Risk On Or Risk Off?

Tyler Durden's picture

By Nic Lenoir Of ICAP

Good afternoon,

I hope you had a great 4th of July weekend and I apologize for the silence the past 10 days as I was travelling for some much needed rest.

Here are my thoughts on risk as I try to shake the rust off and catch up with the market. First I want to reiterate I remain bearish big picture and that my long term target in S&P is 380 with intermediary target at 865. Before leaving we had recommended selling risk either via AUDJPY (selling 80 with a stop or a close above the 100-dma at 81.35) or selling S&P futures at 1,112 with a stop above 1,118. Both trades performed very well and we are actually right on important supports.

First let's look at the Nikkei, where we tested and so far held the 9,050 support, but a break will confirm that we are in a bearish scenario short term as well as long term. Similarly we see on the S&P weekly chart that there is a key support with the 88-week moving average at 992. A word on the 1,006 38.2% retracement that has been much discussed. If this were to be a bull market then March 09 to April 10 is wave 1 in which case a retracement should go deeper to at least 50% or more likely 61.8%. Therefore I don't think for the big picture that this support means much and I will pay a lot more attention to 992, knowing that if we trade for over an hour below 1,000 during US market hours then the support will most likely break.

Since we have some form of H&S formation on the daily charts (see Dow, Nasdaq and S&P) if this is not to be a headfake then 1,040 for the S&P future and 1,775 for the Nasdaq will not be violated to the upside and we remain n a bearish dynamic. Given the excellent entry we got on the short risk trade almost 2 weeks ago I feel comfortable sticking to our gun especially with such a tight trailing stop to know when to take profit.

As I contended earlier in the year equity weakness in H1 2010 was driven by sovereign woes, which we are far from done dealing with, but the real kicker for a risk aversion trade will be the slowdown in the economy in H2. Last week's data has been very weak, and when one looks at the Baltic dry index there is no doubt we have a lot of still untapped capacity while the cycle appears to be rolling over. Weaker growth is what will make the sovereign story go from market jitters to actual defaults. The only antidote the world's governments have is more debt monetization and a new slew of stimulus programs but the G-20 echoes seem to prove what we have been warning about: a waning political support for more fiscal irresponsibility. Is the world about to bite the bullet? World liquidity in monetary terms is currently at all time highs so the central banks have not exactly pulled the rug but without a strong new wave of printing we have all the signs of a clear roll-over that are starting to appear.

Good luck trading,


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43 Steelie's picture

Always look forward to your analysis Nic, thanks as usual.

Panafrican Funktron Robot's picture

The problem I have with tracking the BDI is that it bears little to no relation with equity behavior, particularly over the last couple of years.  I get that it's a great indicator of the "real economy", but it seems like equities have almost completely decoupled from the "real economy".  I think monetary policy is the only thing worth tracking at this point if you're trying to describe equity behavior. 

Sudden Debt's picture

Could that be because of the Evil Speculators :)

Mitchman's picture

This is excellent analysis as always.  Thank you. 

S&P at 380?  That is a very scary thought.

Popo's picture

Risk Off. 

The bulls gave it everything they had after the long weekend.  The media was shrieking for a rally, and what we got was a complete fizzle with a last gasp at the close.  Hardly a showing of strength.

If that's supposed to be a sign that the slide has ended, it was one pathetic signal.


Yikes's picture

Agreed.  Up almost 2% at the beginning of the day (for reasons I don't understand) and couldn't hang on to it.  There are bound to be technical bounces just to keep the algo's happy but IMHO, steady decline.



Chip's picture

TZA was deeply red at 9:45 and closed green--all you need to know. 

Course IBD will be there telling us the usual "day one of an attempted rally, watch for the followthrough day/rally attempt on day 3" etc etc

Deep's picture

All you guys playing these leveraged ETF, watch out, its seems a lot buy the posts, you guys are not really short the market.

Short real way



NOTW777's picture

words of wisdom; sounds even better when listening to angry bull doug kass in the background.

luster's picture

380?  I guess I will not be seeing Nic as a CNBS guest.

