RUNNING FOUR DEEP
You know that fear has hit some outstanding levels when I had to force my hand to click the buy button during the last half hour of trading. Today's reversal was one of the scenarios that had me loading up on the long side. I did that out of respect for my research. I have a number of studies that were pointing to a reversal day below the August lows followed by a strong close being an ideal scenario for developing a rally through October. It didn't seem like it was a possibility until the final hour of trading. I would have preferred to see it rally from mid-day through the close.
Has the market developed such a sense of vitriolic hate for its opponents that setups like today will be destroyed by Wednesday? It could be.
Have the HFT systems become so in tune with how traders function that they are feeding off of tried and true reversal patterns similar to what was witnessed today? The SkyNet of the stock market, perhaps? A group of trading terminators that want to feed on everything that we've been taught, experienced and prospered with over the years.
That's what it has felt like lately in the equity markets. It is only normal to question the stability and sanity of the market after such a wild two months of trading.
I took on four positions today. Here is the reasoning behind each:
QQQ - Simple. Strongest sector of the past couple of months should be the strongest coming out of the gates when a rally kicks off. No rocket science involved here. Your brain can hurt you.
JJC - I have been speaking about the ghost of 2008 haunting global markets for the past couple of weeks. This is being reflected in copper with an abundant amount of weakness as of late. What if copper prices have become an indicator of global fear and panic instead of the reality of the fundamentals? Is any asset class immune from believing that a repeat of 2008 is upon us? What type of discount can be expect to see as a result of the fear of a repeat? How much is a strong dollar influencing copper prices to the downside? All questions that need to be considered.
FAS - Financials are being assigned a substantial discount that is a small part reality and a great part fear. The reality of the situation is that earnings will decline as a result of the current credit environment. However liquidity and stability at the major financial institutions is nowhere near where we were in 2008. Financials are being assigned the greatest discount as a result of the repeat of 2008 mentality that has taken over Wall Street as a result of Europe.
EDC - Emerging markets have been destroyed over the past couple of weeks mostly as a result of perceived negative news coming out of China and the strength in the US Dollar altering correlations that the markets have become accustomed to. Both have been overblown to the downside and emerging markets (EEM) are sitting on a nice area of support here. An uninterrupted move lower only occurs under a worst case scenario. I think we will avoid that for the time being.
75% invested as of now. That is probably as high as I will get.
