BLACK CLOUDS AND TRAUMATIC MEMORIES
When I posted an article a couple nights ago entitled "The Ben Bernanke Kicks Off A Period of Chop", I stated the following: We’re in for some short-term (3-5 days) choppiness, with a slant to the downside I didn't think that "slant" would involve 700 points on the Dow and substantial weakness in several key sectors. There have obviously been some significant events over the past couple of days. Let's review the key points: 1. Transports have broken down for the time being. 2. Financials have broken down convincingly. 3. Key bank stocks (C, BAC, MS, GS) look like they are in death spiral mode. 4. Copper (a leading indicator of the global economy) has been destroyed. 5. The CRB (commodities) have broken down completely. 6. The Fed has been proven ineffective, with Operation Twist being hailed as a nonsensical strategy deployed so that the markets wouldn't crater completely thinking the Fed has abandoned investors. Six significantly ugly events just this week. If you would have showed me the chart for Copper, Morgan Stanley, Goldman Sachs, Citi, the CRB, TLT, and the Dow Transports without showing me where the S&P 500 was I would guess that we would be sitting at 1050. No way I would guess that we would still be sitting in the bottom end of the nearly 2 month trading range. The fact that we are is what I consider to be a positive divergence going forward. The psychological ramifications of the economic Armageddon that was 2008 and early 2009 are reverberating through the current market environment. There is a 2008-2009 repeat scenario premium that I believe is being factored into everything from stock prices to fixed income pricing and going as deep as spreads on various CDS contracts. Out of the sea of disinformation then, we only need to be paying attention to two important factors. Forget the headlines. Forget what Roubini says. Forget what your favorite hedge fund manager on CNBC says. Forget it all. These are the only two pertinent points: 1. The S&P has held onto its lows despite six separate but equally destructive events taking place. 2. Given the relatively short amount of time between the last financial crisis and this current crisis, there absolutely is a repeat scenario fear premium being factored into the various asset classes. And then there is the pure fear I am seeing in various investor fear gauges. For example, some of the proprietary put/call data I keep an eye on is at all-time record highs. Higher than anytime in 2008 or 2009. For these reasons, the window to buy is once again open. And with...
WHICH ONE CRASHES THIS TIME? NASDAQ OR LONG-TERM TREASURIES?
The last time the ratio between the Nasdaq 100 and thirty year treasury yields got this high, the Nasdaq crashed. Which will crash this time? Bonds or tech? click chart to enlarge
RISK ASSESSMENT WEDNESDAY: A LESSON IN BEING HONEST WITH MYSELF
As an investor, one of the most crucial elements in order to achieve the success you desire is to be 100%, unequivocally and without boundaries truthful with yourself. I have been doing this for some 17 years now, with a great deal of success as well as a great deal of setbacks along the path. One of my greatest weaknesses has been the inability to have an honest relationship with respect to what I understand to be truth and what is perceived as truth that ultimately ends of being undeniably false. I expect nothing out of this website. I'm not looking to make money off of subscription fees. I'm not looking to get investors. I'm not looking to connect with professionals that will connect me with a greater network of professionals. I simply want a journal to document my thoughts. A journal I can come back to and review for holes in my frame of thinking. If I happen to assist an investor or two and broaden your thinking with respect to the markets then that's a bonus for everyone involved. This frame of wanting nothing but to give allows me to be totally honest with my successes and especially my mistakes. And from that I continue my growth. With that said, it has become abundantly and painfully clear that I don't understand what is going in the bond market at present. My trade on TMV was grossly premature in its entry. I didn't observe the warning signs along the path that would have alerted me that my thesis with respect to the trade was flawed. The question now becomes what to do about the trade. The position isn't the size where I need to panic for fear of blowing up. If bonds continue to rise I won't like it, but it won't kill me either. It seems that my line of thinking with respect to Twist being factored into the fixed income markets was the line a lot of fund managers were taking. This caused a lot of short covering to take place today along with further buying into long-term bonds as the thinking is that the Fed will protect bond holders through a steady regimen of being on the bid. The downside can't be that much, right? Whenever a governmental entity becomes involved with attempting to manipulate open markets, it creates a sense of complacency amongst investors in that market. Bond investors will be under the impression that the Fed being on the bid will limit their risk over the intermediate to long-term. If the risk suddenly becomes amplified as the a result of that market taking...
