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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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Tue, 07/06/2010 - 17:05 | 455402 43 Steelie
43 Steelie's picture

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

Tue, 07/06/2010 - 17:10 | 455412 Panafrican Funk...
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. 

Wed, 07/07/2010 - 04:21 | 456185 Sudden Debt
Sudden Debt's picture

Could that be because of the Evil Speculators :)

Tue, 07/06/2010 - 17:13 | 455421 Mitchman
Mitchman's picture

This is excellent analysis as always.  Thank you. 

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

Tue, 07/06/2010 - 17:12 | 455423 Popo
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.


Tue, 07/06/2010 - 17:26 | 455462 Yikes
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.



Tue, 07/06/2010 - 19:36 | 455713 Chip
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

Tue, 07/06/2010 - 19:57 | 455741 Deep
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



Tue, 07/06/2010 - 17:15 | 455428 NOTW777
NOTW777's picture

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

Tue, 07/06/2010 - 17:15 | 455429 luster
luster's picture

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

Tue, 07/06/2010 - 17:16 | 455431 NOTW777
NOTW777's picture

is kass losing it?

Tue, 07/06/2010 - 17:16 | 455432 walküre
walküre's picture

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

Tue, 07/06/2010 - 17:26 | 455468 VK
VK's picture

Exactly! S&P 100 is more like it!

Tue, 07/06/2010 - 17:16 | 455433 Jeff Lebowski
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.

Tue, 07/06/2010 - 17:22 | 455451 walküre
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.

Tue, 07/06/2010 - 20:09 | 455766 RichardENixon
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.

Tue, 07/06/2010 - 17:18 | 455436 Cleanclog
Cleanclog's picture

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

Tue, 07/06/2010 - 17:19 | 455438 carbonmutant
carbonmutant's picture

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

Without the "krill" the whales die...

Tue, 07/06/2010 - 17:35 | 455494 Steaming_Wookie_Doo
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"

Wed, 07/07/2010 - 02:41 | 456161 carbonmutant
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.

Tue, 07/06/2010 - 17:20 | 455441 Turd Ferguson
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.

Tue, 07/06/2010 - 17:22 | 455449 Mitchman
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?

Tue, 07/06/2010 - 17:29 | 455473 Turd Ferguson
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.

Tue, 07/06/2010 - 17:57 | 455546 Implicit simplicit
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.

Tue, 07/06/2010 - 18:13 | 455582 Chemba
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.

Tue, 07/06/2010 - 18:04 | 455561 Cheeky Bastard
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.

Tue, 07/06/2010 - 19:09 | 455674 Muir
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.)


Tue, 07/06/2010 - 21:44 | 455910 Al Huxley
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.

Wed, 07/07/2010 - 00:42 | 456087 Turd Ferguson
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.

Wed, 07/07/2010 - 04:33 | 456189 Cheeky Bastard
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.

Wed, 07/07/2010 - 01:13 | 456121 Bonesetter Brown
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.

Wed, 07/07/2010 - 04:37 | 456191 Cheeky Bastard
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. 

Tue, 07/06/2010 - 17:26 | 455466 buzzsaw99
buzzsaw99's picture

My number is 376. Eerie.

Tue, 07/06/2010 - 19:29 | 455705 jdrose1985
jdrose1985's picture

Prechter is calling for <1000 Dow, beat that!


I'll reiterate my Dow 3k number here.

Tue, 07/06/2010 - 17:27 | 455469 SayTabserb
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?

Tue, 07/06/2010 - 18:05 | 455565 New_Meat
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.)

Tue, 07/06/2010 - 20:03 | 455756 Boop
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

Tue, 07/06/2010 - 20:35 | 455812 New_Meat
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

Tue, 07/06/2010 - 22:28 | 455963 Diogenes
Diogenes's picture

How about Irish confetti? (old bricks) LOL

Tue, 07/06/2010 - 17:35 | 455470 Rogerwilco
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.

Tue, 07/06/2010 - 17:38 | 455502 Steaming_Wookie_Doo
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.

Tue, 07/06/2010 - 17:38 | 455501 tmosley
tmosley's picture

Risk off and on simultaneously.

I call it Schrodinger's Market.

Whatever you do, don't open the box.

Tue, 07/06/2010 - 17:39 | 455509 SayTabserb
SayTabserb's picture

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

Tue, 07/06/2010 - 18:07 | 455569 New_Meat
New_Meat's picture

Collapse more than wave functions--lol - Ned

Tue, 07/06/2010 - 17:39 | 455510 Pedro
Pedro's picture

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

Tue, 07/06/2010 - 17:46 | 455523 Turd Ferguson
Turd Ferguson's picture

I keep seeing oldie but a goodie

Tue, 07/06/2010 - 18:27 | 455608 Pedro
Pedro's picture

Hilarious.  The Ole "Black Swan"

Tue, 07/06/2010 - 19:30 | 455707 Implicit simplicit
Implicit simplicit's picture

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

Tue, 07/06/2010 - 18:21 | 455594 HarryWanger
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.

Tue, 07/06/2010 - 19:13 | 455677 beastie
beastie's picture


I appreciate you swimming against the ZH currents. Always appreciate a contrarian view.


