Stock market analysis and commentary from a trader's perspective

Wednesday, October 22, 2014

Price Overlap May Be The First Sign

Price has overlapped 1923.06, the first sign that the decline may be corrective. But 1970.36 remains the kingpin. And if the charts below matter at all, the ascent could soon get a little tougher.

With the new moon lurking tomorrow, we may even be "here" already, or we're almost "there."

Are we here yet?

Or almost there?

Even if 1970.36 is exceeded, signalling that the structure is most probably corrective, it might not mean that price is through with testing lower. It might only mean that if it does head lower (and the levels could be quite scary) it should eventually be bought.

And watch out for a potential asterisk.

Tuesday, October 21, 2014

Crisis Is Not An Option

Each day we're told that the world is awash in dollars, but that's not exactly true.

The world is awash in credits.

The dollar -- a Federal Reserve Note -- is actually a debt instrument. And when you hold one in your hand you are technically holding a credit.

It is backed by promise which is backed by another promise.

If that were not enough, the real slight of hand takes place electronically.

Electronically there are far, far more dollars than there are actual paper dollars backing them up, so it's probably more accurate to say that the world is awash in electronic credits. Such is the terrible truth of fractional-reserve banking.

So we're left with a major supply and demand problem. We think there is far more "money" than there actually is.

This dirty secret is what makes the following so important. It's from Jeffrey P. Snider at Alhambra Investment Partners and was found on Zero Hedge via David Stockman's Contra Corner blog.

Snider just discussed something that has been near and dear to my heart since the dollar went parabolic during the carnage of 2008: the possibility of a shortage of dollars.

Lately it looks like it's setting up for a possible redux.

Causation: malinvestment.

Snider explains:

"The ratio of capital to consumer goods production has continued to climb and is currently just down a smidgen from a recent new all time high. If one compares capital and consumer goods production side-by-side, there is now an unprecedented gap between the two. We believe this is a result of the artificial suppression of interest rates by monetary pumping. Note in this context also that the huge issuance volumes in the junk bond market in recent years are by themselves already indicating that a lot of malinvestment is in train. These economic activities would under normal circumstance never get this much cheap funding. We can be quite certain that a lot of the associated investments will eventually turn out to have been misguided." (emphasis mine)

"When interest rates are artificially suppressed by large additions to the money supply, more and more investment tends to move toward production processes temporally distant from the consumer stage. This is because under conditions of monetary pumping, price signals in the economy are falsified. Longer production processes that would normally be avoided because they are not in line with society-wide time preferences suddenly appear to be profitable, and it is only later revealed that either the real resources to complete them are lacking, or if they are completed, that they simply cannot be continued without incurring major losses once the price structure has normalized."

A most elegant description of malinvestment.

"For the stock market (and other “risk asset” markets like junk bonds and also higher rated corporate bonds) this means that the fundamental backdrop that makes a major denouement possible is definitely in place now."

Snider also quoted a recent IMF study, publicized in the Financial Times, which noted that Asian corporations are more short dollars than previously estimated:

"Residents of emerging markets owe hundreds of billions more dollars (and euros) than previously thought, because they have sold bonds offshore that don’t get counted in national statistics…

"This borrowing creates a currency mismatch. As long as the dollar (or euro) doesn’t appreciate too quickly against the borrowers’ local currencies, the debts can be easily serviced. The danger is that these large short positions could cause a squeeze and create a desperate search for scarce dollars — exactly what happened in 2008."

Like the derivatives time bomb, no one knows exactly how large it is.

"The basic analysis of the dollar short – nobody really knows much about it. It exists independent of any statistical measure and in far too many cases, including and especially policymakers, independent of knowledge and experience (closed system? The dollar short is the empirical refutation of all closed system approaches in economics). As it is in 2014 we are still finding out it is probably bigger (IMF) and more widespread than even thought now after seven years of close involvement with it.

"That makes the indirect indications provided by TIC and dollar “flows” all that more concerning, especially as they represent a sort of proxy for liquidity health and systemic capacity. At some point it may become necessary for “someone” to provide all these “dollars” and if everyone is all short then there will be no one left to take up that side (rerun of 2008).

"There is a clear diminishment in “excess” dollar supply."

Snider warns "the private sector continues to disfavor dollars, or, to put it more precisely, is far less assured of their availability."

Mass belief in the promise backing the promise is the only thing that makes the game possible. Sudden disbelief = sudden crisis = Game Over.

Snider continues, "You only need to glance in the crisis period above to see what happens when you combine a lack of dollar participation with negative sentiment turning onto fear. As dollar shortages spread in 2008 (especially heading toward Phase 2), participation dropped and so did dollar asset prices of everything."

Food for thought as the world's central banks pull out all the stops in order to buy time. In a world of assets priced for a weak dollar wrapped up in a world of credit and debt, crisis is not an option.

Mojitos And The ECB

What a party.

Last night, with futures down nearly 20 points, after taking nearly all day to get above the 38% retracement level, after failing to reclaim the 200dma, after taking nearly two days to get above the measly 23.6% retracement level, after rising on the most tepid volume for op-ex I've ever seen (where's a stat jockey when you need one), another stimulus rumor sent futures on a meth-fueled joyride up Algo avenue.

Forget Bullard's QE4 crap the other day. Forget the Japanese GPIF regiggering rumor. This was the one everyone was really waiting for -- that the ECB would do something so spectacular, so crazy, that it would go far beyond anything the Fed has done so far.

Buying European corporate bonds were the magic words.

That was good for a violent 30 point reversal in futures and so much green in Europe you'd think it was St. Patty's Day.

Regardless, the expectation here in Bonfire land was for higher prices, and higher prices materialized. It matters not how. But it always matters what things look like under the hood.

