Monday, November 29, 2010

SPX 1173

The low of this pullback (at the end of the day today, it might turn out to be more than a pullback, but let's stick with pullback for now) from the highs made recently has been 1173 on 16th November. The intraday low today has been 1173.01. So, keep an eye on this level today. Also note that the S&P MA(50) is at 1177. A close above this will be disappointing for the bears and the market would continue in its current state of indecisiveness. 

Take care and good luck!


Bill said...

I agree the market is in state of malaise even with the 100+ pt swings (Dow). Data says it should be going higher even with a stronger dollar, but investors have to many reasons to not step on the gas. Europe is a major concern but i think fear will subside temporary until the next big bailout esp if they preemptively bailout Portugal. December should end higher but key word is "should" and it probably won't be enough of a bump to push to new highs for the year. North Korea is the wild card to all this. One more reckless decision and the US will easily be swept into its 3rd Major War in 5 years (4 if count Georgia). The financial impact with this war is huge though as China will be forced to choose sides putting TRILLIONS of dollars in imports in jeopardy. This obviously would be terrible in the short term, causing instant hyper inflation. Although i doubt a full fledged war will happen i still acknowledge its possible impact.

"Caution" seems to be a favorite in many analyst pro's vocabulary.

positiontrader said...

Agree with you Bill. These are not the right markets to be holding any sort of biases, whether to the long side or the short side. All this intraday volatility does provide great trading opportunities if one knows what one is doing but at the same time, it is important to remain cautious and not to get carried away here. Personally, I am sticking to what's working (just wrote a post on my trading strategy for these markets). There is no point in overthinking things as I doubt if we have the entire pieces of the puzzle in front of us anyway. What's your strategy for these markets? I know you generally employ a larger time frame than me with your trades, so just curious to know what you are doing here.

Bill said...

This is a little long but here you go:

My 6-9 month outlook is extremely bearish, and i even surprise myself in saying that b/c i've only ever said that one other time and that was in the spring of 2008 to my father at the time, when he asked what i thought about the markets (i also told my friend not to buy a house in 2007 but admittedly i bought a house in 2009 and wished i had waited until 2011). But the market conditions are absolutely ripe for turmoil in a slightly souped of version of 1938. I think i mentioned before how similar the current technical stock patterns in the S&P were to 1937-1938 via an article i read that pointed out the similarities, and while they no longer chart exactly the same i think we are still headed for a similar result and here's why.

This recession is extremely similar to the Great Depression in two area's:
1. We are ALL marginalized to the Neck (First Bus. now Gov.)
2. Political Envirionment

Now, while history is never exactly the same, i think we all agree that the same mistakes made over again produce the same results, and frankly we are doing nearly the exact same things we did politically and monetarily that we did starting in 1932 leading up to 1938, except imagine our current time frame compared to the 1930's is on FF (fast forward) b/c of the vastly different amounts of money printed.

I think the difference this time is that we as a country are far greater impacted by world markets than we were in 1930. Heck we managed to grow during WWII (and not just b/c of war production) when everyone else was barely functioning, today that would not be the case per china and emerging markets that we so heavily rely upon for goods and even services (mexico), we would be crushed b/c of imports (see my comment above).

However i think we are headed for a double dip b/c the first crash is usually caused by business and/or consumer debt and then the following collapse is usually a collapse of confidence due to policy decisions.

We are reaching a point where we have now spent trillions of dollars to prop up businesses and IT WORKED! Our businesses are reporting record profits. BUT, very shortly we will need to recoup nearly all or even more of that money we printed and borrowed out to retain confidence in our debt issuance or our bonds. We have reached a ceiling in our printing and borrowing in the US that will create pressure until relieved or the house will very severely collapse the on the entire US Bond Market. The problem is that we still have high unemployment. Until unemployment goes down, you can't raise taxes that affect the middle class (Bush tax cuts a great example). This forces governments into a three really bad choices: Take from their own people at political peril, take from their own businesses, or take from other countries. Personal tax causes riots and political unrest as we've seen abundantly in Europe and the higher you raise this tax the louder people will get. Corporate tax hikes forces more layoffs and lower revenues, risking a snowball effect of deflation not to mention even more jobs exported overseas ( And finally tariff's on imports was the weapon of choice in the 1930's and it didn't work and only caused more inflation and caused imports and exports to shrink further lowering production and GDP.

part 1

Bill said...

What's happening in Europe with the Debt Crisis is definitely a precursor to the US for three reasons.
1. California
2. Lack of Debt Demand
3. Denial

The US is definitely in denial and even though we can print our own money, we risk losing our ability to sell our debt the more we print, as evidence by the last 30 yr note bond sale and its rising yield (the rise of the dollar makes the yield go down, the devaluing of it makes the yield go up). Heck even consumers are slashing credit cards at record rates.
California is obviously the most obvious bruise on our forehead right now (although several other states are actually worse) and it begs to say that if people lack confidence in the PIIGSB, why would they have more confidence in a worse off California? Even if they think the US Gov will bail them out, they will still drive the yield up out of fear of bond holder "haircuts".

