THOUGHTS ON TODAY’S RALLY
A news driven trampoline of economic indecency and the prelude to a steady European diet of fiscally whorish behavior that would make Ron Jeremy blush. A break of the August lows would be my buy trigger on the downside. I'm looking for 1080 on the S&P 500 as an extremely favorable risk/reward entry. If I don't get it, I won't chase and will reassess once we break out of this range to the upside. Let's say I suddenly woke up with a bullish hair up my arse that caused me to put on long exposure in US equities tomorrow morning. My problem would be that the risk in this range is so wide and unpredictable that it would be a difficult trade to manage. The "embracing of risk" positions I am currently holding will benefit from strong equity prices without all of the volatility. So I...
RISK ASSESSMENT WEDNESDAY
Risk assessment Wednesday came and went without any action. The current portfolio consists of the following positions: TMV - Average purchase price $21.24 - Current price $19.39 - 20 year+ treasury bear ETF 3X. The aversion to risk amongst Wall Street participants has manifested itself through a pummeling in the bond yields. Anticipation of an economic slowdown and fear of the European debt crisis resulting in a repeat of 2008 have created a premium in the price of "safe" fixed income instruments that may turn out to unjustified. Risk will be put back on in the months ahead. Long TMV is a good way to play the future embracing of risk. DZZ - Average purchase price $4.34 - Current price $4.34 - Double short gold ETN. Another way to play the unwinding of risk aversion on Wall Street going into the 4th quarter. A new uptrend in the US Dollar paired with strength in US equities will be too much for an overextended gold market to take over the coming 4-6 weeks. Gold at $1800 is a bet on a financial pandemic swallowing all developed economies. Gold moving back to $1400 will reclaim its semi-legitimate status as an alternative to fiscal and monetary irresponsibility in the form of unstable reserve currencies. Cliff notes: $1800 gold = put option on the financial system of developed economies. $1400 gold = alternative to unstable reserve currencies. EUO - Average purchase price $16.55 - Current price $18.34 - Double short Euro ETF. An unstable and unpredictable future for the EU means an unstable and unpredictable future for the Euro. The only path towards a temporary fix will be through a reluctant program of monetary irresponsibility that will be Euro bearish over the long-term. I'll post the chart this weekend. If you look at it from a long-term view it looks as if a distribution pattern has been taking place over the past few years. A move below 1.20 on the EUR/USD wouldn't be a surprise in 2012. 33% cash - waiting for an opportunity to initiate a long US equity position with the remaining funds. It's not going to happen with market action similar to what we experienced today. While I have been bullish on US equities since 9-6 for an intermediate term run. I am not comfortable buying in what has turned out to be a brutal range for both bulls and bears. It's a more sensible play to look at beneficiaries that lie on the periphery of a bullish move in equities. Beneficiaries that do not possess either the volatility or news driven paranoia that equities currently do. TMV, DZZ, EUO...
6 COUNTER-TREND TRADES
Bonds - One more move down in the markets should cause the long bond to have a final gasp to the upside. It should be shorted. Safety assets will be sold over the coming weeks and months in favor of adding risk into the first half of the 4th quarter. EUR/USD - Sell the rips...do not buy the dips. I expect to see the Dollar return to its lesser of all evils reserve currency status over the coming months. The Euro is too young to facing the problems that it is currently. It won't survive in its current form. Uncertainty kills. Gold/Silver - A new uptrend in the US Dollar knocks a major leg out from underneath support of the rally in precious metals. It wouldn't be a big deal if gold was undergoing a standard bull market. However, given the price action of the past few months, the engine that is driving gold needs to function perfectly. When the engine begins to sputter, as it is now, the specter of downside volatility becomes too much to pass up for opportunistic investors. European Equities - Um, no. The world doesn't need anymore heroes. US Equities - A substantial buying opportunity is fast approaching. Next week at the latest. Crude Oil - Oil futures should see some significant selling if the panic and fear trade comes back over the next few trading days. I see $84 as a substantial long-term support area for crude oil. On a fundamental basis, it seems that the emerging economies are still hungry enough to support a premium in energy prices. A story on Bloomberg a few days ago regarding the strength in the Chinese economy emphasized this point. There is also the issue of crude seeing some substantial relative strength over the past few weeks. It is sitting near an approx. two month high currently. A dip below $85 should be...
