Sunday, Monday, Happy Days… Tuesday, Wednesday, Happy Days… Oh, you know the rest, but let me indulge a bit in my favorite sitcom as a child of the 70’s, for I had the distinct pleasure of hearing The Fonz, a.k.a. Henry Winkler, speak last night about his personal struggle with dyslexia and how he overcame the disability. His motivational drive to achieve one’s inner greatness despite what others may think of you certainly moved all of us in attendance, but I can assure you, I was not the only 35-45 year old male in the audience who wanted to ask if he really jumped over that shark via water skis when defeating the California Kid in one of the most famous episodes of the ABC series. I suppose my giddiness in meeting Mr. Winkler stemmed from my childhood self identification as the Fonz despite my reality of being more of a compilation of Ritchie, Potsie, and Ralph Mouth. Of course, the moment I became a dad I was all about Mr. C.
But I digress. Yesterday’s action in the market truly felt like “Happy Days,” so much so that we have effectively retraced the losses made since S&P’s downgrade of Portugal, the first of three EU members that the rating agency knocked lower. The obvious question remains whether the good times continue to roll to allow stocks to take out the 18 month highs made earlier in the week. Potentially, this morning’s release of Q1 Advanced GDP will have a lot to say about that, but the big news of the day comes late with the potential for large scale month end asset allocation to put pressure on stocks. As a reminder, managers often have a mandate requiring them to peg participation rates among the various classes of securities. For example, a PM may have explicit guidelines to position 65-70% of the portfolio in equities with the remaining 30-35% invested in fixed income by the end of each month or quarter. If, as we have experienced in April, stocks have outperformed bonds (one can use the SPX vs. the 10YR Note as a proxy), then the manager may have to buy credit instruments and fund those purchases through equity sales as the overall asset class allocation has moved out of balance. Typically, the selling will occur during the afternoon, sometimes commencing as early as 1:00 PM while on other occasions coming as late as 3:45 PM. Combined with other funds looking to book a solid month if any whiff of a late day selloff floats their way, I imagine we could experience some aggressive downward pressure such that I assign a high probability that the MOC’s resemble a fire sale. Regardless, from a risk-reward basis, it behooves one to at least get delta or beta neutral after lunch for not doing so is risking 1.5% to make perhaps only 20-30bps.
As for the rest of the day and beyond, we do have the Chicago PMI coming at 9:45 AM. Its loose correlation to the all important ISM due for release on Monday morning makes it one to watch, but please note that someone clearly leaked the data each of the past two months such that one can catch a free ride if he or she recognizes any violent strength or weakness a few minutes before the release. Speaking of Monday, we will turn the calendar to May which, with any first day of the month, should provide a pushback on any asset allocation selling we get stung with today. After that, it is back to the tug of war between stocks that remain fundamentally cheap against a market that is not only overbought but also skittish thanks to the potential for massive contagion stemming for the default of various EU states.
S&P 500 June E-Minis Key Technical Levels
Support: 1201.50/1200.00, 1195.75, 1192.00, 1190.00, 1184.25, 1180.00, 1177.50, 1171.00, 1166.25/65.25
Resistance: 1206.25, 1208.00, 1214.00, 1216.50, 1220.00/20.50, 1224.50/25.00, 1230.00, 1235.00, 1240.00
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