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Evidence Of A Risk Reversal Is Mounting
By Nic Lenoir Of ICAP
While I am bearish on a 2/3 year horizon for certain, I have been cautiously trying to pick spots to sell risky assets for the past 3 to 4 months. Over the past 2 weeks I have become more vocal because a lot of signs that a possibly significant reversal (think more of a 10% move than a 3% move in major equity indices) could be in the works.
The fundamental framework is simple: we are experiencing (experienced?) a bounce in industrial production and it led markets up, while they were at the same time being supported by many incentives produced by the government to invest in distressed securities. Given the amount of shorts the bounce also became a squeeze, and in turn it appears that the positive sentiment has spread. Bear in mind the consumer is sensitive to a turn around by 50% in equity markets, and it can help her/him forget partly his precarious situation, or at least give him hope. Hope was also made more affordable by the "hope anything" programs in place, and the "cash to buy a car you don't need" incentives, not to mention tax rebates. This created an explosive cocktail, and while I think markets have gone way to far on the upside, and very little has been done to solve the real issues, one must recognize the move could potentially go a lot higher. Unlike rates which can hardly go much lower than zero, stocks can go just about anywhere from these levels.
That's why it's key to watch the markets and see what indication they give us that we may, or may not, be turning soon. First we tested the 88 week moving average, and like it or not, it has been your best friend over the past 20 years to trade stocks on a big macro picture. Some ask why 88? Well, that's because it corresponds well to the pace of the long term dynamics for the S&P market. Envelop theory states that to call a change of trend in a bull market for example, one need to find the moving average that best covers all the lows, and if there is one with a great fit, wait for a break to be confirmed, but in doubt buy every test of this support (and conversely for bear markets). Knowing that and looking at the 88 week moving average, it's pretty clear...
I added a few charts showing that oil has clearly broken support on the close last night, and is confirming the break today. GBPUSD, which has traded in sync with risky assets for the most part on the big picture, triggered a H&S this morning with downside potential of at least 1.52. USDCAD as can be seen exhibits a lot of bullish divergence, and it is attemtping to break out through the resistance of the downtrend channel and out of a range that has been relatively important for the pair. A break needs to be confirmed on a close though. On the flipside, the confirmation level to validate a change in trend in the S&P future is a break of the support line at 1,041. That has not happened yet, so one could expect either a bounce or the end of the down move around that level.
So most asset classes indicate a break, but equities don't for now. Save some bullets, maybe cash in a little bit if you shorted the resistance yesterday, and observe with attention. Key levels are all around us, and we already had a head fake reversal in June. The number of people trying to short is what makes it easy for carry traders to squeeze. Until the pain treshold of carry trades is crossed time is their ally.
Good luck trading,
Nic
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I am Chumbawamba.
You know, that would be nice. So far it's just bear chowder. Can't go short because it's insane, can't go long because I really don't trust it.
Not only did we bump against the 1080 SP5 FOMC spewage,
today while raising size, price and punting AONE
+50%, we broke through Rick Ackerman Hidden Pivot
hourly support at 1047.50 and finished with an
afterhours -10% RIMM job that took a quick $5B out of Mr Market's pocketbook. Overnights went to red discounts
below 1047.50 again. While big corporate government
sees nothing but Blue sky from now on, some of us kamaina lightened up while calves chased the market. Very
interesting to see the disbelief of cubs on what was
once described as an intelligent bearish site...
http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3251493
October 12th.
Agree anon October 12th for the equity market and November 9th for the breakdown of the 28 year uptrend of the 30 year long bond. Then the US$ goes into the toilet and we wave it off to the coast. Have gold in hand by then.
John Hussman puts out a great peice every Monday, and he is actually running money so not just a talking head.
http://hussmanfunds.com/wmc/wmc090921.htm
Again, good report Nic. Clear thinking and highlights key points of reference to watch. Reversal the dollar carry trade poses a huge catalyst for the thesis (our opinion).
agree with spx 1041 support. lots of bears looking at that spot
I'm looking for DJIA 9300-9400 or so (convergence with the 50 day average, which is rising as the index is falling so not exactly sure where they will meet). That would be a mere 4% retracement from the high of yesterday.