THE 11TH HOUR: TREAD CAREFULLY OVER THE NEXT FEW DAYS
In looking at futures trading overnight, I'm seeing a move down of some 10 points on the S&P 500. I am expecting the next few days to be down, with a possible close below 1140 occurring within the next few days. In yesterday's assessment of the market, I did mention a close below 1140 as being the first signal that we are about to test and more than likely break the August lows. We closed at 1172 today. As mentioned previously, violent ranges always finish in a symphony of violence. I'm not one for playing multi-day mini trends in the market, which is why I am choosing to stay out of stocks until an intermediate term long opportunity arrives. I believe it could be approaching by the end of the week or early next week. I will post an update as soon as a position is taken. The strong possibility exists of some substantial downside volatility over the next few days. Tread...
THE VIEW FROM 50,000 FEET ON STOCKS, DOLLAR, GOLD/SILVER AND BONDS
Stocks - BULLISH - I have been bullish on equities since last week. The simple reason being that the upside risk outweighs any downside risk remaining in the market. That doesn't mean that a move to 1100 on the S&P won't hurt if you are long. I believe that there is a substantial possibility of that move occurring, which is why I have yet to initiate a long position in stocks. If you are not getting measured on your month to month or quarterly performance, then a slow regimen of accumulation may be in order. If you are measured on your performance by others or have come to expect a certain standard out of yourself, then it may be best to wait a little bit more to do the real buying. Waiting is the course I'm taking. A close below 1140 on the S&P 500 would be the first step towards a test and probable break of the August lows. US Dollar - BULLISH - The breakout on the US Dollar over the past couple of weeks is indeed a real event. The velocity behind the move is substantial. The sentiment at the bottom was dismal. Bear in mind that currencies tend to be much more trend driven than stocks. Those who believe that the US Dollar must fall in order for stocks to rally suffer from a lack of imagination that may be better suited for a game of checkers. Fundamentally the US Dollar may be telling us there will be no QE3. Or perhaps no announced QE3, with the Fed instead opting for a silent moves to bolster the markets and economy. Could it be that QE3 is indeed unnecessary, with talks of an inevitable drawdown in the economy being overblown? Or is the US Dollar simply moving up because it sucks less than all the alternative? Namely the Euro. In either case, I continue to hold my position in EUO from 8-29, with no plans of exiting in the near future. Gold/Silver - BEARISH - On 8-21 I made the argument that either way you slice up the fundamental picture going forward gold and silver are bound to fall. Thus far the thinking has been proven correct as news of further trouble in Europe has failed to drive gold higher, contrary to popular expectations. Gold/Silver at current levels are essentially CDS contracts on the implosion of the financial and governmental sector in Europe and the United States. A drop back below 1500 on gold would serve to remove that designation. Those who drove the price of gold up from 1500 to near 2000 were buying for...
REAL TALK ABOUT THE S&P 500
I've outlined my feelings about the S&P 500 in the chart that appears below. The bottom line is that a violent, chaotic pattern will resolve itself much as it has lived its life...through chaos. Chaos would be a break of the August lows. That would cause mass confusion. That would also put in a solid bottom for the markets to rally from. I'm holding 33% cash to take advantage of such an event. I can't see myself putting on equity exposure this week unless the criteria outlined in the paragraph above and in more detail, in the chart below is met. Upside from a break of 1100 on the S&P is roughly 20%. I can see that move happening in a span of roughly 2 months given the compression in prices and lopsided bearish sentiment. Think outside of the sphere of panic and defeat that is gripping everyone on Wall Street currently. That's the only way you'll come ahead going into the end of the year. Buying into group think isn't a hallmark of successful speculation. Real talk. click chart to...
6 CHARTS TO KEEP YOU IN PEACE AND NOT IN PIECES DURING THE WEEK AHEAD
click charts to enlarge
A LACK OF IMAGINATION IN BEAR LAND
There's some serious lack of imagination from the financial community with respect to the markets at present. 2008 has made professional investors especially into starry eyed zombies that can't differentiate between generational economic crisis (2008) and circumstantial economic crisis (2011). We could very well be in a renewed bear market. In fact, we may have never left bear market territory and the rally of the past couple years was just a standard liquidity driven retracement. However, the bears thinking that we are in for anything resembling the plunge of 2008 suffer from a lack of intellectual color. They see the financial world as black and white instead of a vast canvas where colors blend into each other and no two parts are the same. I believe there will be substantial upside into October and perhaps November. September will be an up month instead of the current -5% on the S&P. The economic ramifications of the current slowdown are being overestimated by the investment community as a result of the emotional scars of 2008. There is a "protect capital at all costs" mentality that will lead to underperformance as a majority of investors will miss out on the rally to come over the next several weeks and perhaps into year end. The panic buying that will come as a result should take the S&P 500 to around 1300 in October to possibly November. Whereas 2008 was an avalanche to the downside. The current bear market will be choppy and extremely challenging for those who attempt to pick the low hanging fruit from the bear tree. It's a simple matter of too many investors having various stages of gloom and doom syndrome. Markets don't collapse when a psychology of this nature exists. They will instead become choppy, extract, rinse, fall rapidly, rise and then fall again. It's a stair step process that will be excruciating. It will require anticipation instead of reaction. I wasn't at all happy with the way I played the market in August, despite seeing the downside well ahead of most. September will not be the same. I have an equal sense of conviction in the fact that we are nearing an important bottom. I haven't allocated into any equity ETFs as of yet. I may do so during the coming week and will update once I...
