November does not fail us as being the month where one sees a reversal of market themes that have been in place all throughout the year.
In 2021, we saw a pivot right when technology stocks, the darling of the post-Covid era, were sold down into the famous Thanksgiving profit-taking time. This year, as we enter year-end for most hedge funds, it is the same sector that is rallying aggressively at the expense of energy, which has been the darling of 2022 in terms of asset allocation. So, as the market rallies, energy fails to make new highs -- in fact, it is actually falling despite the broader risk asset rally.
Such is the nature of massive unwinds as funds close their winning positions and buy back their shorts, hurting the fundamental long/short-focused funds. In a nutshell, the market is in a mess and catches everyone off guard.
The trigger for such a move was inspired by last Thursday's softer-than-expected CPI number for October, which was 0.2 percentage points softer across the board. That was all the market needed to chase their shorts on technology stocks and sell the dollar, which has been the winner of this year. This despite Fed Chair Powell urging the market to not get ahead of itself and saying that further data needs to be monitored before the central bank knows their work has been done.
After all, the Fed has been tightening rates for months now, so it was inevitable that inflation would peak and as the economy slowed down, prices would retreat. That was never up for debate, but what is still up for debate is whether it is enough for the Fed to claim that their tightening is done for now.
To put things in perspective CPI is still averaging around 7.9%, with a 7 handle, which is far above the Fed's 2% target. Their work is far from done and the market rally only gives them more of a justification to keep on going until inflation has come down. Powell stressed that very fact during his hawkish press conference after the market cheered the initial commentary about how the Fed could slow their pace of tightening.
Now, we've got another burst of lower PPI numbers for October, which came in at 0% for the month vs. the estimate of 0.3%, with Core year-over-year printing at 6.7% vs. 7.2% expected, which is taking the dollar down even further, giving the longs a reason to trim it even more.
Year-ends are a powerful thing as bonuses are determined and so there are a lot of mark-to-market games being played to take advantage of that. U.S. 10-Year Bond yields have now dropped down to 3.80%from 4.2%, with the dollar index (DXY) having declining to 106 now from highs of 114, with the Nasdaq having rallied all the way to 12,000 from 10,500.
We are now at massive trend support and resistance levels and the market may have unwound its key consensual positions. Sometimes when positions get too one-sided, they can snap like a rubber band going in the opposite way, but that may not mean there is a change in trend.
2022 has been a year of trading, not investing. From one extreme to the other, we have seen many false breakouts and collapses.
Has the dollar really seen its peak? Time shall tell, but for now let the funds play their games and try to show gains for a year that has been abysmal for most.
