January 2014


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I’m selfish, impatient, and a little insecure. I make mistakes, I’m out of control, and at times hard to handle. But if you can’t handle me at my worst, then you sure as hell don’t deserve me at my best.

Marilyn Monroe

This week’s COT index remains positive at +8.3%, increasing slightly from last week.

Last week the initial dip was bought, but, continued weakness brought the SPY back down through that support area.

Technical

All short time-frames have now turned bearish from 3days to 15days. The support line in the SPY has also been broken. However in breaking through support, the break is now somewhat over extended [oversold] and we can expect potentially a bounce trade against the short term trend.

Another way of saying the same thing is: before going short, wait for the trade to develop and sell resistance. To the pessimistic, resistance will be found at $181 – $182. I think however that I would be looking at $184 to be safe[er] in this market.

So what has changed?

Nothing really except that the market has decided to pay attention to the various bearish aspects of markets around the world. China is slowing, but has been slowing for some time. Earnings have been particularly lacklustre and weaker than many expected. With an already lowered bar, missing now has far deeper implications for valuations going forward. Thus a moderately priced market starts looking like an expensive market.

But really, most of this is old news, or has been ignored in the past. The Federal Reserve is expected to further reduce bond purchases next month – yet, the yield on the 10yr fell last week, which, should have made stocks more attractive, except that the money flowing to bonds came from stocks.

So, returning to the market, Everyone is looking at $170 as the line in the sand as far as the uptrend is concerned. In an algo driven market, all liquidity points are virtually guaranteed to be hit, so $170 more magnet than line in the sand. The goal is to test a significant level and free up liquidity to trade around. After all the stops have been triggered the idea they’ll figure out if there are still more sellers than buyers. If so, expect the next area to be tested. If buyers push back hard, then we have a false breakdown. One or the other (or some combination) will occur, but we won’t know much until we get there and watch it play out.

Internals

Breadth is still intact within market internals. This suggests that the bull market is not yet over and again a bounce and re-test [or continuation higher] is a reasonable expectation.

Technicals [again]

The 3mth chart has the market sitting directly on support. Thus the opening price action on Monday will be important. If the level holds – and I do expect it to hold intra-day and towards the close, then I think we get the bounce for the week. If it fails badly, then I would stay away as the market could trade hard towards that $170 area.

Trade

Entered Trade

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Unless you have been living under a rock, you know that the game has changed this time.

There is something a bit more ominous about this latest market sell-off. Nothing concrete yet — no definitive chart or stat you can point to — that tells us this might be more than the standard 4-8% mini-correction we have experienced numerous times over the last few years.

But something in the tone and tenor seems different. Sometimes when the indexes are down big, a closer look still finds winners among the leaders. All the former leaders have been taken out to the woodshed this time. The losses seem broader, more across the board. The only stock showing strength is $MSFT, which is cold comfort.

A prized thoroughbred naturally has different types of gaits; walk, trot, canter, and gallop. They may not be discernible to the crowd, but the trainer who handles him daily with love and respect can distinguish them, and can tell when something is amiss. He knows that pushing his horse when his underlying health is suspect can have dangerous consequences. Seasoned professionals know the same thing about the markets.

For some reason, markets like the one we are in right now seem to attract soft money, not repel it. Investors and traders who should be doing nothing more than sitting on their hands and re-reading the Market Wizards series are rushing to “take advantage of the volatility.” Meanwhile, smart money is standing aside, waiting for more information, a clearer picture, and a better diagnosis of the market’s health.

Regardless of whether this is “the big one” or not, we have definitely entered into a dangerous type of market, what I like to call a “There is no way” type of market. It’s hallmark is the cry of “there is no way,” which comes from those with some, but not enough, understanding about how markets work.

There is no way it can go lower.

There is no way it won’t bounce here.

There is no way $AAPL won’t come back.

There is no way I can sit on the sidelines while this is going on.

There is no way I am wrong on this stock.

There is no way I went full margin on that position.

There is no way I could have lost all my money.

There is no way I am going back to working as a used car salesman.

