Over Before It’s Begun

November has been a very strange month indeed.

For the entirety of the month, Macro Man has been trying to chip away and establish a P/L foothold from which to increase risk and try and put together a half-decent return. Suddenly, however, it’s the last day of the month, and Macro Man is still trying to establish that foothold. Come Monday, November will be over, seemingly before it ever really began.

While November started (however briefly) with an Obama rally, it’s ending with a rally of another sort- though Macro Man isn’t sure exactly what kind of rally this is. Inbetween, of course, there was some truly horrible price action. To put things in perspective, consider this: over the past week, the BKX has rallied 41%….and it’s still down more than 20% on the month! Moreover, when looked at on a year-long chart, the recent rally is barely noticeable.

Does this mean that there is scope for substantially more upside? Not necessarily, though it would, of course, be foolhardy to categorically rule out any potential outcome. Still, that the recent uptick in prices (the SPX is up “just” 20% in a week) has been accompanied by falling volume does not exactly engender confidence; it certainly does not suggest that massive buying/rebalancing is taking place.

Indeed, the pattern of 2008 would suggest a real risk that the current rally could end almost before it’s begun.

Finally, month end also brings about passive currency rebalancing. While last month’s proved to be all bark and no bite, it was widely discussed beforehand and thus perhaps discounted. Perhaps as a result, the month-end fixing has received relatively little attention this time around, despite decent potential for outsized moves, particularly given the thin holiday conditions.

As the table below demonstrates, there has been quite a disparity in monthly equity returns (and thus relative market caps in the MSCI indices), which should generate decent passive hedge flows. Eyeballing the chart, the dollar should be the primary beneficiary of those flows, most particularly against the yen but also against the euro.

Whether such flow pushes the market remains to be seen, but given that it’s not being talked bout to nearly the degree as last month would suggest that this time around, there is potential for a decent move….after which it will be December, a new month (and for some, a new year!)

Whether the new month brings about a change in risk appetite remains to be seen….

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