RISK ASSESSMENT THURSDAY
On the 3rd trading day of each week, I like to assess the risk in the portfolio to see what positions have the chance to cause the most harm going forward. Today was risk assessment Thursday. It came and went without any action, whatsoever. I'm holding a macro portfolio currently. I feel that this will be the way to allocate funds for the near to intermediate term. Individual stock opportunities have too much individual risk with the scope of earnings warnings and uncertainty with respect to most industries. The macro picture is much clearer here. I think there will opportunities to play from both the bull side of the trade (where I am currently) and the bear side of the trade in coming months. Yes...it's going to be that kind of market. I am holding fairly concentrated positions in EUO, TMV and DZZ. This portfolio is essentially a bet on the great aversion to risk trade dissolving in the coming weeks, creating a crumbling effect for "safety" assets. Gold and long dated US Treasuries are extremely vulnerable. The trade in EUO has been working out well. I announced the trade on the day I got smashed on the short side of the market. There continues to be value in the US Dollar as I have been saying for the past couple of weeks. The breakout today was significant. I will have charts this weekend. I expect the bullish side of stocks to be THE side for the remainder of the month. I think we are in for a substantial rally as the aversion to risk amongst all of Wall Street has grown to the point of being absurd. The economy and financial system literally has to start dropping bombs in order for further downside to take shape. There are simply too many people already out of the market or short to create any significant selling. This doesn't mean that the market is done on the bear side. Over the long-term, we may just be getting started. However, a rebalancing of sentiment does need to take place before any further downside takes place. I expect to see that into the middle of October. Lots of charts and further commentary this...
SEPTEMBER OF 2011: A HORROR MOVIE FOR THE BEARS
This article also featured on Forbes There are two distinct frames of thoughts with respect to the current state of the stock market: 1. We fall from current levels more or less unabated, in a horrific fashion that resembles 2008. 2. We fall from current levels more or less unabated, in a horrific fashion that resembles 2008 following a small bounce. The key here is the reference to 2008. The Fall of 2008 left such an impression in the minds of the financial community that traders, investors and fund managers alike are in various stages of panic for fear of extreme losses. Furthermore, opportunistic investors are now salivating at the prospects for creating monstrous gains via shorting the market thinking that a free fall from these levels is a virtual slam dunk. It's not only far from a slam dunk, the bullish side of the trade is setting up for a move that will wipe clean the gaggle of bears that currently populates Wall Street. 2008 has become like Camp WalaWala. You know, the campground that populated horror movies from the 80's and 90's. A masked man shows up with a machete, chainsaw or blunt object. Obnoxious guys who like beer begin to vanish. Scantily clad women who like guys who like beer also vanish. Eventually the entire campground is emptied of bad actors and what's left is the makings of a great movie franchise. It's as if all of Wall Street has taken to Camp WalaWala for September. You have a large group of investors huddled around a campfire telling stories of all the bad things that happened at Camp WalaWala. At the first snapping of a tree branch or sudden gust of wind, everybody runs into their cabins armed with baseball bats and kitchen knives waiting for a killer that will never come. There are certain truths about the markets that have stood the test of time since the first bid and offer were posted. One of those truths is that deception is an integral part of the functioning of any market where prices lead to profit or loss. There are points in an assets lifespan where the deception mechanism of that market will break, creating abundant wealth for those who ride the trend. The key is identifying markets where the deception mechanism is broken. The recent uptrend in gold is one example of the trend and the euphoria surrounding it taking precedent over normal market function. That function is to deceive. If we are in a new bear market, as many suggest, then there will come a point in the trend where the deception mechanism breaks...