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S&P Update
Submitted by Nic Lenoir of ICAP
When we recommended last Friday to take profits on shorts initiated in S&P at 1,080 when we tested the 88-week moving average, I certainly had no idea we would be right back hanging around 1,055 by Tuesday. In fact it seemed then we would get a good selling opportunity around 1,035/1,038. The ways of excess liquidity are sometimes mysterious...
There is a complete absence of sellers today. One can vaguely see a resistance around 1,060.3 for the future but it's very minor. In fact if one looks at the 21-RSI on the 30 minute chart we can see we are as overbought as we have been since July 15 and August 21, and both times correspond to short squeezes in the market after headfake sell-offs. Squeeze it is then! Beyond 1,060.3 the only resistance the S&P future will face is 1075.5, after which we should go straight to 1138 which corresponds to the 61.8% of the entire sell off since the highs. At that level I would expect a lot more resistance. I am not going to try and attempt to describe the wave structure from the lows of March. I have even come to consider recently that the real lows were October and that March was an irregularity as part of the consolidation (irregular wave b or ii for purists). It is what the FX and credit markets indicate in fact.
The only bearish case I can see from the highs at 1,080 would one where we are piling up as part of a violent wave iii lower, but that would be very bearish, and if it is the case then we should sell-off aggressively and relatively soon. Maybe this scenario has a remote chance of playing out if we are back down below 1,035 for the future by Friday or Monday, but it's a stretch.
The currency markets continue to allow cheap financing of the carry trade, with the dollar index now seemingly headed back for new lows. We will find consolation in that we offered a decent level of entry to attempt buying the USD, but from where we stand now it seems hard to conceive DXY will not make new lows in relatively short order. 76.21 was the 76.4% retracement which we are still hovering around keeping an ounce of hope, but I am afraid it is just that. Gold is screaming higher fueled by rumors of secrete meetings between a bunch of anti-dollar villains. I will have a lot more to say on that later.
Good luck trading,
Nic
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Yes, I will buy the hypothesis that the stock market insanity (as though Friday's horrible employment report never happened) is carry-trade related.
God help the stock market if the dollar rallies though. Investing in stocks at this point is equivalent to an irrevocable bet against the dollar.
which is why all the 401k bagholders are fearful to sell their longs after the stick save bounce.
Great piece by Gregor.us I brought over to blog
Unlike in the past when rising asset values foretold of economic recovery, we have entered an era when the leadership regime will inflate assets as a function of a POOR economy.
http://www.fundmymutualfund.com/2009/10/guest-post-gregorus-alignment-of...
Think of the US as a derilict (sp?) amusement park...
He writes it much more eloquently than I can ;)
A good quote from that link:
"We can put into perspective the asset inflation we are seeing in many different asset classes that has been achieved in part due to a depreciating US$ by analyzing the returns in the S&P 500 and DJIA for 2009 in terms of gold (real money as opposed to fiat). This highlights again the nominal gains we are seeing in stocks this year as opposed to real gains.
In gold terms, the S&P 500 is down .7% in 2009, a far cry from the 16.9% nominal gain, as the S&P 500 buys 1.017 ounces of gold vs 1.024 on Dec 31st 2008. The DJIA in gold terms is lower by 5.7% in 2009 vs the nominal rise of 10.7% as the DJIA buys 9.37 ounces of gold today vs 9.94 on Dec 31st 2008."
Ok, beat me to quoting myself. I'll have to work faster next time.
The cause of asset inflation creating debt creation is only being and can only be supported by endless runs to the bottom on fx with corresponding episodes of flattening during periods of "instability" designed to prop up dollar assets. This works as long as traditional value stores can be manipulated to maintain value at the pace of the slide elsewhere. This is the area that is most likely to break down simply because the endless cycles of race to the bottom create an ever larger pool of folks looking for value store. This process now has become its own feedback loop and is accelerating.
Cheers folks. Enjoy this ride.
Doesn't that argue for a further "up move" in the S&P? If so, how do you reconcile the declining cash flow value of corporate America? Also, if I'm not mistaken, your thesis would indicate that assets get bid up to the point of diminishing marginal return, which in a weakening global economy must keep ratcheting down due to the negative cash flow implications of wage/employment.
I'm not trying to be clever - I just want to understand your point more fully. Thanks.
Yes.
In a race to prop assets valuations for debt creation earnings have limited meaning beyond the capacity of those who own those shares or debt to leverage those holdings creating a "wealth effect". Or, the only meaning is the value of debt that can be created from any particular "asset".
