“To buy the dip, or not to buy the dip”: over a week since the February 5th volocaust, that still remains the question, and in his overnight macro view, Bloomberg’s macro commentator and former Lehman trader Marc Cudmore has a decidedly pessimistic outlook, and writes that “taking a step back, the situation remains bearish overall. High U.S. rates, elevated volatility across assets and wealth destruction all point to further equity deleveraging.”
And while the next direction in the market will be unveiled on Wednesday with the all-important CPI print, anyone hoping for a calm reaction will be disappointed as “we’re now in a world of higher volatility”, especially since the signs suggest that the dead cat bounce may be ending:
If there’s high inflation, then yields might rise again, further squeezing liquidity and financial conditions. A low print — and it would appear markets have got way too far ahead of themselves in pricing rising inflation — and more wealth destruction will come through a squeeze of the large short positions in Treasuries.
Cudmore’s full note is below.
Don’t Read Too Much Into the Short-Term Stock Swings
Whether the next 3% in the S&P 500 Index is up or down doesn’t actually mean much in this environment. So don’t waste mental capital trying to predict short-term moves.
While price itself is the most important fundamental, price- action provides a vital guide to positioning and sentiment, as well as offering insight into stories that may be under the radar. Neither should be ignored but they do need to be assessed in context.
Up until late January, investors became so used to minimal volatility for such an extended period of time that it’s hard to ignore the large swings we’re seeing now. But February has already seen the S&P 500 carve out a range of more than 10% and we’re still less than two weeks in. That’s the context short-term moves must be interpreted within.
Bulls shouldn’t relax until E-mini futures break above last week’s open at 2,757 while bears must be nervous about the possibility that 2529 will be seen as an important double-bottom in hindsight.
Taking a step back, the situation remains bearish overall. High U.S. rates, elevated volatility across assets and wealth destruction all point to further equity deleveraging.
Everyone is understandably looking to U.S. CPI as the next major catalyst. It could be argued that that event is skewed to be an equity negative either way.
If there’s high inflation, then yields might rise again, further squeezing liquidity and financial conditions. A low print — and it would appear markets have got way too far ahead of themselves in pricing rising inflation — and more wealth destruction will come through a squeeze of the large short positions in Treasuries.
We’re now in a world of higher volatility. Register that fact and don’t let the increased noise distract and mislead you.
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