October 09

Crowded Trades Squeeze Bears

This  week has seen a huge V shaped bounce in the most shorted currencies ,stocks, commodities and corporate bonds. The Energy sector ETF has rallied almost 16% off the lows seen last Friday as US equity markets opened down 1.2% after a disappointing jobs number pushed stocks back near their August lows. A turnaround started shortly thereafter has continued now for five trading days with the S&P 500 today closing above a key resistance level at 2000.

The rally seems to have been driven by shorts rushing to cover positions that have been working for well over 6 months now. Oil grinded higher early this week and the rallied picked up steam over the last 48 hours with West Texas Intermediate closing just below $50 a barrel today. Most oil and gas related stocks have fallen 30%-50% this year, but these firms have seen a huge bounce this week with Chevron rallying  17%, Anadarko 21% and the main Bakken shale player Continental up 34%. Macau Casinos were also big losers this year, falling on average 50%-70% since their 2014 highs but Wynn Resorts has jumped 47% in 5 days and Las Vegas Sands rallied 29% as investors look for a bottom in Chinese casino stocks. US Steel and Freeport McMoran also saw sizeable gains of 29% and 37%.

Commodity and Emerging Market currencies have gone along for the ride with ZAR, CAD and AUD rising 5.3%, 3.5% and 4.1% as the Dollar has taken a back seat to broader movements in oil and credit. This dynamic of oil steering a large proportion of financial assets is likely to continue as US shale companies and OPEC nations hold their breath and hope for a recovery. Oil has traded in a relatively tight range between 44 and 50  for a month now, and even with the large gains of the last two days the range has not been decisively broken. The 200 day moving average looms at $51, price has remained below the 200 day since decline began in July 2014.


West Texas Intermediate, 4hr Chart

Make no mistake this is yet again a “China Trade”, only this time is a squeeze. It remains to be seen whether this bounce in everything commodity related is a routine positioning squeeze or the start of something bigger. The supply overhang still exists, as do doubts about global demand and growth. One thing however is sure, if WTI falls below the 2009 weekly support level at $40 per barrel the junk bond market will probably be in for a world of pain as bankruptcy fears would send contagion to broader financial markets.