Following on from yesterday’s tepid price action in equities, markets opened on the back foot this morning but have subsequently snapped back smartly. Far from basking in the glow of the brave new world, spurred on by (yawn) another rumoured Chinese stimulus package, Macro Man feels as if he’s being incinerated in the red hot crucible of a Panglossian risk orgy.
Yesterday’s US retail sales data is a classic case in point of why the current environment is so treacherous. While the month-on-month decline was certainly disappointing, the 3 month rate of change turned sharply upwards. This is an example of the fabled “second derivative”, i.e. an improvement in the rate of change in the data. Obviously, extrapolated further, this potential “green shoot” could blossom into the flower of recovery.
Yet in the scramble to ride the wave of of recovery, it’s easy to lose sight of the fact that the green shoot may, in fact, be a dandelion. Certainly the chart of actual retail sales paints a less compelling picture than the rate of change chart above. Indeed, if retail sales were a financial asset, you’d call the early-year pop little more than a dead-cat bounce.
Yet it is the very fact that there is ambiguity in interpreting the data is what has made things a bit tricky. It is difficult enough to project the trajectory of economic variables; figuring out which interpretation the market will pursue adds an additional layer of complexity that, for a trader like Macro Man, considerably reduces the chance of success.
So he has decided to pursue a somewhat different tack and focus on the charts. Price, as they say, trumps all; in the current environment it certainly offers the clearest signal as to how the market chooses to interpret various datapoints.
The problem, of course, is that it is difficult to check one’s inherent biases at the door. It would be far better if Bloomberg had an application that could change asset price tickers from EUR, CL1 and ESM9 to Tom, Dick, and Harry. (Perhaps there’s a business opportunity there!)
In the absence of such a tool, Macro Man is steeling himself as best he can and trying to keep his eyes as open as possible in the hunt for “sexy” charts. Like Austin Powers, he’s trying to recaputre his mojo; if any readers know a Tom, Dick, or Harry (or prehaps a Felicity Shagwell?) that could help him in his quest, he’d love to meet them.