BGR, your points are totally valid from a point of traditional metric of value, earnings and the capacity of society to carry the whole. I have said for a long time that the sum total of notional value & debt that is created by a particular economic system is limited by the capacity of those that are encompassed by that system to carry it. Basic structural engineering which seems lost on central bankers and most politicians. The process of negative cash flow from wage/employment is simply a by product of the process. Hence the process of wage deflation in "absolute" terms and the natural questions that arise.
The fact remains, as you point out, that for the fed's program to work there will be a further erosion of wages & employment as society and the economy adjusts to the "new normal" of what full employment means. The goal appears to be able to say; "See, consumption still is above 65% of total output" along with all of the of the traditional metrics since they will maintain loose comparative place against each other. In essence folks are left wondering in a comparative world, what are real valuations. A commenter below defines it via the metric of how much of the S&P an oz. of gold would purchase today vs the end of '08. There are still many marvelous questions beyond those that you have asked. I am simply making an observation based upon what I have seen policy makers do and have attempted to extrapolate a comparative analysis based upon the data. Reality never needs to either make sense or be prudent.
My question in response is do you actually believe that the dollar at 76 today +/- is the same dollar in absolute terms it was when it last visited these levels?
Thanks for your clarification. Your points make perfect sense. Unfortunately, I don't have a discipline that allows me to take advantage of what you say.
In response to your question regarding the value of the dollar, I believe it is roughly equivalent to the value when last at 76 due to the destruction of much of the debt that inflated markets prior to last year's crash. I see the potential hyper-inflationary effects of increasing the monetary base here but since I continue to believe we're in a depression, I don't see the potential multiplier off the rising base.
Check to BGR. Rough equivalence... Although I have to wonder if an ore or nickel miner, steel producer or an insurance or energy company would agree.
BTW, neither do I. I am J.A.F.O.
Miles,
You gave me a lot to think about tonight - I knew most of what you were writing, but you put it in a form that is sparking the gray matter.
Regarding steel companies and the rest, I think they're seeing worse destruction from places like China which is growing money supply by 28%. Debt or base money - does it really matter during a fiscal year? Also, since I'm in the global depression camp, I think those commodity companies are going to soon discover that declining demand will have them pining for today's revenues in a year. Iron ore is a deep cyclical - demand can fall out of bed very quickly. In my world, they are anything but a store of value.
Considered opinion. I am flattered that you found a bit in my writing worthy of reflection.
Cheers.
the rumors of the anti-dollar vigilantes have been circulating for several months....it is not news and i think that there is substance to the story....
insofar as there is substance, it is not a change which will happen overnight but the hubris of the usa has finally precipitated a nasty coagulation of forces seeking to displace the usd...
however, the replacement will be more of the same goo and gunk of which the usd is made unless it is a pure gold play which i seriously doubt....
Is this really a short squeeze?
They have been squeezing shorts for months, haven't you noticed?
I think it is but I don't think enough speculators got short to make it worthwhile. The proof? What stocks did Goldman upgrade yesterday? WFC, COF, BAC - the ones picking up short positions.
I've been afraid to short this market, and I still am, but it appears to me that shorts are exhausted around the time that the weak economy starts exerting itself.
One other point - if the market rebounded on misplaced QE liquidity, was today's piece about China et al, looking to replace petrodollars a warning? If so, will the Fed expand QE following this warning? I don't know the answers.
I was thinking the same thing about shorts: when did they come in? The whole "Oct is a bad month sell off" looks like it started in the afternoon on 9/30 and finished before the market opened in the US on 10/2. Not a lot of time to build a position.
Afraid? Nah -- Sold SDS Oct $41 Puts for $1.80...
I would doubt it as short exposure on S&P500 was at very low levels last I checked 4 weeks ago; unless last week's drop suddenly had a bunch of people reverse course (which i doubt) this is just the simplest trade thats been working for a long time
weak dollar, buy anything.
There is no short interest to squeeze.
in other news, the dollar-SPY inverse correlation algo continues at full speed ahead
MI pre annoucnes -stock up. Enough said
Using Japan as a guide, its going to be a long slow burn.
Question.
At what point will a dropping dollar be seen as negative for US equities? Or does the premise that a weaker dollar is positive for equities hold until the DXY is down to 40 and the S&P is up around 2000?
This is not a rhetorical question. At what point in the destruction of the US Dollar will US equity investors become unglued and sell? Is there a point (assuming the dollar continues to fall) when US equity investors will ever sell?
