This page has been archived and commenting is disabled.

You Gotta Have Friends - Stock World Weekly

Submitted by ilene on 12/04/2011 19:20 -0400

You Gotta Have Friends - Stock World Weekly

Xcerpt from the Week Ahead Section:

Stocks enjoyed a strong, bullish run this week, thanks to the efforts of the world’s central bankers.

Earlier in the week, Bruce Krasting discussed the ECB’s need to engage in “shock and awe” tactics and make central bank friends. On Wednesday, immediately after Bruce published On FX intervention and the ECB/SMP, the Central Banks announced their coordinated plan that launched the stock market higher (although the shock and awe decision may have been made on Monday). Bruce added an introduction, “Yikes!! I posted this and a few minutes later the Fed/other CBs announces a round of coordinated measures to assist the ECB. My point in this article was that the ECB has no friends, and that was the weakest link in their defense of the EU bond market. It seems they now have friends. We shall see how good these "friends" are...”

In the article, Bruce had written, “The ECB is in a bad position. The news flow and large supply have put them on the defensive. Defense is no way to run an intervention policy. At best, it’s slow grind to a loss...

When confronted with unstable markets where the instability is, by itself, undermining the broader economy, the first objective is to reestablish stability. There is only one way to do that in the short-term. The financial authorities must establish Two Way Risk back into the market. Ideally, the objective is to create as much risk in being long as the risk of being short.

The ECB has failed to establish two-way risk. Virtually every (Italian, etc) bond that has been sold over the last few months has been a “good” sale. There has been no risk to selling, the only risk has been in buying. If the ECB wants to be successful, it must create a risk situation that is equally weighted. Call that shock and awe.” (On FX intervention and the ECB/SMP)

Friday was a reasonable time to take profits on at least some previous bullish trade ideas. Friday morning, Phil wrote, “I have very little to add – I just want to make sure this Alert goes out right away, so let’s just get back to cash and have a nice, relaxing weekend. We can mess around with new stuff on Monday. But – as you can see from Friday’s post - and that doesn’t even include the White Christmas Portfolio (WCP) picks and our other bull bets – it’s been a fabulous couple of weeks, so why push our luck?

“Downside hedge is still EDZ. China is probably the next disaster focus now that we’ve beaten the bears back in Europe. The EDZ Jan $15/20 bull call spread is $2 and you can sell the $16 puts for $1.50. If I have to tell you why I love this net $0.50 hedge with EDZ currently at $17.80, you need to go back and do some remedial reading!

“I still like the oil shorts but that’s more like riding a bronco, whereas EDZ gives us smoother waves.”

John Rubino, co-author with James Turk of The Collapse of the Dollar, discussed the impact of the central banks’ latest intervention in his article Fooled Again! John wrote, “The pattern is by now so familiar that it deserves a place beside other technical indicators like moving averages and Fibonacci retracements.

“It begins with part or all of the global economy appearing to implode under its five-decade accumulation of debt. The public sector/central bank nexus responds with a liquidity injection, leading the markets to rally explosively and the pundits to declare the problem fixed. Then the markets gradually remember that liquidity and solvency are two different things, and that the mortgage lenders/money center banks/PIIGS countries/hedge funds/State and local governments, etc., are insolvent, not illiquid. And the cycle begins again...

“Now, trading strategies work until they don’t, and there’s always the risk that this latest bailout will actually fix the world’s problems and usher in a new era of consumer-led growth with soaring corporate profits, low inflation, and rising share prices. But…nah, why even give this possibility serious consideration? Nothing that was promised this week will make much of a near-term difference. Lower reserve requirements in China and cheaper dollar-denominated loans in Europe are just tweaks to already existing programs. More fiscal integration in Europe is inevitable if the common currency is to function as promised. But think for a moment about what this implies — Germany and France getting to micromanage Italy’s pension and tax system — and it clearly isn’t happening this month. Getting from here to a German-run Europe will take maybe five more near-death experiences, and in any event won’t address the fact that even Germany’s balance sheet (when you include its unfunded liabilities) really isn’t AAA.

“So, the pattern should hold: “Risk-on” trades work this week, then things get choppy for a while. Then the markets grow cautious and finally terrified...(Fooled Again!)

As the chart above shows, the NYMO (NYSE McClellan Oscillator) is squarely in the middle of its range, almost exactly between overbought and oversold. As Phil said on Friday, this is a time when cash is King, so we can watch and wait for opportunities.

Click on this link to sign up to read all of this week's newsletter: You Gotta Have Friends.

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Philstockworld, LLC (PSW) nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither PSW nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance, including the tracking of virtual trades and portfolios for educational purposes, is not necessarily indicative of future results. Neither Phil, Optrader, or anyone related to PSW is a registered financial adviser and they may hold positions in the stocks mentioned, which may change at any time without notice. Do not buy or sell based on anything that is written here, the risk of loss in trading is great. This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument.

- advertisements -

Sun, 12/04/2011 - 23:50 | 1945711 buyingsterling

If you're not convinced the system is run by insiders, you can then be certain of at least one thing: You aren't one of them, and probably never will be.

Sun, 12/04/2011 - 23:17 | 1945653 non_anon