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,

Nic