NOTW777's picture

is kass losing it?

walküre's picture

Great analysis. I like the S&P 380 call but why stop there?

VK's picture

Exactly! S&P 100 is more like it!

Jeff Lebowski's picture

I had to re-read it twice to comprehend that it really did say "three hundred and eighty".

Yikes.  Any timeline associated with either number, Nic?

First I want to reiterate I remain bearish big picture and that my long term target in S&P is 380 with intermediary target at 865.

walküre's picture

What they're really suggesting is that Double Dip is now priced into the market.

So, what's next? The Great Recession is priced in. The Depression or Double Dip is priced in.

When will we learn that a collapse of all monetary systems has been priced in and the market goes up?

This is too funny.

RichardENixon's picture

The 2011 increases in capital gains and dividend tax rates are not priced in yet. That will happen by December at the latest.

Cleanclog's picture

Doug Kass . . . excited to be strongly opined that GDP is above 1%, like that's a reason to be bullish. Pathetic.

carbonmutant's picture

"The consumer is the "krill" at the bottom of the food chain"

Without the "krill" the whales die...

Steaming_Wookie_Doo's picture

True, but when you and several billion of your closest krill friends die for another whale, it is cold comfort.

Maybe krill have bumper stickers that say "Shoot the whales"

carbonmutant's picture

 Well in our economy the whales don't actually eat the krill, they do depend on them for revenue and for profits.

The bailouts were a way of feeding the whales until the krill started to produce again.

Unfortunately the administration's feeding program seems to be causing an outbreak of government obesity while starving the krill.

Turd Ferguson's picture

Risk on = Sell gold

Risk off = Sell gold

$ rally = Sell gold

$ selloff = Sell gold

The desperate manipulation of the gold market tells you, if you're willing to listen, that something major is coming. QE2.

Mitchman's picture

I agree with you TF.  But don't you think that will precipitate a crash in the Treasury market?  At least  ablowing out of spreads on the weekly rollover?

Turd Ferguson's picture

Mitch: I'm not sure there is much of a treasury "market" anymore. 

Step 1: Allow JPM, GS et al to borrow unlimited $ at discount window for 50bps

Step 2: JPM, GS et al take said $ and purchase unlimited treasuries at auction

Step 3: Cover it all up with vague notation "Direct Bidders"

Can't see where a new, massive stimulus plan or an extension of MBS participation by Fed would effect this dynamic.

Implicit simplicit's picture

It will have to be something opaque with the direct bidders. The public resistence to GS and JPM would be considerable.

 The "national security" team will prop up a station on some Godforsaken Island and buy billions in treasuries.

Chemba's picture

don't be such an ignorant turd.  GS does not "borrow from the discount window to warehouse treasuries" on its balance sheet.  Citi perhaps, but not GS.

Cheeky Bastard's picture

The desperate manipulation of the gold market tells you, if you're willing to listen, that something major is coming. QE2.


Actually very much NO. If indeed market was pricing in QEII [which it surely will, but not yet] you would see Gold rising; not falling. The market is pricing in a deflation and that is reflecting on both gold, commodities and equities. The manipulation was done in May [for reference and confirmation see the following; day-on-day evolution of all-tenor GOFOs, m-o-m increase in average daily volume cleared and dollar value of the volume cleared that month]. This was unwinding and selling for liquidity. Gold had almost no resistance on its way up to 1260 [except on OP-EX days; but that is usually reverted in the matter of minutes]. When they yield on the 10Y goes above 3.20% the market will begin pricing in the possibility of QEII [but that is unlikely to happen at least not before September]. When you see 10Y above 3.20%; start buying.

Muir's picture

"Actually very much NO. If indeed market was pricing in QEII [which it surely will, but not yet] you would see Gold rising; not falling. The market is pricing in a deflation and that is reflecting on both gold, commodities and equities. "

There can be no argument with this statement.



("When you see 10Y above 3.20%; start buying." I'll keep that in mind.)


Al Huxley's picture

I'd just reiterate at this point that, the return on new debt having gone negative, QE2 is the worst imaginable thing possible for the markets and the economy.  I'm sure there will be the reflexive bounce, but if you see QE2, that would be the sign to start moving towards a 100% short position.  There is no saving this situation now, short of a massive debt default.