THE BEN BERNANKE KICKS OFF A PERIOD OF CHOP
Charts are below with further details. We're in for some short-term (3-5 days) choppiness, with a slant to the downside, based on a number of things I observed today: 1. Copper fell off a cliff 2. Emerging market index looks ready to follow copper down 3. Nasdaq looks tired 4. Nasdaq has had a nice run, yet the S&P and Dow are still trapped in their respective range bound dungeons. If the Nasdaq is indeed tired and wants to take a breather, where does that leave the S&P and Dow? 5. Companies like AAPL, AMZN and SBUX all look ready to catch their breath. Goes back to the Nasdaq looking tired. I don't play 3-5 micro-trends in the market, however, I will be looking to buy into the weakness next week. Not sure where I will choose to allocate as of yet. And finally, the Ben Bernanke gets to show his love or lack thereof for investors and the economy in general tomorrow. click chart to...
TODAY’S THOUGHTS: VOLATILITY IS A TWO WAY STREET
A news driven spin cycle driven by indecisive European finance ministers that detest United States monetary policy but increasingly find themselves with no other choice but to follow the path of the hated one. Of course, with such a description of our latest crisis situation one would expect volatility to become the rule rather than the exception. I have been bullish on US equities since September 6th. My view hasn't changed despite the volatility. At the same time, the volatility is the reason I have been reluctant to initiate a position in any equity related ETFs. I am having a difficult time measuring my risk in this range. It has become a trading range that is simply too wide to be able to exercise proper risk control without either (1) getting stopped out prematurely (2) giving up too much equity to ride out the volatility (3) putting on a position that is too small to matter. I continue to believe that the best way to play a return to equities in the coming weeks and possibly months is through a "risk amplification" trade that puts together a basket of assets that will benefit from the unwinding of risk aversion. My favorite being short the long end of the curve. Shorting gold is another favorite. And being short the Euro is one I've had since August. Although that is more a macro play on an intermediate term trend towards the US Dollar regaining reserve currency status. With respect to the action today: I wasn't really surprised by any of it. You know you are facing difficult conditions when a 200 point downswing on the Dow to start your Monday morning becomes a typical start to the week. The last hour of trading exhibited in a monochromatic light the exact change of behavior I had outlined in my article over the weekend. The difficult month of August and first part of September saw 150+ point down days, invariably continue their momentum to the downside during the final hour of trading. Today we saw the reverse effect, with the markets attempting to take back all of the losses, and the QQQ/Nasdaq Comp (important market leaders) nearly finishing green on the day. At present, futures are wildly volatile once again overnight on news of S&P downgrading Italian debt. Same old European saga in a bucket of molasses waiting for Grandpa Gurt to kick it over and set the rodents free. We are quickly approaching a point where Italy, Greece, France and Germany will be put in the rear view and the spectacle of outstanding strength for the earnings of corporate America, especially technology,...
10 CHARTS THAT WILL MAKE YOU HEAD BUTT, KISS, HUG AND THEN GET KNOCKED OUT BY YOUR OPPONENT
click charts to enlarge
HOW STARBUCKS TELLS US THAT THE BOND MARKET IS A LIAR
To be functional in the capital markets you must develop an internal lie detector that is constantly seeking out those asset classes that are truth tellers and those who are devious liars. The most interesting and challenging aspect of this exercise is that on a month to month basis those asset classes we recognize as being angelic truth tellers suddenly become devious liars and vice versa. The bond market is regarded by many as the ultimate truth teller. People like to believe that bond traders and investors are greatly sophisticated. The Bill Gross brainy types who relish and dissect economic statistics, formulating a recipe for success that makes equity investors seem like Forest Gump. I am of the opinion that the age of information equality has taken away the edge that bond investors used to enjoy. They are now as susceptible to being outright wrong as any other class of investors. It is fair to assume that during any recessionary period (coin flip chance currently according to most) the first thing to go will be discretionary items that when thought about on a deeper level seem absurdly overpriced. A $5.00 soy vanilla latte is one of those items that is threatened by sudden attention to the daily budget. It is fair to assume then that one of the first companies to fall under threat of a recessionary period, driven by consumers opting for a $2 cup of coffee from McDonalds or a 50 cent cup of coffee from home, would be Starbucks. Instead, however, Starbucks is barely below its highs. All the meanwhile, bond yields have plunged to levels that tell us $5.00 lattes are out and 7-11 coffee that you pour yourself is in. Bonds are lying click chart to...
