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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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Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration.

Abraham Lincoln

The Christmas period is now over for another year and the markets will return to their business.

The last three weeks COT index number are: 55%, 69%, and this week’s 64%. Thus, this week, looking at the price action of the market, I would expect a weaker market in that the COT number as it strengthened at 69%, the market only moved marginally, and did not make new highs. This week, the index number weakens, and therefore I would be looking at a weaker market potentially.

Technical

The 10day and 15day charts correlate best with the current price action. There is support marginally above the $182.oo level on the 15day chart and the same on the 10day chart.

The area that causes concern is that on the 10day chart we have a downtrend channel, while on the 15day it remains an uptrend channel. There is no real way to predict which short-term trend will dominate, however adding the COT index number to the mix and I would be leaning to the bear case [for this week].

Starting next week, I’ll be [via the newsletter] be adding an overnight end-of-week-trade. I’ll be testing it live this week, and if all goes as it should, I’ll be adding an extra e-mail with the trade on Thursday prior to the close, to run to the close [or thereabouts] on Friday, so a very short-term trade. It is a refinement of the original “Weekly Trade” that I ran for the first half of last year.

Trade

Entered Trade

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I have just entered some ‘sell’ orders in the portfolios to take some profits. EWP, EGPT & EWI all have some sell orders. GLW in the pure common stock positions.

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For some reason I thought that today was a public holiday in the US and that the markets would be closed. As a result, I have just sent out this week’s duCati Report, but of course it will be late. Apologies, I’ll add an extra issue to all subscriptions.

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Life’s but a walking shadow, a poor player, that struts and frets his hour upon the stage, and then is heard no more; it is a tale told by an idiot, full of sound and fury, signifying nothing.

William Shakespeare

Federal Reserve

Well, after all the hype, the taper finally was announced. It remains to be seen if the reduction in purchases translates into a negative for the financial markets.

As the Fed must continue credit creation to maintain the short end of rates, the only area that will be affected are banks still trying to unwind losses in MBS’s. That they can now only unload a marginally smaller amount each month may impact the housing sector, but time will tell.

COT Index

The COT index number continues the trend of weakness at [-4.7%]. This continues a COT seasonal weakness through the Christmas period.

Technical

The technical picture confirms the COT number, although the bear trend has flattened after the huge rallies after the Federal Reserve minutes were released. Resistance still sits circa the $182 level. Thus into the holiday shortened week I would expect some selling.

Support sits circa $177. Both the areas are found on the 15 day chart which is the current time period most strongly correlated with the price action, therefore I will use it in looking at the technical levels.

Therefore, in anticipation of the January effect, and that seasonally the COT numbers tend to reflect buying, I would be looking at long trades in the support area.

Confirmation

Due to currently placing market neutral trades, there is no real requirement to wait on confirmation. For directional trades, I would wait to see if the support area holds rather than anticipating that it will hold. The reason being that on the daily charts, the pullback is very shallow and could go deeper, the current reaction being a bounce from the lows.

Trade

snoopychristmas

Give me six hours to chop down a tree and I will spend the first four sharpening the axe.

Abraham Lincoln

The COT index number this week stands at +0%. This continues the trend of lower COT index numbers over the last four weeks. This has correlated with the market that has topped out and last week moved lower. This week’s number would therefore suggest further weakness in the market, and potentially a weaker market for the moment. Thus I would avoid buying the dip for any longer term positions. I would only consider any new long positions for a swing, counter trend type of trade.

Technical

However the technical picture suggests that a counter trend move higher may well be on the cards. On this basis, with support at circa $177.oo, I would be looking for the market to bounce, but, it would be a counter trend trade until the current short term downtrend is reversed, if indeed that is the outcome. I would look to close any swing long positions circa the $181.oo area, but be prepared to close any trades quickly.

Longer Term Positions

These positions can be managed, or simply be left to themselves currently until a trend develops. As they are market neutral and can profit from a move higher or lower, no decisions need be taken currently, unless they are currently sitting in profit, where locking in that profit may be an option.

Federal Reserve.

There is again chatter in the market with regard to a December taper. Really? With the economy a mess, unemployment static and corporate profit growth largely non-existent, the chatter is just that chatter. Of course, those that can offset short term positions may do so, which is one reason why the COT number has been trending down the last four weeks. The message is simply wait until the market is satisfied that there is no taper to be announced by the Fed, and the COT trend to reverse.

snoopychristmas

“Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, ‘I can calculate the movement of the stars, but not the madness of men.’ If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.”

The best trades since 2009 have been in sitting tight. Holding positions for the big trends. On a longer term basis, one of the trends looks as if it could potentially be preparing to roll-over and reverse. There is a fundamental basis underlying this potential change, which is the change from Bernanke to Yellen.

The COT index numbers from last week and this current week are +12.8% and +8%. So while the index numbers are weakening, they are still bullish, and dips should be bought.

Technical

On the 15day chart, which has correlated most closely to last week’s price action, the resistance is currently at $182.50 with support at $180.50. Thus early in the week I would expect a bullish early part of the week.

This bullishness correlates well with the longer term charts, specifically the 6mth chart in which the recent weakness constituted support.

The area of the market that could potentially push the market higher are the financials which have technically moved higher, and in fact broken through a resistance point in price, but have underperformed the broad market.

Gold

Has made a double bottom on the 4yr chart. This looks as if a year+ of frustration is ready to reignite higher. There could definitely be a trade available [long] for gold. Silver, which more or less echoes gold is also on for a potential long trade.

Federal Reserve and Employment

The employment numbers came out last week. They were not great. Of note is the increase in the non-participation rate, or, those just giving up looking for work. The result? QE operations will continue for at least the first 6 months of next year. Certainly Bernanke will not alter anything until he leaves next year. Yellen will hold the line I’m guessing most likely until 2015. The thing is that she is a vocal dove. She may well think and act on the belief that more inflation is what is required…and now she has the power to act. The ‘taper’ may be further postponed under Yellen, or, QE interventions increased.

The economy is not going to improve. The reason that it is not going to improve really comes down to the natural rate of interest as against the rate imposed by the Federal Reserve. If the natural rate was high, at least higher than the Fed Funds rate, Corporations would be borrowing and investing. They are not. They have not been, save the odd exception, for a number of years. They have predominantly been cutting costs. This is not a growth economy.

Stocks and markets are rising due to the offsetting inflationary effects of stocks. Gold and silver have been involved in a serious correction, which was possibly a wait and see approach, made stocks [i] the only game in town and [ii] lent credence to the “there is no inflation” brigade, looks as if the markets are ready to change once again.

If gold and silver once again enter bull markets, what happens to stocks? I have no idea at the moment, but it is something worth watching going into next year.

Trade of the Week

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