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Air Pockets Ahead

Tyler Durden's picture





 

From Nic Lenoir of ICAP

The chairman would like for you to return to your seats and fasten your seatbelts. If I have not given many updates in the past few days it's because the fundamentals are known, the Fed's game plan is known, and now we just need to front-run the fed and watch everything as we know it falls apart.

Over 40 million Americans on food stamps, a bankrupt banking system, bankrupt sovereign governments in many cases, a broken world economic model where the consumers borrow and the producers don't consume, and in my eyes you can add a broken political system in most Western democracies, peak oil, and food supply shortages... all counterbalanced by the stacks of Benjamins thrown at the world by helicopter Ben. It's like hiding in the basement when a meteorite the size of the moon is about to crash on earth. 

My friend Julian Brigden recently pointed out the interesting example of the Nasdaq in 1999. Back then terrorized by Y2K the Fed engorged the financial system with tons of cash which led to a 100% rally in the Nasdaq from the fall of 1999 until March 2000. Of course the market went as quickly as it came. Will we see a repeat? Maybe... Maybe not. For that we have to wait the next couple weeks to see if when the cash starts to actually flow in we do get a ramp up, or whether the discontent and distrust are so great that markets protest against loose policies. Fundamentals are a lot worse than in 1999 for one, and most of the cash printed goes into precious metals or abroad because most realize the future or safety don't lie within our borders and banking system, at least not without some serious changes as to how things function and after the market is allowed to clear at prices that will truly attract investors for the right reason (read: right reason does not equal front-running the Fed for a quick buck). The backlash from international observers was quite expected as a lot of emerging countries are being choked by inflation as USD liquidity flood their markets. More interesting is some of the backlash domestically, from established independent economists to Kevin Warsh at the Fed who basically said that skyrocketing commodities and a weak USD would be a sign of failure of current policy path. That's about as much disagreement as one could expect from someone in his position and that's why I feel those words carry a lot of weight.

Precious metals took everyone by surprise interrupting their parabolic ascent yesterday following the announcement of higher margins for Silver future. Some claim it is a way to rig the market. I respectfully disagree. While having no faith in the government as I know economic releases and markets are heavily manipulated by its actions, given recent volatility it makes perfect sense to increase margins. After all margins are a function of the VAR (hence volatility) and liquidity in the market. When liquidity deteriorates and price swings grow in size the exchange needs to make sure everyone can cover their losses to avoid serious systemic risk. If the Fed keeps buying bonds and there is a status quo in terms of the way the world economy operates, precious metals remain well supported fundamentals and this violent pullback does not threaten the overall trend one bit. Watch 1,384/1,385 in gold as support, as a break there would mean more weakness short-term as a H&S is triggered and in such choppy markets it would most likely be followed by some liquidations of weak longs, but other than that the fundamentals behind the trend remain intact. If anything people should be more worried if LCH and other clearing houses start asking bigger haircuts on bonds, as this is a lot more significant since it puts pressure on bond prices which are not fundamentally sound.

Being long German Fixed Income seems to be the only other thing that makes sense fundamentally as people spread it against short PIIGS and Germany inspires confidence to investors by its austerity. However given the swings you have to actively trade in and out of your positions to manage avoiding the flushes that will happen in tandem with those in US bonds for which supply and demand are in such size versus the risk appetite of non-government participants that chainsaw price action is likely to be the norm. With a holiday tomorrow, 30Y auction today, and Fed buybacks on Friday we have a perfect set up for choppy markets and so far today has not disappointed in that respect. As we said after the Fed announcement: welcome to markets where VIX and other vol measures collapse yet prices have daily 2%/3% swings constantly. This is what happens when markets experience tides of liquidity and disturbed fundamentals, until the swings get so big that all assets collapse as nobody can withstand the volatility anymore. It would have been the advantage of letting asset markets find the real price at which they are supposed to clear, that way they could have relied on solid footing. We are dealing with a lack of confidence in the financial system's solvency, a lack of confidence in our currencies, and a lack of confidence politicians are anywhere close to add something good to the mix.


