Thursday, May 20, 2010


We are getting awfully close to the bottoms endured during the "flash crash" of last week on May 6th.  I am anticipating a turn soon as the fear is so thick that it is palatable.  We have not seen the last of our friends at the FED and there should be an end to the unsettled issues of financial reform being thrown about in CONgress.

Did you catch that all of this weakness in the market occurred immediately after Goldman Sachs was hit with an SEC inquiry and that it has accelerated as talk of bank reform has gotten serious?  The banks are stilling leading the direction of the market and while they have shaken the market it will rise again like some phoenix from the flames.

I have a mixture of things I want to post so that you have a mid-month update of things to watch.  Clearly things look weak and shaken here, but I am anticipating a bounce here that will take us back to the 1160 to 1175 area.  Once that area is attained it is imperative that we clear the decks as the true wash out will have begun. 

I've been kicking myself because I have been identifying the end of April as my time frame for a significant drop.  When that drop didn't come in my time frame I questioned it and actually pressed more into what was continuing to work and extended my time frame for an end of May drop.  Within a week or so later, the first market drop occurred validating everything I've been writing for some time.  Well, here we are facing an almost 10% drop in the DOW and I'm suggesting that a turn could be coming with a decent sized rally only to be followed by a sobering drop in early to mid July.  

What I'm stating is that we are probably due to a reversal because that just what happens in markets.  A true market is not one-sided like the market we experienced over the last 14 months.  It waxes and wanes.  It oscillates.  Like a tidal wave of fear and complacency we have ups and downs.  Many have forgotten that and now the fear is here we must remember that we need to buy when we don't feel like it and sell when we are most jubilant.  In fact, I was selling my options today that were going higher as the market dropped.  (I won't mention the name of what I was buying because I firmly believe that that trade will reverse and if you bought it, it would be like playing with a loaded revolver).  I didn't want to sell at the close today because the greed within me was telling me that it just might go lower tomorrow, but the conservative manager within me was planning on scaling out so I could reverse when the market started showing a trend to go higher.  If we have continued weakness --- I'll probably be shorting, but I'll be closing out all trades by the end of each day.

Don't get me wrong --- nothing has fundamentally gotten better over the last two weeks that are not subject to reversing for a double dip recession, but price action should slow and reverse.  I mentioned earlier today or yesterday that the CPI data (as the government reports it) came in weak showing the absence of inflation.  This will allow the FED all it needs in terms of a go ahead to print more and inflate every asset class (even though it is working less effectively than before).

Ok, here are a few charts I'm looking at....

VIX - (fear index) is off the chart.  If you bought the VXX I recommended a while back and held it WAAAY past the stops I suggested you are in the money big time.  Again, I often see the trends but am looking at so many things that I'll identify it and move on.  It was pretty obvious that the VIX was too low as it dropped into the 16 level - so good for you if you make money here.  I of course suggest you sell the increased volatility now and be a disciplined trader.  VXX is now trading at $34.  Even my early identification of that trade was at $25, but you would have had to tolerate some pain to get to see the money!

Financial Conditions Index - Update
Didn't we just state the other day how this thing was showing that we were out of recession?  May's update said NOT SO FAST!  Today's print is not healthy.  There is a true collapse of liquidity going on and this thing is looking sick.  There had better be some quick intervention soon or we're going to begin seeing some stories about increased inter bank lending rates and distrust in the banking rates for overnight lending ---- ala Part II of the Lehman and Bear Stearn collapse.

My friend Guy Lerner at is still suggesting that there is time to go on this decline.  I would not bet against him, but I certainly am cautious especially since I've done pretty well on this decline.

Be safe and conservative here, no reason to blow your foot off.  If you have questions, let's discuss it, leave a comment!



I will be looking for a bounce as the SPY trades down to $106.50 at that line of support.  The fundamental picture is getting pretty nasty, but I believe that area will be defended strongly.  Most traders are looking at the S&P 500 ($SPX) at a level of 1050.  If that area is breached, you better run for cover on everything you own as you could see the markets drop another 10% to 20% from those levels.  Europe and Asia are falling apart quickly.  If this continues, look for the Euro to trade at parity with the dollar.  -

So, having said all of this, let me summarize.  We are getting close to the point where we have wild-eyed fear in the market.  These are the exactly the times when the market catches a bid and moves higher.  So look for opportunities with your dry powder. 

One other note - the CPI has come out again showing no inflation.  This should grab your attention if you are invested in metals, commodities, and oil.  These are all selling off because the inflation trade looks dead about now.  In general I've made money playing those directional trades, but as I mentioned the other day about gold - you might exit now and buy later as the fear continues to wash throughout the world.  There will be an opportunity to buy again.

Sadly, I've been thinking more about the Euro and the trouble that the Eurozone is facing.  I throw about phrases that suggest that the Euro will collapse, but really my thoughts are that the ECB will change the structure of their confederation.  Currently the European Union leadership (ECB) has no real power or autonomy to enact policies without consent and a one by one vote by the individual nations.  Ultimately I believe their will be a consolidation of power by the ECB where they obtain policy making power and power to make taxation and appropriation policies.  In other words, this means that the ECB will take power from the individual nation states of Europe and run the area in a federal manner (like the United States).  This may not sit well with the EU countries citizens, but that is the price you pay to be a WORLD CITIZEN.  What is dangerous in my mind is that the US leadership seems happy to participate in this world management approach and I would look for our leadership to contribute and participate in world taxation schemes ---- like Kyoto or Cap and Trade, which are veiled ways of taking taxes from the citizens of each country and redistributing them to others (and of course skimming off adminstration and trading costs for bankers and the political class) .

Perhaps its time to go to Europe for vacation --- just remember to pack your riot gear.