Can a economy/country ever have too much heroin?
A dropping dollar will not be seen as negative for equities until it translates into meaningful commodities inflation.
As long as we are in a deflationary economic environment, it is very difficult to see that happening. So in the meantime risk assets are bid higher with all the excess liquidity being used to "fight the deflation".
So does this mean my personal ATM...er my house will also go up in price (I won't use the term value) as a side effect in the rush to equities?
God I would love to find a sucker....er a willing buyer for my home at my price.
I am not bullish on real estate. We have just experienced a once-in-a-lifetime real estate bubble. Prices could easily fall another 20%-30%.
Even in a high-inflation scenario, real estate will underperform due to higher interest rates.
Disclosure: Own two houses, paid with cash, and would love to see prices go up, but am not optimistic.
Looking at the market I could believe that commodities inflation is good. Just look at the gold miners.
so does tim geithner
Look at the market post tech bubble for your answer. it doesnt take sherlock holmes to see the dollar and gold moves from 01 to 07 and how this plays into markets now. if the dollar vigilianties cant stop uncle ben then dxy to 50 and gold to 2.5k before we all crash and burn into a stinking pile sometime early to middle of next decade.
cant see how we reinflate from that crash without a debt jubilee. moral hazard that time around will between not just consumers and banks but govns and govns. ww3 anyone?
I ask that question out loud daily.
Perhaps when SP 500 is at 3500 and bread costs $17 a loaf?
What would make you think a sinking dollar and a rising equity market raise the price of a loaf of bread? If the price of mansions, private jets and Rolls Royces are rising, does that mean your bicycle is worth more when no one in your market has the money to bid with?
Mish Shedlock makes a good point on all the dollar oil and commodity dollar nonsense.
I think Mish is being dangerously near sighted. While he's right that it doesn't really matter what currency oil is priced in, it most certainly does matter what the accepted currencies are. Remove oil purchasing from the functionality of the USD and what's left?
The idea that little pieces of paper from a massively indebted nation will actually increase in value is absurd.
Falling prices in terms of real money (gold and silver), rising prices in terms of paper money.
For most Americans, who have zero exposure to gold, does that sound like an inflationary or deflationary situation?
Mish is an idiot who has absolutely ZERO sense of history.
It's great that he says "Good luck trading" at the end, cuz it seems like with "Nic" y'all will definitely need a lot of "luck" trading.
Via Big Picture:
In gold terms, the S&P 500 is down .7% in 2009, a far cry from the 16.9% nominal gain, as the S&P 500 buys 1.017 ounces of gold vs 1.024 on Dec 31st 2008. The DJIA in gold terms is lower by 5.7% in 2009 vs the nominal rise of 10.7% as the DJIA buys 9.37 ounces of gold today vs 9.94 on Dec 31st 2008.
A little off topic but that there AIG must be a good company.
if the ultimate insider driving policy" is doing so in an effort that has to end in devaluation, is it off the ranch to think that said institution is positioned for such an outcome? These memos that keep cropping up on ZH are interesting in that context - how are they being sourced - kinf opf a buirn from below as opposed to topple from above
with the dollar collapsing, will any foreign sucker, uh investor want to buy any US debt?
There could be fleets of full tankers floating upon oceans of oil and those maggots could still jack the price. What does that tell you about the US$?
The only bearish case I can see is valuation, but apparently people still haven't learned. They will.
What's going on with the exchange traded TVA bonds, symbols TVC and TVE, today? They're getting hammered!
I cant find any news. Is this all the bad publicity over the 60 Minutes fly ash expose or is a ratings cut in the works? Any ideas?
Oh oh, Here comes Mr. Dollar.
BTW this and TF are great sites to read sentiment and feel when shts/longs have pressed their luck. Thanks you have made MY trading day great!
Didn't you hear about the Red October Surprise?
!!! S U R P R I S E !!!
(everyone make party noise like its new years eve)
All the scaredy cats have already moved into bonds and treasuries, so there can't be any selling. The fuel for this rocket is hopium and changeium and the only time there's a selloff is to sucker the bears back into the market to set up another squeeze of the their shorts, (pun intended). They don't call it a bears sucker rally for nothin'.
So just dump your money back into the market and hibernate you bears.
GS IS TANKING!!! SHORTS GET YOUR GUNS READY!!!
What a horrendous backfire it will be if the Fed's QE only causes inflation in Gold and Oil. Digging their own grave.