So Is This It?

Last Friday I mentioned a piece about big call spread trades going through on the VIX. July 45/55 call spreads to be precise. It stood out because it was clearly calling for a big market fall, not only that, but a market fall pretty quicksmart too. Who knows if this punter knew something but the timing pretty much bottom ticked the VIX which rallied 10% yesterday and 15% over the last few days.
Equity markets suffered their biggest fall in a couple of months but the reaction is slightly muted this morn. Volumes are at c80% with the defensives again providing the majority of the support. EStoxx closed below the 200 day MAV but SPX didn’t and it makes sense I think that people are reticent to really follow through on the downside until that happens. Oh and we’ve had some good news too, which probably doesn’t’ do any harm, ZEW came in better and the UK inflation numbers came in ahead too. Which is erm, good news right?? Then we get to have rate hikes which stifle growth. High inflation and high unemployment can co-exist. Dr Phillips was disproved…and this is called stagflation…and if that’s a cause for celebration, then we really are delusional. Anyway, I digress, CPI came in at 2.2% YoY vs est of 2%. RPI was ahead too. Sterling caught a bid on the back of this as the Inflationistas point towards rate hikes sooner than previously anticipated. However, look at the trend of these numbers, and also how the actual has come in versus the forecast number over the past X months…this is the lowest CPI print we’ve seen since Jan 08 and typically the actual comes in higher than expected. It’s getting a bit more traction today however.

The Dollar is falling foul of a Russian 180. Despite Kudrin commenting yesterday about not seeking an alternative to the Dollar, Medvedev has turned around today and showed him who’s Boss by calling for…an alternative to the Dollar! Resource stocks are on the fall today but resource currencies are enjoying a bounce. EURGBP continues its trend downwards as Eurozone issues mount and yesterday’s comments from Papademos about banks in the area facing further losses of up to EUR283bn certainly hasn’t helped.

I’m more convinced we’re at a potential turning point in the market here and especially so if the SPX can break through its 200 day and I still like the defensives on this basis. We’ve been near enough to here before though so you can’t discount the wild rally for not much reason but I think we’ve exhausted the uptrend and the path of least resistance is down as reality hits home.