Tue, 07/06/2010 - 19:46 | 455730 Pedro
Pedro's picture

I lost a lot of money on last July's head and shoulders too, Harry.  This time I am getting out sooner if things start to go up or if QE2 commences.

Tue, 07/06/2010 - 19:58 | 455746 Sisyphus
Sisyphus's picture

If I am not mistaken, it was Intel's earnings that rocketed the market higher, last July. Intel hit it out of the park and the market shot higher. Intel reports next Tuesday, July 13th. Look at the SPY chart from last July, the chart was showing an H&S pattern, the trend was downward and then the decline stopped on July 13th and we were up, up and away.


I realize everyone is bearish, but I would be careful next week. It this week is down, then it might not be a bad idea to go long next Monday, with tight stops, of course.

Tue, 07/06/2010 - 21:26 | 455884 Screwball
Screwball's picture

From a tech standpoint, last July was an almost perfect H&S.  This one is a bit ragged. 

Last July (July 13 if my memory is correct) was Merideth Whitney going on CNBS in the morning and pumping the banks.  Rocket up market followed.

Tue, 07/06/2010 - 21:47 | 455914 IE
IE's picture

Why not just stay short with tight stops? 

Remember it wasn't just Intel - it was the entire Financial sector, plus very high expectations of the inventory cycle kicking in.  And an expectation that housing had bottomed and the stimulus spending would improve the employment picture.  And an expectation that Europe was doing better than the US, and that China would lead the way to global recovery.

(keep in mind I'm not saying that's what people HERE thought - but those were the "recovery talking points")

So... what is it exactly that you're looking for next week? 

Tue, 07/06/2010 - 22:20 | 455957 Sisyphus
Sisyphus's picture


All I am looking for is a bounce; a temporary one, at best. The prevailing sentiment is so negative that any "good news" from any of the companies that are reporting, especially Intel, will shoot the market higher. The explanation given will be: "See, it isn't that bad; we are still in a recovery and it is gaining stregth". I agree that the economic picture is pretty grim, but irrationality will prevail. Anticipation of QE2, bullish bias, oversold conditions... whatever be it, we might have a rally from here. And it might surprise everyone on the upside.

Moreover, if you believe that the PTB are controlling the market, then, now way in hell will they let it go down, unless it is in their best interest. And right now, in my opinion, it isn't in their interest to let the market go down. That's why they will try to nudge it higher.

I am looking forward to a short term rally, as I want to ride it higher; then, go short. That's what I intend to do. But, it all depends on how much of a bounce we have this week.


Tue, 07/06/2010 - 22:08 | 455939 walküre
walküre's picture

My bearish sentiment got the better of me last year around this time and I didn't recoup until later in the year.

The Intel story and Meredith Whitney's call are good reminders of how the market was played then.

Samsung just announced record profits but Asia is down across the board. Could be profit taking after yesterday's run there or the end of this summer rally before it even started.

Keeping it in perspective is a good idea.

Tue, 07/06/2010 - 19:02 | 455666 Muir
Muir's picture


Nice and succinct.


Tue, 07/06/2010 - 21:23 | 455880 tempo
tempo's picture

IMO you will not see a collaspe in equity prices w/o a liquidity crisis.   With EU libor at .54% for the last two weeks, there is no liquidity crisis.     If there is another selloff there will be more QE  and the market will rally when that occurs.   The market is oversold and stocks are fairly valued but that conditions will remain in place until there is a trigger which will likely be another large stimulus program.    Whats the alternative.... Another 1933 type Depresssion followed by civil unrest and another world war killing billions?  

Tue, 07/06/2010 - 21:51 | 455918 Al Huxley
Al Huxley's picture

Rally back to the 20dma is a good possibility, but thats where I'll load up on short positions again.  In the meantime I'm a little edgy about my July puts but I have aggressive sells in on my Septembers, Octobers and Novembers - if they don't fill, I'll just add.  There's no mid-term upside here.

Wed, 07/07/2010 - 01:14 | 456122 Privatus
Privatus's picture

Let me get this straight. To know where the S&P will be in the future, I only need to check the published "target". Then I lever up to the rafters, short SPY and simply take profits when S&P hits the "target". This crystal ball stuff rocks.

Wed, 07/07/2010 - 01:25 | 456128 ChevronSky
ChevronSky's picture

For the first time since the start of the March '09 rally, the persistently rising quarterly values have reversed (as of 6/30/10) in the following: SPY, QQQQ, DIA, IWM, RSP as well as most of the individual Dow Industrial components; and GOOG and AAPL if that matters to anyone.  When quarterly values reverse, this indicates that the recent directional bias (in this case, down) is continuing with unusual trend tenacity.  In other words, it indicates a change of higher-timeframe trend, i.e. of Primary degree.  Quarterly values for most major index ETF's began increasing in Q3 2009. Prior to the end of Q2 2010, it was premature to call an end to the Primary bull run that started in March '09, especially for long-term investors.  Now it is not.

Wed, 07/07/2010 - 03:29 | 456173 Eric Cartman
Eric Cartman's picture

An 88 week Moving Average? 

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