Seems quite modest when you think the index was 6500 less than a year ago.
funny things happen when the audit the fed bill is in committee and gathering support in the senate. CNBS the other day had a segment with our favorite 'I would like to be in a hot tub with anchor' Erin Burnett about Washington Insider Trading where politicians and there staffers can sell info and front run. Check out the video
http://www.cnbc.com/id/15840232?video=1269475331&play=1
and also the story at:
http://marketplace.publicradio.org/display/web/2009/09/17/pm-inside-dope/
here is part of the article
That law bans corporate insiders, from executives to their bankers and lawyers, from trading on inside information. But it doesn't apply to political intelligence. That makes this business lucrative. Bagley says firms can charge hedge funds $25,000 a month just to follow a hot issue.
A lousy 10% or S&P 500 = 950!? That's it?
Seems more along the lines of a "head fake" to me, as well.
We just did 1,080 to 1,050 (2.78%) in few hours so I don't consider 10% significant.
I agree. If the market breaks enough to go down 10% I think it will go down 25-40%. Who really believes in this economy? I suspect there are a lot of equity holders who think they're going to be the first one out the exit door and liquidity will disappear like it did last fall.
May I add this: I am an "industrial producer" as it were - I manufacture things that others buy, sell and consume further down the chain. There was a period of time not long ago, when the "liquidity crisis" hit, and basically all the people down the line slowed their purchases to a trickle. But eventually consumers had to go out and buy a few things they needed, and so the shopkeepers had to cautiously replenish some items on the shelves, and so the distributors had to replenish some inventories, and so the manufacturing lines had to produce more.
And so you have it. Industrial production "picked up". And relative to the quarter prior, it was good. But overall, it is isn't getting a whole lot better 'relatively'. A little bit.
I still wonder if there isn't a liquidity trap. Commodity prices went so high (thanks to speculators?) in 2007-2008 that I am now able to negotiate much better prices from my vendors. The FED is helicoptering cash but producer prices are not rising much, savings are eked from axing plebs and reducing production costs. I value cash higher than anything else right now, even if the dollar is tumbling. But then I am a producer who buys and sells in dollars, and for export (about 20% of my biz and rising) the dollar at 76 doesn't hurt me so much.
Just a thought... that your 2/3 year horizon is too far. 2/3 year we migth actually be recovered. I think the entire economy/people have gotten a little too excited at a modest uptick in production. The only serious inflation I see is in the price of stocks.
Just anecdotal... good luck out there.
Whoop-de-do. Not much of a call.
Check this out:
http://finance.yahoo.com/news/Feds-exit-strategy-may-use-rb-280208450.ht...$%&!=4&asset=&ccode=
Fed confiscating cash to clean up it's books for audit by hiding toxics in mutual fund cash(sidelined by 2.5 trillion dollars!)
It *couldn't * get any worse than this! Could it...?
Pure stupidity. How long does the Fed think many existing MM funds will exist at these low rates?
The cost of running these funds is prohibitive right now so much of that $2.5 trillion will flow to treasuries in the next year as MMs disappear.
Duh !!!
Not stupidity; plan. Mmkts are a detriment to the new economy. Someone has to step up as Treasury buyers.
So the government will run the MMs (because at .25-.50% the can't afford to operate)? Of course not.
My point was that MM shareholders are being forced to by T-Bills directly because rates are so low.
So this Reverse Repos talk is jive ass BS.
yep...and wait til the first whiff of fear and the MSM reminds people that their mm funds are not fdic insured...break the buck fears skyrocket, massive withdrawals.
in my view, coming soon to a theatre near you.
And though the camels may drop, the caravan moves on.
blowout 7-yr auction results: http://www.treasurydirect.gov/instit/annceresult/press/preanre/2009/R_20...
Volker said we need a new Insurance guarantee mechanism.
Jesus, he is the ONLY one implying what might be hiding
in Insurance company portfolios. Little AIGs everywhere IMO
as well as owning lots of toxic bonds. That could be a trigger for selloff 2.0.
