Do you know the difference between education and experience? Education is when you read the fine print; experience is what you get when you don’t.

Pete Seeger

The COT index for SPY this week continues its selling pressure at [-14.7%]. The commercials relentlessly continue to sell into rising prices. At the conclusion of this week, we saw perhaps just a small glimmer of fear creep into the financial ‘stock’ markets.

The 10yr Treasury looks, technically, to have made a top. The possibility that it again rises is possible if the Federal Reserve target purchases of this paper. That is probably unlikely as the danger [still] to commercial bank balance sheets are the continuing mortgage defaults.

While the housing market to superficial investigation seems to be firming, it is somewhat misleading. It is misleading in that Hedge Funds have stepped into this space. Quite what their strategy is – I have no idea, but, the housing recovery is not a housing recovery that signals an improving economy.

Therefore the COT number, while certainly of no practical use for several weeks now still cautions against joining the bull market at its current levels. While I believe that the bull will continue due to Central Bank easing everywhere, even with QE liquidity we can have pullbacks. We may be on the cusp of one currently. If it is, the bottom [or near bottom] of the pullback would be a rational entry point for new long positions.

Bernanke ruffled markets with his somewhat less than clear communication. The thing is this: employment is an issue. It is not improving. The recovery is stalling on all economic metrics, or progressing so slowly that it is much the same thing. Therefore Bernanke cannot pull QE. The factor helping him is the ‘officially’ low rate of inflation, that of course excludes energy and food. Inflation for the average man in the street is a factor. The money velocity is falling through the floor due to corporate and banking hoarding, not your average chap who pays his bills etc, but doesn’t move the needle as far as money velocity is concerned. Corporate activity has centered around stock buybacks etc, which has the effect of sterilising the money.

It is on this basis that I continue to look for trades that are market neutral. Trades that can profit in either a market collapse, or run higher, with limited risk, but enough time on the clock that the risk [maximum loss] should never seriously come into play.

This is largely due to a loss of faith in the Federal Reserve to stay ahead of the curve. They are consistently behind the curve which is very risky for the smaller market participants who get caught in events that overtake the bankers.

The constant selling by the commercials has me a little concerned in that they [if anyone] tend to have their fingers on the pulse. That they [seemingly] have been so wrong, for so long, is unusual and out of character. As such, while I will not trade with them, I still am trying to understand their purpose.

This week’s stock has the potential to deliver excellent returns with minimal risk in that the volatility required to lift it into profit is hardly excessive. Of course, if it catches fire in either direction, then the % return on capital is significant. With a January 2014 expiry, there is every chance of catching the seasonal runs in this name.

Once again, this trade will not receive public disclosure on the blog.

Until next week,
jog on