For now I think that as long as there bond market does not collapse around the auction today being long into the close today to front-run Friday's POMO makes good sense (too much sense? be nimble as everybody might be thinking the same and you will need to jump ship quickly so you better be sharp at observing fractal nature of price swings!). There are a lot of local opportunities but they require small positions and active management given the environment. We will know a lot more on trends we can rely on when the cash starts flowing in on Friday and subsequently and we can gauge whether the Fed's wallet can muscle around public distrust. Until then trade like your TT is your first Nintendo in 1988!

Good luck trading,

Nic

 


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Wed, 11/10/2010 - 12:15 | Link to Comment vs18
vs18's picture

Good to see Nic posts again :)

Wed, 11/10/2010 - 12:17 | Link to Comment HarryWanger
HarryWanger's picture

I think Nic's been a bit bruised and battered. Tough being on the wrong side of the equity trade for so long, I imagine. Great to see he posted again after two marginally down days though.

Wed, 11/10/2010 - 12:22 | Link to Comment SheepDog-One
SheepDog-One's picture

'Equity trade', wow thats funny, bitch.

Wed, 11/10/2010 - 12:28 | Link to Comment 1100-TACTICAL-12
1100-TACTICAL-12's picture

Harry, wake up...wake up.... you're dreaming again...

Wed, 11/10/2010 - 14:04 | Link to Comment Deflationburger...
Deflationburger with Fleas's picture

So sayeth the Chariman and CEO of "Flip Floppers LLC".  Get bent, Harry.

Wed, 11/10/2010 - 12:18 | Link to Comment citationneeded
citationneeded's picture

Yup. Knew we would see him again after a few down days. Not that I'm complaining.

Wed, 11/10/2010 - 13:54 | Link to Comment Minion
Minion's picture

I've seen the light - technical analysis serves only as a suggesstion to what might happen.  Price action is not ruled by channels, retracements, or oscillators. 

It is ruled by capital flows.  POMO has obliterated any fund outflows, and if Blackhawk Ben really gets to continue the airlifts, the bulls are probably going to hang out in the drop zone with money bags to collect the loot.

Net capital flows, my friends.  Everything else is just suggestion......

Wed, 11/10/2010 - 14:01 | Link to Comment Orly
Orly's picture

Actually, Minion, if I may say, technical analysis can also be used as a stand-alone tool for evaluating market conditions and sentiment, with or without actual fundamental information to corroborate it.

When the actions of the whole are reflected in a picture that shows such market sentiment and momentum, then being able to read the price patterns is more vital an understanding than being able to read 10-Ks.  You're right in that SEC filings have little to do with stock price but learning the nuances of technical analysis will serve you well, especially in fast-moving markets like 4X.

The idea that everything is already known and refelcted in the price chart, from insider information to the Iron Condors on AAPL.  Try it for a week.  Just watch what the price is telling you and you may find you're having much more "luck" as a trader.

Wed, 11/10/2010 - 14:15 | Link to Comment Minion
Minion's picture

TA is better than nothing, but in the land of the blind, the one-eyed trader will usually win. Nothing like seeing the cards of the other players.

I will make one exception to my original statement:  I don't consider Elliot Wave analysis to be TA..... TA oscillators and sentiment indicators are tactical enhancements of the overall strategy behind theory of price waves which caused by capital flows, themseklves caused by changes in group behavior which follows a known pattern. 

Stated another way, people with dollars have been in the mood to buy.  :) They usually buy in three waves up with two pull backs, and the second pullback never retraces more than the first wave of buying.

 

Edit: I should have read all of your post.  :)  I don't ever use FE, always TA and it's failed me too many times.  But even FE is only a suggestion for future capital flows.  I still think it's all ruled by waves of emotion and group psychology.

