HALLOWEEN HAS COME EARLY THIS YEAR FOR THE STOCK MARKET
I get the sense that the market needs to eat more bears before the August lows are broken. I made the contention a couple weeks back that we are at a point where the deception mechanism in the markets is effectively broken. During one-way, maniacal bull or bear moves (think gold currently or the bear market of 2008), nothing matters except for the trend. Deception stops taking place. Sentiment numbers no longer matter. Oversold/overbought readings are useless.
I was under the impression that the market had moved into its maniacal stage very early in August, I was caught off guard when the S&P moved back to above 1225. Under a "deceptionless" scenario, this type of move shouldn't have taken place. Now we see that the S&P is moving right back to the bottom end of its range (1140 on SP futures currently).
If the deception mechanism is still alive and well - meaning we haven't entered the meaty phase of the decline where nothing but the trend matters - the lows of August should hold quite easily. There are simply way too many bears out there to see a sizeable decline above and beyond what we are going to get tomorrow morning. This is a shift in sentiment for me, as I was expecting these lows to fail initially.
I am not going to be taking on stock exposure. However, I wouldn't mind adding to TMV (bearish bonds/bullish yields). I expect yields to continue their decline in the morning.
The only way I see bond yields continuing their move down is with a fundamentally disastrous scenario of economic failure either on a large-scale corporate or governmental level. I think there is a better than even chance that the widening in CDS spreads and various other indications of fear we are experiencing here are traders looking back at 2008, making a comparison to 2011 and believing that the market is wearing the identical costume.
Given all the fear the markets caused in 2008 with its most frightening costume in many years, the sight of anything similar will of course cause all the children to run home and hide under the covers. I believe over the coming weeks and months, the costume that the market is wearing will be revealed to be much more kind than what anyone is currently expecting.
