Christie's And Social Mood

There was a record-setting auction last night at Christie's in New York. It's times like these that I'm tempted to call my ex-girlfriend who is a specialist there for the inside scoop. But I'll have to make due with the FT.

Christie’s sets global record with $495m contemporary art sale

In his 1985 report, “Popular Culture and the Stock Market,“ Robert Prechter commented on art this way:

Popular art, fashion and mores are a reflection of the dominant public mood. Because the stock market changes direction in step with these expressions of mood, it is probably another coincident register of the dominant public mood and changes in it.

This is why I pay attention to headlines announcing record art sales. Art is just another aspect of social mood, and is subject to the same extremes. Note the following:

Brett Gorvy, the auctioneer's chairman, said the evening’s sale was “the highest total in auction history”.

“The remarkable bidding and record prices set reflect a new era in the art market, wherein seasoned collectors and new bidders compete at the highest level within a global market,” he added.

Notice that Mr. Gorvy says that record prices "reflect a new era in the art market." Socionomically, record prices merely reflect a new extreme in social mood.

The article goes on to note that "the sale attracted intense bidding at a time when cash-rich individuals are opting to pour money into art." Yet it's also a time when governments are confiscating cash from cash-rich bank accounts.

Study this paragraph carefully:

Long-term returns, particularly at the high end of the market, continue to perform well relative to many other asset classes, which is driving up prices. According to Knight Frank’s Wealth Report 2013, art has seen a 92 per cent increase in value over the past five years and a 199 per cent increase over ten years.

The Federal Reserve has fought a near constant battle against credit deleveraging since 1998. That the art market has been a primary beneficiary of this is far more about a temporary hedge against money debasement than a permanent store of value.

This misguided value perception will flip when social mood turns negative and the dash for cash begins.  "Priceless" works of art will be sold for whatever cash they can muster before they truly do become priceless.

“No one knows if we have reached a peak or if these prices are just going to keep going higher. They were quite astounding, really eye-popping numbers,” said Dorsey Waxter, president of the Art Dealers Association of America, who attended the sale.

“There were works on paper that were considered just as valuable as those on canvas, which has never been the case,” she added.

This reminds me of penny stocks in 1999.

The FT also noted that "demand for high-end art has increasingly been driven by investors from Asia and other emerging markets looking to acquire trophy works."

Probably very true. Sadly, America's largest export, compliments of the Federal Reserve, is commodity and currency inflation. Argentines are so desperate to guard against their government's destruction of their pesos that they are buying BMWs. The art market is no different. Neither is Asia.

Will this record-setting art auction affect my trading decisions today? Not really. But it will get filed under "Macro mood."

Regarding the S&P, the volume shelf at 1647 still has not been hit. There is another higher one at the 1657 area.  There is also a lower, wider one from roughly 1626-1632. The Aussie dollar broke down through a multi-year trend line last night. It is critical that .95799 hold if it wants to stay strong.

Asia and Europe are mostly higher. The yen is still showing buoyancy. I'm wondering if today turns out to be a range-bound sleeper.

The S&P requires more of an extension down to put the pressure on. Otherwise, there could be surprising buy pressure back to 1670.

As Dorsey Waxter said above: “No one knows if we have reached a peak or if these prices are just going to keep going higher.”

The Market Is All About Potential Now

Yesterday made me think of July 2007. That was when I took a deep breath and bought the largest number of puts I'd ever owned. My cue was the yen: as the S&P rallied to a new high, the yen went the other way: it broke from its near perfect S&P correlation and mysteriously began to get stronger. That, on top of a clear wave count, gave me the conviction to do something that seemed crazy at the time.

Yesterday as the S&P broke out (during the hour of the European close when I usually take a break) it did so as the yen went the other way. Just as it did in July of 2007, it started to get stronger.

I went into the morning with a lot more long delta than short delta. I cut back the long delta and increased my short positions against a tight stop at 1651.10. It was wrong, and I got out immediately after I was proved wrong. The interesting thing was that the market came all the way back below 1651.10 after it ripped higher for two hours. That hasn't happened lately.

Incredibly, I missed the turn at the high too. I went outside to lay in the sun for a few minutes and missed it.

The point is that this suddenly odd market behavior should be taken seriously.

I have gone from being openly bullish on short yen to doubting the success of Abenomics and the BOJ. In the face of the overt shock and awe that Abe and Kuroda are inflicting on their country, to doubt them seems foolish.

However, the success of their grand plan requires millions of Japanese to play along by buying JGBs. JGBs are sending a message that they ain't.

Central banks are not omnipotent, yet most people and pundits think they are. This false belief leads to exceedingly dangerous assumptions in behavior and markets.

When central banks want you to do something, do the opposite. They want you to sell yen, buy JGBs, sell dollars, buy stocks, and keep consuming with borrowed money? Great. Buy yen, sell JGBs, buy dollars, sell stocks, stop consuming, raise cash, save your money, and get out of debt.

Timing is obviously important. But the last four are smart anytime.