If you don't think this all ties together then i always suggest taking real everyday examples to prove a point.
~ You are the head of a major department. You run the shipping and receiving at a large supply company. Things have been going great and your department has been in the black for a long time. Suddenly orders go down and cost go up and you are running in the red for 3 quarters straight. You are now in the red for the year in your department, so you go to your boss and explain the situation and he says, "Don't worry about it, here's some money to cover the losses and to get your department back in the black." Accounting takes the money and plugs it in your balance sheet and you make no other changes, no cut backs and no increased income. The next year same results, same infusion of cash from your boss. The middle of the third year your boss comes you and says our creditors/banks say this department is a threat to the existence of the whole company. You have to make cuts or increase income or they won't give us the loan we need to keep going. So you have three choices if you want to keep your job: raise the rates your department charges customers, lower the rates your department pays for its materials, or decrease the pay/benefits you allot for your employees (i know some business major out there will say to be creative but that is essentially the standard options for most people). All three are bad options.

part 2

Bill said...

Now all this being said my assessment isn't that the US will break up or cease to exist or that "the end is near", but i strongly sense we are about to enter the 2nd half of the Great Recession and its not going to be full of roses, so to speak. I think its very possible we see a %30-40 drop in current market value in the next 6-9 months and i would not be shocked if it began happening as soon as feb 2011. There are quite a few tipping points already in place and with all the false reassurance from failed investment banks and country's in this environment nobody believes a liar even when he tells the truth.
I think the US resolving California is paramount to avoiding this and i don't think either the Legislature in California nor the US Legislature will be able to agree enough in time to avert bond yields forcing a last minute decision.

Europe seems to have no end in sight for its debt problems and i think January is a key month for Portugal who must be able to sell enough debt at a reasonable rate to maintain market confidence. If Portugal goes its only a matter of time before Spain goes and so on and so.

BTW side note, Google: Italy's Garbage Crisis, WOW@!

But Greece is the wild card even if Portugal and Spain hold up b/c their yields are so high right now they won't be able to finance any new debt and therefore the everyday operations next year by March without a 2nd bailout from the EU/IMF. And i think politically its going to be hard to sell the 2nd bailout to the stronger members esp Germany who is by far the strongest. They may consider leaving the Euro because of these ongoing bailouts that they don't want to have to keep funding. That day will mark the end of the Euro as we know it.

Good Luck and Trade Smart.

part 3

positiontrader said...

Thanks for the detailed, well thought of and very well articulated comment Bill! If you ever start a blog of your own, I would be the first one to follow you. So, are you slowly loading up on shorts here or is there a certain inflection point when you start doing so?

Bill said...

Thanks. Yes, starting in October i've been slowly buying 6 mo - 1 yr options on a variety of overpriced stocks recently, i mentioned i am accumulating NFLX $75 - $125 puts and still am, cheaply i might add. Some of my other put holdings include GM, BAC, and mostly recently TSLA. These companies face the most exposure to credit tightening and bond holders, political pandering, and market corrections. They are all flavor of the moment stocks (except BAC) with valuations exceeding sales by leaps and bounds with all but NFLX having literally mountains of debt. I picked Netflix strictly on price value not on poor management. But i think in the internet marketplace, originality lasts about as long as a tootsie pop. They face growing competition from Best Buy, Amazon, Apple, Hulu, Google, not mention the many free sites that are starting to pop up. And they risk losing their physical dvd rental market to coinstar (redbox).
The Auto picks are because of management and sales issues compounded by liquidity. Can you imagine if GM went bankrupt again? No way they get bailed out the 2nd time around. Even if the gov still holds shares, it will either dissolve or complete a gov takeover. And they have no new car concepts that have any chance of garnering future sales, they are basically riding the good models for the past 3 or 4 years. And we all know how well that went for them before (hummer, pointiac).
And of course BAC is just in a world of trouble from all sides, consumer loans, political pressure, and rising costs.

I do not think there will be a definitive inflection point but if i were going to wait to short until the last minute i would mostly likely wait until a day with a single drop of more than %3 in market values (probably on really bad news), after that its all down hill to the bottom but you most likely will have hit your long stops at least once maybe even twice if your foolish enough.

I like the current position the market is in for this short as well, because even if the political environment somehow manages to stabilize itself, the market seems way overvalued from a fundamental perspective, and i would expect a pullback from these markets being so overbought for current economic conditions. The current political monetary problems only accelerate and deepen this belief in a pullback. So even though i am fully engaged in my belief of a major correction i am not uncomfortable even if those targets are not reached. Good short traders know when to take a profit, at least thats what the "short term" traders tell me :-)