The irony of the “there is no way” market is that, “Yes!” there is a way. It is precisely when you start believing that there are things the market just won’t do, that it in fact does them.

Markets like this are the exact type in which you have to put your biases away and keep your mind open to what can happen. You also need to alter your strategy.

If you are a trader, resist the urge to catch every bounce. Trade less. Trade smaller. Trade smarter.

If you are an investor, pare down your losers and raise cash. Find the stocks that hold up best during this turmoil and put them on a list. That is your shopping list, the one you will use to buy from when things settle down and the smoke clears. Those stocks will be the winners in the next move up.

Possibly.

My point however is that assume for the moment that it has. Your strategy for this eventuality should already be in place. That is to say that you’ve already been selling taking profits in readiness for any potential market weakness and have cash ready to deploy, or, run a market neutral type of strategy, in which case a decline is as good or better for profits as a bull market.

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There’s always plenty of speculation about what the U.S. Federal Reserve will do next from every corner of the financial world, but, late on Wednesday, the result of Ben Bernanke’s final policy conclave in the Chair reminded markets that, first and foremost, the Fed is America’s central bank.

With not even a mention of the turmoil engulfing emerging markets from South Africa to Turkey and back again, the Open Market Committee stuck to the plan and announced another $10-billion-a-month hack at its asset-purchase program. This takes it down to a trifling $65 billion. What’s more the cut was agreed unanimously by the Open Markets Committee. No dissent.

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Some, quite a lot actually, of jobs are never coming back. Robots, computer technology all are dissipating the employment prospects of the line manufacture worker to the middle management services provider.

This will mean that until the new opportunities become available or apparent to these displaced workers, unemployment will remain uncomfortably high. There will be disruption within corporate profits. This period, while a blip in history, will last potentially a worker’s working life.

Time to retrain. Until the opportunities become clearer, this means into higher [intellectual] services. Businesses I suspect will also in many instances become smaller, at least while the competitive fight for market share predominates.

If the Fed is true to its word, this means low interest rates and higher inflation for quite some time. Investment becomes critical for those hoping to retire at some point. Bonds are a lost cause currently. Commodities and stocks are the two areas to be. Stocks hold the edge. The volatility however will be uncomfortable for many.

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The trade was signalled in last week’s newsletter. The entry has worked out, now the exit [with some profit] needs to materialise.

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Is the cycle ready to turn?

commodities

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Sometimes when you innovate, you make mistakes. It is best to admit them quickly, and get on with improving your other innovations.

Steve Jobs

This week’s COT index number is +7.8%. Improving strength. In the current market we are at a point of indecision. It could move either way. So with a stronger COT number, my bias is to the upside. Are there confirmatory signals elsewhere in the market?

Technical

We are in a short-term uptrend in 15day, 10day, 5day time-frames. Only in the 3day time-frame are we in a downtrend. Support sits at circa $183.oo, which is a buying point long should the market trade that price. I would expect that price to be hit near the early part of the trading week, with the market trading higher into the close of the week.

Technical Trade.

Enter a Bull Spread in SPY [Buy $182.oo, Sell $183.00 @ or around the support level at $183.oo] dependent on pricing, as the trend and COT index number support the thesis of a long position out of the support area.

10yr

The 10yr has pulled back to the moving average. If it finds support and trades higher – what if anything does this mean for the market? At the moment stocks and rates are not tightly correlated, so there is nothing that really has any evidence one way or t’other. For the moment ignore. Bond rates are returning below the inflation rate and are therefore as an asset class, not particularly attractive.

Earnings

Have been pitched so low that most should clear the hurdles set. Currently stocks are more about inflationary pressures. Until the Fed stops creating credit, and the T-Bills etc trade higher, stocks will continue you trade higher as rising capitalisation values provide the return against inflation. This can only continue until it doesn’t. Therefore, unless you are trading individual names, the aggregate of earnings should be positive for the over-all market.

Healthcare

Looks, compared to the over-all market, ready to revert to the mean, thus a trade could potentially be structured for this.

Entered Trade

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