Timing the market? Know exactly where you're wrong and act on it. Live to play another day.

Overnight, the S&P futures look like they too have lived to play another day. Another triangle looks probable. I do see a fat volume shelf at 1647 on the cash, but the futures are suggesting something different. As always, though, its the cash market that drives the charts.

I see the potential for the S&P to wedge or triangulate higher into 1665-1672. A correction could occur there. Then, depending on the structure of the correction, perhaps even higher targets can be projected. Or much lower ones.

The market is all about potential now. Because, from a technical standpoint, it's not about much else.

A Market Beyond Metrics

The S&P could be mere points from ending a large impulse not only from May 13th, but from April 18th as well. It depends on the subdivisions of the waves, but 1652-1654 could be it, or the 1665-1672 area.

Nothing else has mattered thus far -- not internals, volume, number of days up without a correction -- so why discuss it anymore. It doesn't mean I don't keep track of these metrics anymore, it just means there is nothing to do but trade (and selectively hedge). This is how I can distrust the market and still make money from it.

The metrics I care about are my own. Still well behind my goals for this year, but making a solid return with a profit factor (gross profits/gross losses) of 4.6X and a win/loss ratio of 75%. Max drawdown is .20%.

At some point, metrics will matter to the market once again and my conviction will return.

Global Dislocation

“We don’t need you to type at all. We know where you are. We know where you’ve been. We can more or less know what you’re thinking about.”

“We know everything you’re doing and the government can track you.”

“We will know your position down to the foot and down to the inch over time…Your car will drive itself, it’s a bug that cars were invented before computers…you’re never lonely…you’re never bored…you’re never out of ideas.”

It's Bilderberg season. These comments are by Google CEO Eric Schmidt, who has been steering the tech behemoth closer and closer to the ideals of the Bilderberg elite for several years now. Just thought I'd pass them along.

Regarding the yen, I found an interesting bit about Japan that amplifies my thinking of late. It's from Aspen Trading, a recommended follow on Stocktwits.

...last weeks limit down day in the Japanese bond market (JGB's) struck me immediately. How can that be, the BoJ is The Fed on steroids right now, yields should at a minimum remain flat or go down. I know the answer but I am asking to prove a point.

A colleague of Bill Fleckensteins offers this insightful nugget. You can be sure this only further heightened my interest in keeping a very close eye on Japan.

"He believes we need to keep our eyes closely peeled on Japan because in the very short run, the stock and currency markets there have acted like they are (preemptively) rejecting the concept of money printing.

He pointed out that while the yen has tanked 15%, and Japan's bonds have backed up 25 basis points (though merely back to January/February levels) from a base of 50 basis points(!), beneath the surface the volatility has increased in such a way that it might begin to cause problems for Japanese derivative books. When you are in a country such as Japan, where interest rates have been zero for so long, you can be sure that all manner of volatility has been sold, in an attempt to enhance yields, at the wrong price. So if volatility and interest rates increase, we could see quite a lot of chaos precipitated from Japan, just like when the housing bubble burst, when it wasn't just declining housing prices that caused problems, it was the levered up exposure to mortgage-backed assets and other crazy products."

If, after record central bank stimulus not ever seen on this planet, money printing should appear to fail for any reason in Japan, an enormous global dislocation could follow.

JGBs may have become the most important leading indicator in the world of finance.

S&P futures did a round trip last night, trading out a Big V which has ended higher for the time being. This fits with the action in the cash S&P, which seems to have a target of 1640+ in mind.

There are higher targets such as 1665, but the way the A/Ds look (advancers - decliners) it's a wonder the market is up at all. A/Ds simply look pathetically weak. This is occurring while 91.5% of the S&P is above its 200-day moving average, with price a stunning 161 points above the 200-day average.

Credit as represented by JNK and HYG has plunged severely versus SPY and IYG (financials). The market is ahead of itself.  Any thrust to 1640 or above will have me unload SPY 163 calls and book profits and put on some outright short positions.

Both Sides Now

Peter Brandt posted a great bit of ancient wisdom that I wanted to share:

Magnificent trading wisdom from 2,400 years ago

When an archer is shooting for nothing . . . he has all his skill.

If he shoots for a brass buckle . . . he is already nervous.

If he shoots for a prize of gold . . . he goes blind;

or sees two targets . . . he is out of his mind!

His skill has not changed. But the prize . . . divides him. He cares.

He thinks more of winning than of shooting . . .

and the need to win drains him of power.

– Chuang Tzu, 400 B.C.

I like this quote because it dovetails well with trading psychologist Dr Ari Kiev, who also uses Eastern Philosophy in his work.

You need to stop being too invested in the personal significance of your financial outcome

and begin to see trading strictly as an opportunity for self-expression.

The pursuit of mastery is ceaseless. It is a journey without end, a state of mind rather than a result. The results show up on their own, often in unexpected ways. But you better enjoy the trip.

The S&P had an ambiguous close on Friday. The pattern suggested two things: a sharp reversal down targeting below 1620, or a choppy continuation of a triangle targeting 1640+.

