The crowded liquidity-fueled pump-fest of the last few months is beginning to unwind. Look around at where the damage occurred. Equities and Credit were smashed; the USD is practically unchanged; Treasuries very marginally bid; commodities sideways (aside from Oil's oscillations).
But, But, But I'm Hedged...
Image may be NSFW.
Clik here to view.
The close did see some of the other asset classes start to catch down to equity and credit but based on our models, we see the S&P 500 having retraced about half its short-term mispricing relative to Treasuries. All the over-pumped sectors were the biggest laggards - Financials, Industrials, Materials, and Tech - but from the 11/25/11 beginning of the global coordinated central bank pump, there is still plenty of downside for stocks. Our greatest concern now is if high-yield bond ETFs are unwound (where so much liquidity is concentrated) and forces cash bond liquidations - there is simply no depth to soak up that move and the entire secondary market will reprice (and shut the primary market - which has lived on flows for so long).
So what happened...and why - well maybe this chart will help...
Image may be NSFW.
Clik here to view.
Gold is now almost 3% ahead of stocks on the year as the long-bond is catching up fast on the S&P 500...
Image may be NSFW.
Clik here to view.
but stocks have plenty of froeth from the beginning of the globally coordinated liquidity flush from 11/25/11...
Image may be NSFW.
Clik here to view.
the S&P 500 has now retraced around half of its pre-QE3 dislocation...
Image may be NSFW.
Clik here to view.
and equities are also catching down to high-yield credit's warning signs...but the reflexivity will begin in this pair shorly...
Image may be NSFW.
Clik here to view.
and for a sense of the relative calmness in non-equity/credit markets today... with ETFs all moving as one big liquidity block (left) but FX, Treasuries, and commodities were unimpressed having already made their moves... (right)
Image may be NSFW.
Clik here to view.
HYG crossed below its 200DMA and equalled its largest drop in over six weeks (with serious volume)...
Image may be NSFW.
Clik here to view.
and the last few days shows that when the selling begins, it will squeeze the cash market (the lower pane) just as the wash of liquidity drives the cash market via the ETF on the way up in HYG... Critically, we saw a big bond dump at the open today to catch down to HYG's 'price' and then HYG kept going lower all day to leave yet another big gap...
Image may be NSFW.
Clik here to view.
Evidently, as we have said again and again, the surplus of liquidity has been soaked up in the synthetic instruments (ETFs for instance). It's all fun and games on the way up - just ask Bruno Iksil - but when the unwinds begin and the 'real' market can't soak up that risk (consider dealer inventories!!) then price adjustments are rapid and gappy - everywhere...
Finally, the long-term CONTEXT view of where we stand...
Image may be NSFW.
Clik here to view.
We would imagine that every repo desk margin call is currently going directly to voicemail...
Charts: Bloomberg and Capital Context
Bonus Chart: AAPL's last week...VWAP finally snapped
Image may be NSFW.
Clik here to view.
AAPL Shareholder's perspective...
Facebook's 12% rise (coincidentally on record daily volume and perfectly ending at the big gap-down day's VWAP close...not sure this one holds up here) and for one more crazy coincidence (which by now we hope you do not believe in) - today's closing VWAP of $21.62 is EXACTLY the same as the aggregate VWAP from the 10/24 high volume ramp til today...
Image may be NSFW.
Clik here to view.
and Facebook putholders...