4 IMPORTANT STRUCTURAL CHANGES TOOK PLACE IN THE MARKETS LAST WEEK
Structural changes took place in the markets this past week that are of note: 1. The Nasdaq 100 asserted its leadership role and left no doubt that the relative strength it enjoyed during the past several weeks was deserved. Any rally worth participating in over the past 15 years has been led by tech. 2. The semiconductor sector was one of the strongest sectors in the market over the past week. This is key to the rally in technology. Given the "clearance" the SOX enjoyed over its previous range, it is fair to assume that the rally is legitimate. More details to come in the weekend chart review later. 3. Massive intra-day and often downside volatility of the past several weeks turned into primarily upside volatility. This is a definite change in the attitude of the market. We have experienced countless last hour sell offs over the past several weeks. The intra-day volatility, both to the upside and downside has been frustrating. This week we saw very little intra-day volatility and fewer in the way of last hour sell-offs. This is a change in character for a market that has had severe multiple personality disorder since August. 4. Commodities have faded to the background instead of asserting their role as a leader of the current rally. The new uptrend in the US Dollar dramatically shifts the landscape of established relationships between the various asset classes. I would like to see commodities rally alongside equities as this what I have grown comfortable with over the past couple of years. However, it is important to keep an open mind and realize that the US Dollar is THE foundational support for the established patterns that exert themselves in the macro world. A change in trend for the US Dollar will therefore shift the patterns into temporarily unrecognizable mush. Commodities may fall into this mush for the time...
THAT BEAR FLAG THING
It was the talk of the town last weekend. This weekend it will be something new, I'm sure. The scenario drawn up in the chart review last weekend for what the market would do this week turned out to be fairly accurate. I was expecting a bigger penetration of the downside of the "bear flag thing". It seemed to have sucked in enough shorts, with or without the bear flag thing, to cause the substantial rally we experienced this week. This is the S&P chart from weekend chart review on 9-11. click chart to...
3 BULLISH AND 3 BEARISH POINTS…WELL, KIND OF BEARISH
THE GOOD: 1. Strength in tech: The leading technology companies are all experiencing substantial strength. They have, in fact, been bucking the trend of perpetual weakness since the swoon began in August. Mega-cap tech is leading the way. The obvious strength seems to be screaming that a surprisingly positive October earnings period lies ahead. 2. Pessimism: The markets have caused enough psychological damage that a majority of individuals and institutions do not have nearly the exposure they would like should the market continue moving up. This is a difficult rally to buy and that's exactly how the market wants it. 3. Semiconductors: The leader of technology has regained its position as a leader and is experiencing a substantial breakout from the trading range formed over the past several weeks. This bodes well for the entire market as strength in the SOX provides a foundation from which technology can pull up the entire market. THE BAD: 1. Commodities: What happened to the leadership of the commodity sector? It could be a reaction to the recent strength in the US Dollar. It could also be a reaction to weakness in the global economy. It's too early to say. However, it deserves to be watched. 2. Bond Market: Bonds are often times slow to react to changes in trends. I think that could be the case here. Classic bond market watchers will look at bonds in their current state of disbelief with respect to the current rally and say that the rally will fail. I take the opposite view: The lack of conviction amongst the army of chicken littles hiding in the bond market is capital awaiting to reenter assets with a positive real return rate. Those who are hiding in fixed income will suffer from underperformance anxiety by the first to second week of October. Either way, the long end of the curve is due for a substantial decline. Perhaps this belongs in "The Good" section? 3. Still Rangebound: In the S&P and Dow we're still sitting in the nightmare range of the past several weeks. These averages need to follow the Nasdaq and breakout within the next week in order to legitimize the bulls case. A flood of money will rush into the market if a sustained breakout occurs. I'll have a bunch of charts in my Sunday review this weekend going over the ever changing picture in the...