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The thaw that stopped at the surface — the intermarket at 50.1 in August 2016

Article

The extreme

An index sitting at the center of the scale usually means calm. In August 2016, it meant the opposite. The intermarket returned to neutral ground after nearly a year of aversion — the surface thaw that had been missing since the bottom of 2015. But the aggregate reading was an average, and the average hid movement. The month before, the preference for cyclical stocks had reached the most stretched point of the entire series; in August, it came apart. In numbers: the intermarket rose from 45.8 to 50.14; the Cyclical/Non-Cyclical ratio pulled back from +2.87 to +1.78 of deviation, while Financials/IBOV jumped from +0.13 to +1.11. The month's strongest upward force and its strongest downward force were both internal to the stock market.

What happened next

The money that grew tired of the cyclical bet did not leave the room — it took the banks' chair. With the Selic pinned at 14.25% a year, the migration had logic: the financial sector thrives where the cost of money is expensive, and money stayed expensive. That is why the aggregate index barely moved while leadership changed hands. The Perene Risk Index closed at 44.5, also neutral; the dollar eased to R$ 3.2097, the lowest level of the series; the IPCA softened to 0.44%. Nothing at the top announced the succession of chairs below.

What did not happen

The thaw was not a regime turn. Aversion did not give way to euphoria: the risk axis stayed neutral and neutral it remained. Domestic mood did not track prices either — it stayed in extreme optimism, at 73.4, unhooked from a merely lukewarm structure. And neutral did not mean a still market: underneath, cyclicals were ceding, banks were rising, and the disaffection with commodities was deepening (Commodities/IBOV from −0.17 to −0.66). The calm of the surface was not calm.

The honest verdict

An index at the center of the scale says less than it seems. It reports the average temperature, not the current underneath. In August 2016, the honest reading was not in the 50.14 — it was in the changing of command that the number, on its own, did not tell.

Continue reading: The three alarms of August 2015 · The bottom of 2016 — structure before mood · What the intermarket reading is →

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Characters: Structure (intermarket) · Flow (risk appetite)