Turd Ferguson's picture

Wrong, Cheeky. You clearly don't see the powers of Bullion Bank manipulation.

Look at the charts of 6/21 and 6/28 to see the clear evidence.

Cheeky Bastard's picture

Wrong, Cheeky. You clearly don't see the powers of Bullion Bank manipulation.


Dude; there is a 1000 word post I written about precisely that about 1.5 mth ago. I understand it; believe me I do; but this was not manipulation; this was profit taking.

Bonesetter Brown's picture

Cheeky, any opinion on why there has been no draw on the Fed's FX swap lines?

The re-opening of those swap lines were a form of qualitative if not quantitative easing.

Cheeky Bastard's picture

I have no idea. With every new report coming about FX swap lines i remain puzzled as to why the swap value is either 0 or some negligible amount. 

buzzsaw99's picture

My number is 376. Eerie.

jdrose1985's picture

Prechter is calling for <1000 Dow, beat that!


I'll reiterate my Dow 3k number here.

SayTabserb's picture

So by a parity of reasoning, if that is apt here, does this mean that the S&P is going to lose 63% of its present value, and should that translate to a 63% loss on the Dow, taking it from its present 9,700 to about 3,600?  Is that a correct correlation of these two markets?

New_Meat's picture

ooch--you said the sainted number 63% <insert eeirie sounds here>.  It is an e thing.

Yamada has said SPX 600 followed by 400.  No time frame, noted.

But check out the volume on SPY vs. DOW on basis of individual stocks.  That will be first-order correlation, but, yes, everyone comes out to the Paddy-Wagon, even the piano player.

- Ned

(I was only 20 or so when I figured out that "Irish Pennant" was an ethnic slur, invented by Irishmen I learned.  But I was in my 40's before figuring out Paddy-Wagon.  Go figure.)

Boop's picture

Perhaps not from the Irish - Irish pennant:

   1. (British) (nautical) A loose or untidy end of a line or other part of the rigging of a sailing ship

   2.(US) A loose thread of a Naval or Marine uniform; also the loose end of any knot not tied properly

New_Meat's picture

I learned -2.

and the doggies would taunt their recruits with the lanyard equivalent : "Boom, Sir". Don't know how far back that went, probably to Jackson at VMI or in Mexico or earlier.

Tradition matters.

- Ned

Diogenes's picture

How about Irish confetti? (old bricks) LOL

Rogerwilco's picture

Here in the USA they need to goose things enough to keep up appearances through the November elections. Then the lame-duck Congress will deal with all the malcontents and naysayers with much needed legislation. Next it's Obama's turn, and he'll have to gin up some kind of shooting war to get his numbers out of the basement in the run-up to the 2012 elections. The risk of a pre-election rally is too great to ignore -- I'm staying out of the bipolar markets.

Steaming_Wookie_Doo's picture

My concern is that the lame-duck congress might end up voting for the most monstrous legislation, knowing full well that they are out of their current gigs and hope to be behind a desk at some finance firm after a few "favors" are passed.

tmosley's picture

Risk off and on simultaneously.

I call it Schrodinger's Market.

Whatever you do, don't open the box.

SayTabserb's picture

We'll be collapsing the wave function, all right.

New_Meat's picture

Collapse more than wave functions--lol - Ned

Pedro's picture

Is it just me or does every major index chart I see have a head and shoulder pattern?

Pedro's picture

Hilarious.  The Ole "Black Swan"

Implicit simplicit's picture

Or the ole bugeyed duck; a very rare event, much like the black swan:)

HarryWanger's picture

I've been pretty bearish lately but I gotta say, last July, oh, right about this time, everyone and their brother was screaming SPX head & shoulders. And I mean everyone. Traps so many shorts it was scary. I'm not buying into this one yet either. Sure, it could continue down but it also could be a repeat of last July.

Not a big fan of the head & shoulders formation. I actually think most of those formations exist to suck people into the trade and crush them. We'll see but I'm playing quick trades this week until some earnings start to flow.