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Probably the happiest period in life most frequently is in middle age, when the eager passions of youth are cooled, and the infirmities of age not yet begun; as we see that the shadows, which are at morning and evening so large, almost entirely disappear at midday.

Eleanor Roosevelt

The COT index is +0.3%. Last week we had some strength in the COT and the market rose moderately. The COT number is weakening which normally suggests a weaker market. We are currently experiencing a [mild] decline, with a bounce, which was last week.

Technical

The 5day down trend has shifted into a bull uptrend. We are however near some short term resistance at $167.5o. The market should move higher initially, which is simply a continuation move continued from last week. The weak COT should make that resistance point one that holds.

The 10day is still firmly in a downtrend. The resistance is at $168.oo. Again, a weak COT number would suggest that this area becomes a resistance point.

The bounce could have been caused by a short covering. New short positions would now look to be established at/around the resistance area for the next leg down. Therefore any profits might want to be locked in or hedged with the momentum that could carry the market higher into the early part of the week.

For what it’s worth Ralph Acampora has turned bear. He was very bullish, but not any more.

Also the S&P500 is higher than the DLI. This divergence can sometimes be important. These are the big international stocks that have earnings all over the world. Having exited earnings, where again revenue growth has been lacklustre.

The technical internals, breadth, new highs, are all falling lower, and therefore they are not confirming the continuation of the bull move.

Throw in the month of September, add to that the Presidential cycle, which is entering the worst period, and the seasonality issues are worth keeping in the back of your mind.

Bonds

Whenever you talk about bonds you have to talk about the Federal Reserve and Septaper. The Federal Reserve if they instigate a taper will remain in control of the short end of rates. They will in theory let go of the middle and long ends of the rate curve.

This curve however should [and pretty much always does] operate on a spread. Currently assuming that the Fed will let go in September, bonds are giving a historically wide spread that in theory really shouldn’t exist.

The Fed have said that they will continue with a very loose monetary policy for the foreseeable future. The middle and long ends of the spread should come in. For the moment, they are not.

What happens to stocks if the yields continue to rise? About a year ago Dalio identified the rotation, which would allow for higher yields and higher stocks. The smart guys would have taken this trade a year ago when they could have sold their bonds to the Fed and cycled into stocks at lower prices. Is this trade still viable as yields continue to rise? This is one of those trades that we’ll just have to sit back and watch.

This week’s trade is a great trade. It has the potential to really earn big dollars. The trade is a market neutral trade in XXX. It has an 15 month life. It is a credit spread.

Entered Trade

Until next week,
jog on
duc

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