially true if they are in profit and see the profit shrinking rapidly. For various psychological reasons, once the position is red, people are more likely to hold.

Open interest in options and futures greatly magnifies the amount of stock available, and when you see these catastrophic falls, the only counterparties in town are market makers, who you can never beat.

Two things to remember:

Week to Jan 28th

Short squeeze war, More strong earnings, Markets drop sharply

MY CALL THIS WEEK : BUY AUDNZD

In a week that saw concern about the rising number of cases and speed of vaccine rollout, and despite a dovish Fed, markets were sharply down, with Wednesday being the worst day for over three months. Markets were also spooked by a retail ‘army’ piling into institutionally shorted loss-making retailer Gamestop, short-squeezing the share up 642% from $65 as high as $420 (P/E 1,477!), with many commentators concerned that this could happen.

The safe haven dollar rose, although notably traditional havens did not move as expected. The yen fell sharply against all currency, Gold and yields were flat on a V-shaped week, as was Oil which had a very narrow range. The Fed were as dovish as could be expected, but for the first time in weeks, we saw FFR Futures rise, as reflected by a 4.1% rate hike being priced into the next Fed meeting in March, according to the CME Fedwatch tool.

Next week sees more of the same, and important earnings from AMZN and GOOGL, and of course Non-Farm Payrolls, all of which are potential points to either arrest or accelerate the current turn in sentiment.

Monday Jan 25

After an opening dip, SPX closed up 0.4% and NDX outperformed. The general increase was put down to stimulus hopes, whereas tech outperformance was put down to worries about vaccine distribution. The safe haven dollar was up very slightly, although all this movement was against EUR. Other currencies and Gold were flat. Yields followed the opening dip down. Oil was up in line with equities.

Tuesday Jan 26

JNJ, MMM and AXP all beat on earnings and revenue to give a good start to the day, and unlike yesterday, Europe closed up. However, markets then faded again as markets were concerned about the Fed the next following day. The recovery in stocks meant the dollar turned down again, as did Gold (following stocks for once, not the dollar). Bonds moved down in line, but Oil also fell, in a narrow whipsaw pattern which lasted all week.

Wednesday January 27

Great MSFT (up 6% AH Tue) earnings gave the day a good start, but a massive miss from BA (down 4%). Added to concerns about COVID variants, and the slow progress of stimulus, markets finally gave way and plummeted posting the worst day since October. The drop was broad with both SPX and NDX falling 2.6%. Markets were also spooked by a Robinhood retail ‘army’ going into battle with institutional shorts on obscure stock GME, (up 140%) and AMC (up 300%) and stayed there. VIX hit 40 for the first time since November with the first VIX marubozu candle (no tails) for nearly a year.

The sharp equity collapse led to a strong surge in the safe haven dollar. The Fed was dovish with open-ended commitment, but crucially nothing new. This cause a spike up in USD and a spike down in Gold which finished down. Once again inter market relationships failed, bonds were up and Oil was down, albeit both marginally.

Thursday January 28

Today was a bounce back day following the large drop. VIX gapped down, down 19% despite only a 1% move up in SPX and DJI, with NDX underperforming, an indication of weakness, after the GDP miss. The battle stocks GME and AMC were down 44% and 57% respectively on profit-taking. The dollar and bonds were down in line, although surprisingly Oil was also down. Gold was flat on the day.

Friday January 29

The volatility continued today, with another leg down on major indices. SPX was down 1.9% and NDX lost 2%. Short squeezed stocks GME and AMC were 67% and 54% up. The dollar was down again in line as was Oil, however bonds were also down. Gold was flat on the day.

WEEKLY PRICE MOVEMENT

All indices pulled back this week with FTSE faring the worst. The largest forex move, very unusually, was AUDNZD, down 1.42%. AUD is very closely correlated with SPX, NZD is not. Crypto was back up, maintaining its recent volatility, and FANGS generally fared worst than NDX, in other words more volatile.

Unfortunately my EUZNZD long was down 0.32% last week (I should have bought EURAUD), so my 2021 position is now +0.91% with 3/4 wins. My view is that move in AUDNZD must revert to mean, so I am buying AUDNZD this week.

Note we use Google Finance data for daily movements, listing UUP as a proxy for DXY. All references to ‘the dollar’ are based on DXY. The equity and index prices are now based on the cash close each day.

NEXT WEEK (all times are GMT)

(Calendar High volatility items are in bold)

• New Month
• AMZN and GOOGL earnings
• UK and Aus Rate Decisions
• Non-Farm Payrolls

Monday February 1

A new month may see some repositioning, maybe restoring some of the end of month activity on Friday. Also, it’s manufacturing PMI Monday.

00:00 Aus TD Securities Inflation

01:45 China Caixin Manufacturing PMI(Jan)

07:00 Germany Retail Sales (p5.6%)

08:55 Germany Markit Mfr PMI

09:30 UK Markit Mfr PMI

10:00 Eurozone UnEmp

14:30 Canada Markit Mfr PMI

14:45 US Markit Mfr PMI

15:00 US ISM Mfr PMI e59.5 p60.7

19:10 Fed Rosengren speech

Tuesday February 2

Today’s earnings before the bell are vaccine producer PFE, and once-giant XOM, but much more important are the last two FANGs AMZN and GOOGL reporting after the close.

03:30 RBA Rate Decision/Statement (e0.1% hold)

10:00 Eurozone Q4 Prelim GDP (QoQ e-1.8% p12.5%)

18:00 Fed Williams speech

22:00 Aus Commonwealth Bank Svcs PMI

Wednesday February 3

No significant earnings today, so attention will turn to the ADP and ISM figures, both important economic indicators.

01:30 RBA Governor Lowe speech

01:45 China Caixin Services PMI

08:55 Germany Markit Comp PMI

09:00 Eurozone Markit Comp PMI

10:00 Eurozone CPI (YoY e0.4% p-0.3%)

13:15 US ADP Employment Change (e40k p-123k)

14:45 US Markit Svcs/Comp PMI

15:00 US ISM Services PMI (e56.5 p57.7)

Thursday February 4
Dow Pharma (but not vaccine) player MRK reports before the bell. However, the main news of the day is the BoE Rate Decision, or more particularly the report and speech.

00:30 Aus Imports/Exports/TB (TB p+5.02B)

10:00 Eurozone Retail Sales (YoY e0.4% p-2.9%)

12:00 BoE Rate Decision/Statement (e0.1% hold)

12:30 BoE Governor Bailey speech

13:30 US Jobless Claims

15:00 US Factory Orders (MoM)(Dec)

22:30 RBA Governor Lowe speech

23:30 Japan Overall Household Spending

Friday February 5

First Friday and so it’s NFP, the first in the Biden era, with a very modest positive estimate. The pace of re-employment has slowed considerably, and it is important to still be going in a positive direction. Canada’s report is simultaneous offering volatility possibilities in USDCAD.

00:30 RBA MPC Minutes

00:30 Aus Retail Sales (p-4.2%)

07:00 Germany Factory Orders

13:30 US NFP/AHE/UnEmp (NFP e85k p-140k)

13:30 BoE Governor Bailey speech

13:30 Canada NFP/AHE/UnEmp (NFP p-62.6k)

15:00 Canada Ivey PMI