And let's just say "not so good." Which is fine, because when I have a bear suit on, I want the market to go as high as possible on punk internals, so that I can short it. And I'd love to have another crack at it actually in front of my screens instead of a smartphone in a hotel room watching CNBC.

The 1920 area is of keen interest to me, especially 1923.06 where the S&P could potentially get its first overlap.

The 61.8% retracement level is at 1943.39 and the all-important arbiter of all things corrective sits at 1970.36.

Slowly adding UVXY against SPY calls.

But anyway, I've got this going for me now, which is cool because I've always liked the smart and witty ones.

Kate kindly followed me after I found out that I was in Puerto Rico the same time she was. But the amazing thing is that she would follow me at all when there was a mojito pic on my Twitter page.

One of her funniest quotes on Below Deck was "only terrorists and a—sholes order mojitos.”

At least I was ashore when I ordered mine . . . .

Monday, October 20, 2014

More Scenario Planning

Scenario #1

Scenario #1

Note that while "B" could reach above "b" in the above chart, it doesn't have to.

However, a final kiss of the lower trend channel and psychological resistance at 2,000 would be an ideal R&R (retest & reversal) level.

It is also possible per the above chart that "A" is not finished. As long as the eventual wave "C" stays above 1474.51, the September 2012 high, scenario #1 holds merit.

Scenario #2 treats current market action as a developing impulsive move which would call for the current rally staying below 1926.03 and fading soon.*

I don't like scenario #2 for the reason that the subwaves of the assumed wave "1" are sloppy and irregular, which leads me to think they are corrective rather than impulsive.

Key distinction between the scenarios is that #1 would see eventual new all-time highs. #2 would result in a retest, and likely a failure, of the 2009 lows.

*Caution is high after the futures blew an overnight rally and are now down .4%. Both DAX and CAC futures were up close to 3% last night. They each reversed and are down  over 1%.

Therefore, if the current bounce gets below 1956.85 without a new high prepare for another new low.

For a bigger picture, I'll dust off two additional charts (not updated) that might help visualize how Scenario #1 could fit into the overall picture.

Friday, October 17, 2014

Futures Jawboned, Volume AWOL, Greece & Oil Still Stressed

Jawboning still works. Especially when there are a lot of shorts in the market. And especially when markets are addicted to stimulus.

Zero Hedge noted that overnight futures were hovering around unchanged when ECB Executive Board member Benoit Coeure said that "a program to purchase covered bonds will start within days."

That sent futures up over 20 points. The German DAX and the French CAC each soared 2%.

That there is no volume associated with this move won't likely matter until it does. Yesterday's slopppy rise was on 28% lighter ES volume, 13.5% lighter NYSE volume (proxy for S&P 500), and 26% lighter SPY volume.

There have been many, many rallies since 2009 that have risen from the dead only to continue to all-time highs. I am still on the lookout for a three-legged correction that leaves people battered and bloody. The problem is that there are still one or two legs to go.

1970.36 remains the pivot for this view. A rally back to the 200dma (currently 1906) should be expected, as should a failure to remain above it. Another probe lower would likely wash out the bulls and set up a better, possibly longer-lasting buy.

Pure speculation at this point.

Also, if everyone seems to be watching the price of crude oil for the next move in equities, it may be worth watching oil's wave structure from the 79.03 low -- it looks like a three-wave corrective bounce so far which could suggest more downside.

Elsewhere, Greek bond yields should be monitored...again. They have come off their 9% highs back to around 8% which is still signalling stress. Problems throughout Europe have not been fixed; they're been papered over.

Thursday, October 16, 2014

Expect Anything

The Drudge Report called the bottom again, almost to the minute. But now there's a new worry: things are too good in the labor market. Jobless claims fell to their lowest level in 14 years and futures freaked out. That's not exactly a recipe for more "help" from the Fed.

As if the Fed has really helped anything. They're as much to blame for current conditions as the people who drank their Kool Aid.

This is the chart that matters to me now. It projected yesterday's end point within 1.15 points, a margin of error of just 0.58%.

I took some profits on my long suffering UVXY position which had swung from a 45% loss the day before the Alibaba Top (when I last added to it by phone, on vacation) to as much as a 32% gain yesterday. I also bought SPY calls at the Drudge low (which eerily coincided with the Fib target).

With no new low on the employment news, the market could be forming a double bottom or gathering steam for another leg down, which is why I added the extra Fib targets. Once you get a direct hit, there can be others too, so it's wise to use a "correct" Fib measurement until it breaks.

Notice the 261.8% target would line up with the Feb. lows at 1737.92.

Op-ex is tomorrow. Expect anything. Up or down.

Elsewhere, Erica Blomgren noted that Norwegian banks reported slightly lower household credit demand even after mortgage rates were recently lowered. So it seems, yet again, that no matter where they are in the world, consumers do reach a point where easy money has diminishing returns and does not guarantee endless expansion.

Wednesday, October 15, 2014

Cigarette Boats And Leverage

The bond market dwarfs the stock market. The 10-year note is like a huge supertanker. It just took off like a Cigarette boat. It's up over a full point.

S&P futures are tanking. The Empire State manufacturing index collapsed. Oil held 80.01 but looks shaky. 1814.36 looks like the next test. And 1737.92 waits if needed. Leverage is unwinding which makes the down side unpredictable depending on how much gets unwound.

At this point 1970.36 remains the crucial bull/bear line.

If indeed the S&P concluded a rising wedge or ending diagonal (as was exhaustively presented here for months), the first target is 1737.92. That's why these patterns are worth the trouble: they're very mechanical and straightforward.

Otherwise, the action in the 10yr feels a bit capitulative. Either the decline from 1970.36 forms an extension today to far lower levels, or it has the potential to create a wedge itself, in this case a bullish falling wedge.