The way the futures opened in last night's Globex session, it seemed the first scenario could unfold.  But in this morning's pre-market there is more support so far. Until I see below 1620 in the cash market, I'll be looking for higher areas to load up on SPY puts and establish another VIX call position. Still holding the SPXU against SPY 163 calls. A run to 1640+ would be welcome, especially if I can successfully increase the call position today.

Investors pulled $20.8 billion from gold bullion funds this year. If gold gets above 1539.40 without making a new low first, I will start looking for spots to get long GLD or calls on gold futures. It could signal a potential rally to over $2000.

The big news of the day happened after the close on Friday. Jon Hilsenrath's WSJ article hit the press:

Fed Maps Exit From Stimulus

Timing of Wind-Down Is Uncertain, but Focus Is on Managing Unpredictable Market Expectations

Recall this was flagged back on April 9th, right here, in a post titled Subtlety.

It's just a whisper thus far, but the Fed may have sent its first signals that it may be getting ready to begin tightening.

Last night at the Atlanta Fed, Bernanke said the Fed will raise the interest rate on excess reserves as its primary tool for tightening monetary policy rather than selling assets from its balance sheet.

I don't think we've heard this level of specificity before. And it seems to have passed under the radar. Or maybe that's the plan at this point.

The Fed's eventual tightening -- which may not happen for years if the market rolls over on its own -- is likely to be telegraphed far ahead of time. It feels as though it began last night.

When the reality hits it won't be pretty. All the warning signs are there: large FX moves in the yen, counter-trend cracks in the bond market, a Daily Sentiment Index reading of 92% bulls, and a Market Vane Bullish Consensus reading that equals the highs of May 2012.

It may be a good time to focus on mastering both sides of the market. Cue the angel from Alberta.

Bass, Beer, And Gundlach

From Zero Hedge this morning:

It appears things are getting a little out of control around the world. Between the collapse in JGB implied volatilities in recent days, today's melt-down in JPY (+255 pips from pre-open US levels), the last few days melt-up in the Nikkei (+6.8% in 3 days), and now the quadrillion Yen Japanese government bond market is halted limit down as yields smash higher by 11bps to 70bps in 10Y - the highest yield since mid-February. For context, this is the worst day in JGBs in five years (and 5Y yields are back near 13 month highs).

Kyle Bass probably just pulled on his favorite pair of boots, cracked a beer, grabbed his shotgun, and headed outside for some fun in the sun, Texas style.

Today is a big day. The yen has reached 101.443, a multi-year swing point. The dollar looks set to crest above 83.19 which could wreak havoc with the commodities markets. And the action in the JGBs is ominous in light of the recent behavior of the US 10-year and 30-year which have cracked hard.

There may be a chorus line of Wall Streeters touting The Great Rotation and how higher rates mean the economy is expanding, however, they conveniently sidestep what rising rates signaled in Europe. It's simple. If long-term rates shoot higher in the US and Japan, it's over.

Dartmouth grad and $60 billion bond manager, Jeff Gundlach, says it better starting at around 6:00 (the video caused a slight formatting issue):

Short-term rates such as T-bills could remain low due to safety reasons (investors caring more about return of capital rather than return on capital). Gundlach makes a much-needed point starting at 6:00 that no one else talks about on the Street and must be said: rising rates will cause an implosion in rate-sensitive asset classes. As for the S&P, there was a beautiful impulse wave down yesterday. Who knows if it is a kickoff to something larger, but I see the 1615 level as a buy. It's a 38% Fib retracement level, and it would be a rough 1:1 target. Below 1615 could bring 1600-1597. To the upside, I'm starting to zero in on the 1665 area for reasons mentioned previously and will mention again soon. Getting below 1580 would immediately call this into question as things now stand.

New Moon, Solar Eclipse

I still think the market is set up to extend into tomorrow's solar eclipse where it could then meet with some profit taking, but there is also new moon today. The combination of the two could bring a trend reversal at any time. Somehow I don't think it will have occurred in the overnight session.

Initial jobless claims just fell to the lowest since 2008 and the futures spiked lower. Overnight there was another new futures high that was erased, however, so far the move looks choppy, and the spike on the claims number is being reversed. As long as 1622.70 holds I'll be looking for higher levels.

Seeing the reaction to the claims number tells me that uneasiness is increasing about the Fed continuing stimulus measures.

Playing the same game from last week: long SPY 163 calls hedged with SPXU. I start with an unhedged call buy, scale some at a profit level, then hedge 50% of the remaining delta with SPXU. If the market continues higher, a guaranteed profit is locked in that will increase as the delta of the calls expands against the fixed fractional delta of the SPXU position.

Suppose yesterday's high close was the near-term top for a while: just a mild 38% retracement of the November lows could target 1522. Plenty of time to increase SPXU, buy VIX calls, and load up on OEX and SPY puts.

To the upside, I still see the potential for the 1665 area where a confluence of Fibonacci extension targets reside.