But even this method can be corrupted by excessive bullish or bearish bias.  Prechter $ co sell more subscriptions by arousing worry..... they had to change their published wave count on a recent update as this bull market smacked them down.  :D

Wed, 11/10/2010 - 14:24 | Link to Comment Orly
Orly's picture

Several things:

  • It is not about mathematics, it is about people.  People trade stuff.
  • People have a very short memory but the patterns they leave are indelible.
  • No one wants to be in the middle, i.e., mediocre, for long.  People would rather be at extremes.
  • When extremes are hit (2 standard deviations...), people tend to come back to the middle.  Sometimes, they even go clear to the other extreme.

Sideburns, bell-bottoms, hip huggers, afros, buzz-cuts, piercing, sundresses, tatoos, pink pumps...all these things come in an out of "style."  Try to think of price action only in that way and discard the Five wave of A3 stuff.  Put down the calculator and open a clean chart.

It would be a step forward.

Wed, 11/10/2010 - 17:09 | Link to Comment Minion
Minion's picture

This would explain your avatar changes.  Indecision comes in waves..... I predict a third attempt at a glam self portrait before you give up.  :)

Seriously, I'm an engineer.  I need data, I need to see patterns.  I can't just go off emotion.... 

Wed, 11/10/2010 - 17:52 | Link to Comment Orly
Orly's picture

First, this is not a glamor shot.  It was taken in my backyard.  I like the black and white for contrast.

I have only changed it once, really, and that was after I got a photo of me in my ZeroHedge hat.  I thought it was cool but whatever. No one else liked it, so I changed it back.

If that shows indecision to you, then perhaps you're a little hard on yourself.

/"

_________

And now to the subject at hand: Trading!

Have you read George Soros' book on Reflexivity, "A New Paradigm for Financial Markets"?  I'll save you the twelve bucks because he uses the same basic idea as the uncertainty principle, in that if you could measure every single nuance of markets into a computer, then you wouldn't be any closer to solving the riddle than before you spent billions on the measurement- because you measured it!

You can't know because once you know, that spoils the information and the market is more random than before you knew what it turns out you didn't know anything about anyway.

Another example is magnetic resonance imaging.  The machines can take the cycles of radio impulses out to the twelfth decimal place.  Pretty precise. But inside the picture, there are phenomenon that cause artifact in the images: phase-wrap, ghosting, truncation, ringing, etc.  So even as precise devices as MRI machines are, they are still subject to errors in encoding and decoding.

Instead, I suggest to take a step back and watch for patterns to emerge from a more-or-less random interaction that occurs in markets- but well within a boundary that is easily recognisable as "science."

Use a simple Bollinger Band technique, with a period of 28 and a standard deviation of 2.  When the deviation gets greater than 2, the chances of a return to the BBMA (moving average...) is greatly increased.

If the retracement passes completely through the BBMA in one candle, or three of the same color, then the chances are the price will move back to the opposite extreme.

The great thing is that this technique works on any time-frame and with any traded chart you can imagine.  You may have to titrate your BB periods to the closest fit on the chart but once you find the right "size," the size doesn't change in the future.

The charts will tell you everything.

:D

Wed, 11/10/2010 - 21:20 | Link to Comment Minion
Minion's picture

I've been using a 20/2 BB for a while, as a sell signal.  I tried using it as a signal for shorting before I got tired of always being opposite the prevailing trend.

 

Wed, 11/10/2010 - 12:16 | Link to Comment SpeakerFTD
SpeakerFTD's picture

It's like hiding in the basement when a meteorite the size of the moon is about to crash on earth. 

So that's what the missile launch was all about!   Next up, Bruce Willis.

Wed, 11/10/2010 - 12:19 | Link to Comment Turd Ferguson
Turd Ferguson's picture

 "Watch 1,384/1,385 in gold as support".

Agreed. I'll say again, however, with the new POMO schedule kicking in as soon as Friday and continuing to almost Christmas, buy all dips. Our buyer(s) of size certainly will.


Wed, 11/10/2010 - 12:23 | Link to Comment HarryWanger
HarryWanger's picture

I think after these shallow dips and maybe a test of 1200, we'll see a meteoric run into the EOY. Do not count 1300 out. BTW: As I said, a few days ago, I'm actually short via SDS since Friday afternoon. Keeping my finger on the sell trigger though.

