An Ugly Day For "Rose-Colored Glasses" Haute Couture

From Peter Tchir Of TF Market Advisors

The big question is how many people are long stocks because they played the 200 day moving average bounce?  We have had at least 3 chances in the last week for investors to buy the moving average.  It seems like a lot of people had stopped buying the dip during the relentless march down for stocks, but everyone seemed to jump on the bandwagon that the 200 DMA was a big support for stocks.  I think a lot of investors got sucked in and allocated capital and are now weak longs.  One group waited until Tuesday when the market really seemed strong and 'was destined to test resistance at 1300' before buying in.  The other group of weak longs are those who typically don't play technicals but found the 200 DMA bounce theory too compelling to resist.  It is always difficult to trade when losing money, but the ability to make really dumb decisions goes up when we have positions that were put on for reasons that we don't normally follow.  The technicians are used to these trades, it is what they do.  The 'fundamentalists' are not and are more likely to react badly to losing money here.  People must be scratching their heads a little, since it seems, according the rose colour glasses world i)  Greece fixed, ii) Contagion avoided, iii) economic soft patch is only a soft patch and no risk of double dip, and iv) Bernanke will be there for us.

It seems clear that the sovereign debt crisis is far from over.  SOVX is back to recent wides.  Greece may be resolved for now, but that doesn't fix the problems in Ireland and Portugal.  Greece may not be the first domino to fall to spread the contagion, but there is nothing to stop Ireland or Portugal from being the triggering event.  To believe that saving Greece ends the contagion risk, is just wrong, it just shifts (for now) the domino most likely to start the chain reaction.  And to me, at least, it is still not clear that Greece has been fixed yet.  One good development at least, seems that the market is back to focusing on who owns the bonds, and realizing contagion will come from losses on bonds and not some mythical CDS exposure.

Credit markets still feel weak, and we are working on a piece that shows how time and again, credit markets have long slow grinds better followed by short big drops when liquidity goes  away.

I am cutting some SPY short just to be safe here in case there is more 200 DMA money, but will add again on any bounces or short some HYG depending on how they trade relative to each other.

This oil release thing seems a bit silly to me, and if anything, is just another example of governments failing to 'wait til they see the whites of their eyes' mentality.