I think we can be assured that if someone said "ok let's see the books" to these
companies another wave of selling will ensue.
My uncles sister daughter caught the swine flu at her school. They live in Merced, California.
She brought it home and my uncles sister caught it too. Now they are both sick and scared that they will die.
What should I do?
http://www.cdc.gov/h1n1flu/guidance_homecare.htm
drink heavily
Tell them that you love them.
The person next to me at work has 11 year old twin girls who had it (from school in atlanta), the mom also got it. Doctor gave tamiflu to the mom, not the girls, more potential problems if giving it to kids. They recovered in 5 days, high fever but it worked out without any complications. It just takes time, tamiflu knocks one day off of the misery. Good luck
Hopefully they'll have a mild case. My daughter just had it and is fine. High fever, cough, runny nose. Five days of blah and then back to normal. :)
Your uncle's sister's daughter would be... YOU??
before I was a kick-ass fund manager, I was a kick-ass doctor...
the swine flu is no more dangerous than seasonal flu. if symptoms started in the last few days, they should see a doc and probably be on tamiflu which may shorten the duration of their symptoms. most importantly, they should not freak out. it's just the flu. tylenol and/or ibuprofen is good for fever. a warm steam humidifier is nice to keep them breathing well when they lay down to sleep. keep them away from any friends/relatives that are immunocompromised.
if towards the end 7 days, they get worse instead of better, have higher fevers or nasty yellow-green sputum, get 'em to the doctor again b/c sometimes people can get a bacterial pneumonia after the flu. little kids can get a bacterial ear infection following the flu.
my wife and twin daughters have the flu now, and b/c of the timing of their symptoms (got sick right before a weekend), we missed out on tamiflu. they are recovering nicely.
i hope that helps.
Tyler,what are you looking at for key levels on the carry? Are u looking at the DXY or one of the pairs? And at what level(s)
The dollar today pop, large it is.
Yoda?
http://anonymousmonetarist.blogspot.com/2009/09/it-is-consumer-in-debt-s...
To hold hands with the Federales near term is to be a dollar bull for they of course realize with bubbles needed to bring our troubles to a safe landing, we can't let the confidence proxies (markets) get ahead of the political will for future bailouts. They can signal tightening without tightening, for example by purposely not explicitly stating the context within which reverse repos might occur in the near term.
Such magicians they are with models they built that show no chance of fail when the money is easy and free. It is merely a matter of scale not design. These models rate the probability as 100% that our blessed leaders can manufacture the economic consent of consumers by getting them to add more debt because same consumer will believe that prices will be higher in the future.
These models and the besotted following are both trading without respect to fundamentals.
Inflation expectations were well anchored in the Great Depression.
The debt that is out there can't be serviced with the money in play. There WILL be deflation or hyperinflation. But theres just not enough time to steadily inflate the way out. If it goes inflation it will be hyper beyond imagining. What people need to know is that no matter how bad deflation gets if that road is picked. No matter how many houses sell for 5k 10k 20k over the next few years. GOLD and SILVER will be GODAWFUL expensive. Just like in the great depression. The longer the fed holds the reins the more these dynamics will play out. Gold is the asset doorway to keep enough dollars in the system to work itself out. People had better come to grips with this dynamic very quickly. Slight deflation slight drop in gold price. Huge deflation, HUGE INCREASE IN GOLD PRICE. Learn it. Live it. Love it.
just buy the dips or you'll regret it
I suggest you all read the aricle in the WSJ by A. Laffer about taxes, tariffs, and today....Monday I think.
Dearest Leader and staff are committing the same mistakes despite BB and TG efforts at reflating as in the 30's.
We'll make it out of this, but at what cost?
short interest dropped to very low levels quickly at the march 2009 turn up, short interest started to pick up in late may, and again in mid august, short interest was low at the last report, any indication of current short interest?
I could also add point that HGZ9, cooper, also formed somewhat seems like a spherical top, which is one of the most reliable reversal signals in technical analysis
Tyler.
628 day...twice Pi cycle.
If you plot 314 day there are also correlations.
;)