Wed, 11/10/2010 - 13:51 | Link to Comment Minion
Minion's picture

I used to think you were crazy, until I realized that markets are not the economy.  I don't think your forecast is that unlikely.

I'm expecting a brief pullback to above 10500 then back on up to new highs. 

Wed, 11/10/2010 - 12:22 | Link to Comment Dr. Richard Head
Dr. Richard Head's picture

Benny bouncing benji's. 

Wed, 11/10/2010 - 12:28 | Link to Comment gwar5
gwar5's picture

Air pockets indeed.

"First you're nauseaus, then you die, and then, well, you aren't nauseaus anymore!" Woody Allen.

Wed, 11/10/2010 - 12:32 | Link to Comment prophet
prophet's picture

 

If anything people should be more worried if LCH and other clearing houses start asking bigger haircuts on bonds, as this is a lot more significant since it puts pressure on bond prices which are not fundamentally sound.

Margin boost, other woes hammer Irish bonds

http://www.marketwatch.com/story/margin-boost-other-woes-hammer-irish-bonds-2010-11-10

 

Wed, 11/10/2010 - 12:33 | Link to Comment Threeggg
Threeggg's picture

Someone sounds extremely pessimistic today ?

Tyler ?

I dont know how they (the EE) keep this juggling act up for so long. ?

Is it the ability to turn the printing press on at will ?

 

Wed, 11/10/2010 - 12:48 | Link to Comment beanieville
beanieville's picture

Pretty simple, really.  The economy is improving and we're in an organic bull market.

Wed, 11/10/2010 - 12:52 | Link to Comment HarryWanger
HarryWanger's picture

I agree with that to an extent. As I maintain, it's improving very, very, slowly. But improving nonetheless.

Wed, 11/10/2010 - 13:21 | Link to Comment Tortfeasor
Tortfeasor's picture

"Improving" is a relative term.  The key is the economy isn't "improving" to a degree necessary to fund our nation.

Let's say I owe $400k on my house, have $13k in credit card debt, $35k in student loan debt, and I get fired from my $95k a year job and I get divorced.

If I get hired in my same career field at $60k/yr, relatively I'm "improving".  I'm still bankrupt, as I can't afford food, clothes, house, alimony (and child support).  So I can scream till my lungs bleed about "improvement", but I'm still fucked.

That's us.

Wed, 11/10/2010 - 12:33 | Link to Comment plocequ1
plocequ1's picture

Sounds serious. Private Joker asks, Does this mean Ann Margaret isnt coming?

Wed, 11/10/2010 - 12:52 | Link to Comment Bananamerican
Bananamerican's picture

wtf

Wed, 11/10/2010 - 13:22 | Link to Comment goldsaver
goldsaver's picture

movie line - Full Metal Jacket.

Wed, 11/10/2010 - 19:53 | Link to Comment Judge Smales
Judge Smales's picture

This line seems more fitting: "It's a big shit sandwich, and we're all going to have to take a bite."

Wed, 11/10/2010 - 12:43 | Link to Comment MGA_1
MGA_1's picture

IMO - QE2 was the beginning of the end.  Looks like the next several months mike be "interesting".

Wed, 11/10/2010 - 12:46 | Link to Comment beanieville
beanieville's picture

And that's why you need to buy stocks, pronto.

Even mother wants the squeeze.

http://abetterwaytotradestocks.blogspot.com/2010/11/rax-next-mother-of-a...

Wed, 11/10/2010 - 12:49 | Link to Comment RobotTrader
RobotTrader's picture

I still don't have a short signal yet.

20-day EMA has been holding for weeks on end.

Most guys are going to be buying dips until the trend changes.

Wed, 11/10/2010 - 12:56 | Link to Comment Ned Zeppelin
Ned Zeppelin's picture

"The backlash from international observers was quite expected as a lot of emerging countries are being choked by inflation as USD liquidity flood their markets."

