Nothing to Worry About …
It was clear that stock markets would sell off and US treasuries would catch a bid on the news of the failure of negotiations between the former “troika” and Greece. What was less clear was that gold would actually fail to catch a bid, but we are putting this down to the fact that another surprise event occurred: the euro, after initially declining, actually ended the trading day slightly higher.
Some of this has to do with positioning: there were already lots of speculative shorts in the euro, and speculators added some 24,000 contract to their long position in gold futures ahead of the weekend. When a big move higher failed to make an appearance, some of these positions in gold were evidently sold again, while euro shorts welcomed an opportunity to cover on a dip caused by widely unexpected news.
However, in spite of some brief displays of bravado early in the session, the US stock market did close near the lows of the day, with the DJIA losing 350 points. This isn’t really all that much anymore these days, in fact it is a move of less then 2% – hardly what one would call a “panic”. However, it did leave the average poised somewhat precariously just below its 200 day moving average and slightly below short term lateral support:
The DJIA falls by 2% and ends just below its 200 dma and short term lateral support – click to enlarge.
The daily candles left behind by the SPX and the Nasdaq look similarly ugly, but have failed to violate their respective 200 dmas or any noteworthy support levels so far. All in all, the reaction was probably worse than many had expected earlier in the day, but in percentage terms it really is no big deal. Overnight, Asian stock markets have put in a small bounce and at the time of writing, European stock markets are trading slightly higher as well.
What we find astonishing though is the complacency that is accompanying recent events both in anecdotal and positioning terms. For instance, the pure Rydex bull/bear asset ratio stands at 27.26, with bear assets only a smidgen above a new all time low – at less than half their level of early 2000, and that’s in nominal terms. To state that “no-one is looking down” is an understatement looking for an appropriately sensational sounding descriptor. We have discussed market sentiment and positioning data about a month ago (see “The Stock Market – A Picture of Excess” for details) and there is definitely no need to update these charts just yet – so far, they don’t look much different.