 

Explain the mechanism whereby all this USD liquidity has washed up offshore. I think it has not.  IN fact, if I hear one more commentator expain that QE is a method whereby the Fed "injects money into the economy" I think I'll scream. Commodities are rising in USD terms due to perceptions of the USD declining in value in the face of QE.  I would submit that no QE dollars have reached anyone outside the insular group of protected banks, and that only 2 objectives can be obtained by QE, namely reduction in US interest rates and consequent chasing of risk assets to generate returns necessary to feed debt service. 

Wed, 11/10/2010 - 13:07 | Link to Comment Captain Kink
Captain Kink's picture

only 2 objectives can be obtained by QE, namely reduction in US interest rates and consequent chasing of risk assets to generate returns necessary to feed debt service.

they succeed in lowering rates iff the rest of the bond market buys into the ultimate success of the action.  Rates are as high as they were at the first mention of QE2, so the market has already priced in and is now more concerned about the consequences of dollar destruction and monetization of the debt.  Rates will not go down if the fed is the only buyer (and holder) of bonds. they will be down in the treasury purchases they make (will they mark to market?) and never put them back into the market.  the fed will be holding bonds on its ever expanding balance sheet until the last of the bonds matures.  if they are around that long.  the fed is now the "bad bank" and only its ability to print money will keep creditors from dumping--for now.

 

Wed, 11/10/2010 - 13:20 | Link to Comment Max Hunter
Max Hunter's picture

10 yr at 2.70   =  20 bps above QE2 announcement..

Wed, 11/10/2010 - 13:29 | Link to Comment Captain Kink
Captain Kink's picture

exactly! thank you.

Wed, 11/10/2010 - 14:21 | Link to Comment Ned Zeppelin
Ned Zeppelin's picture

And I would quickly add that the effectiveness of QE 2.0 in achieving its goals is in doubt.

Wed, 11/10/2010 - 15:42 | Link to Comment Lucius Corneliu...
Lucius Cornelius Sulla's picture

Who else is going to buy the paper at that bid?  They're desperate.  Plain and simple.

Wed, 11/10/2010 - 13:06 | Link to Comment plocequ1
plocequ1's picture

Why would anyone short the market with all this bad news floating around? We need some good news. Nas in the green. And they're off!!

Wed, 11/10/2010 - 13:40 | Link to Comment Hook Line and S...
Hook Line and Sphincter's picture

As beaner-ville and Rogainecock erroneously state above, we are in an organic bull market. Try an organic bullchit market. 

In this swamp, there are quite a few posters lurking about who have never owned/managed/worked a company that produces anything. 

Observations made behind myopic beady eyes.

Stained glass self-perpetuators.

Chart chiggers. 

Disgusting.

When's the last time you drove around with your doors unlocked?

 

Wed, 11/10/2010 - 15:18 | Link to Comment RockyRacoon
RockyRacoon's picture

Chart chiggers... now there's a new one.

Wed, 11/10/2010 - 15:50 | Link to Comment Hook Line and S...
Hook Line and Sphincter's picture

Yeah, sometimes is just gets to me. I've started up and hired so many people in the past 20 years, I can't even start to remember their faces. And true, half my endeavors ended up in abject ruin for myself, but I got up and ridiculously did it again. There is a place for everybody, but there is a peculiar blindness evident by the entitled workers (who won't even try to start their own bus), the state workers (who have a repressed self-destructive hatred for job creators), and the investor/gaming class who expect to feed upon those who are either too stupid, arrogant, or balsy to stop filling the trough.

The cost/benefit ratio became a paltry ration this past year for me. My eyes are set on the future of greener pastures geographical and political. 

Wed, 11/10/2010 - 16:32 | Link to Comment dark pools of soros
dark pools of soros's picture

i planted some raspberries and ate them for about 2 months...  felt better than any recent job i had in decades...

Thu, 11/18/2010 - 03:37 | Link to Comment meichou
meichou's picture

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