Greece To Join The Party And Issue Dollar Bonds

Zany things happen in a world awash in credit and debt.

Bloomberg reports Greece will be the latest country to issue dollar bonds, possibly by early May. It will thereby join Spain, Portugal, Germany, Belgium, Ireland, Canada, and India in issuing bonds in US dollars. The folks at Zero Hedge and Global Perspectives are in a lather about this, citing that the destruction of the dollar is such a certainty that foreign governments are lining up to take advantage of it. The only certainty is that governments are always late to the party.

From an Austrian School perspective, a world awash in credit and debt is actually in short supply of the underlying reserve currency (US dollar). Yes, I know it sounds bizarre. But study your charts from the early 2000s. You'll see that with the sole exception of the dollar everything went up: stocks, bonds, metals, energy. Then study 2008. Massive dollar spike, and massive contraction in everything else. Did the dollar fundamentally change overnight? No way.

Instead, the market woke up to the sudden realization that it needed the medium of exchange -- cash -- not credit. In a world awash in credit, in a world of fractional reserve banking, overcapacity, and endless amounts of stuff, cash becomes the real gold standard. How do market participants get cash? They sell stuff. They sell bloated assets. They pay off debt. They even sell gold and precious metals. Anything to get cash in dollars (or as close as you can get to it: note that US treasuries spiked higher on a flight to safety in 2008).

It's pure supply and demand. Credit is everywhere. Cash -- real dollars backing the credit -- is in short supply. Eventually the diminishing returns of credit in a fractional reserve system reach a limit. There are more dollar credits existing as blips on a computer screen than real dollars to back them up. I do not for a second think that washout that began in '07/'08 has concluded. It is my opinion that foreign governments are floating dollar denominated bonds because they're short on cash. Cash that counts. Not Euros. Not Yuan. Dollars. US dollars.

All that said, it would not surprise me to see the USD have a good pullback here, possibly into the 79 area. If that happens and the SPX starts gunning for 1200-1250 and JPY suddenly starts diving toward 89 and below, get ready to take risk off the table quickly. That could be the only clue you'll get that big players are in the process of doing the same.

Turbulence

Big fish love turbulence. They lay in wait in the still water below while the little fish above are buffeted by the turbulent cross-currents and make for easy prey.

Despite two days of intraday reversals, Thursday and Friday offered back to back days of up-down markets with little net progress. Most telling, there was no price spread to the downside. So the market seems to be churning here, perhaps distributing longs from big fish to little fish, while the big fish build short positions. Unless we make haste to the downside next week, this feels like a high level consolidation and distribution just before a last gasp blow-off top that sucks in the public. A nice, old-fashioned fish fry.

Remember the four market phases: accumulation, markup, distribution, and markdown. Sometimes the market, in its infinite wisdom, disguises the transitions between the phases most beguilingly. With the exception of down days having more volume than up days, there are few overt clues. So let's widen our gaze.

In the Life Imitates Art category, Ridley Scott's newest film is "Robin Hood" -- just in time for the passage of ObamaCare and its repercussions. Irony at its best. It seems the mood is spreading too. The Grand Casino in Basel, Switzerland, was just knocked off by 10 heavily-armed robbers. Spreading the wealth around by force looks like a new trend.

Moving on to Forex, forget the Euro and the Pound for a moment and ask why the commodity currencies (CAD, AUD, NZD) got whacked on a dollar decline Friday while gold spiked higher? I ordinarily take gold action on Fridays with a grain of salt (thin market). Yet evidently, cross-currents are everywhere. Such turbulence will likely obscure and redefine intermarket relationships in the near term while much larger trends reassert themselves. What are these larger trends? 1) More US dollar strength -- a near-term correction to the 79 area notwithstanding. 2) A return of the bear market in everything else. Study what happened in 2008 when the dollar strengthened. I assure you it was not on fundamentals. (Will post about this soon)

From a macro perspective, Greece is the subprime of 2010. It will spread to prime, i.e., Germany. And I agree with Jim Chanos on China. It is a trainwreck waiting to happen. Interesting times indeed.

As far as targets go, note this weekly chart of the S&P cash index:



That's a 200 period MA plotted on there. It's sitting at about 1225. It's so close that I'm assuming the big fish would love to see us get there. Then the media and every bull in the world would trumpet that we've gotten back (and possibly above) the 200 MA. It would certainly be a new bull market then, right?

For now, let's use simple box theory. 1150 needs to be broken to the downside if we're going to cave in. If 1150 holds, then we could retry 1175. If that holds, we're likely going to 1200. And then, since we'd be so close, why not 1225. Above that, there's a nice volume cluster at about 1250.

Until the market sorts this out, all I'm doing is betting on turbulence. That means long calls on dips and long volatility on rips.

A Tiny Spark in the Bond Market

Back on March 9th, I said one spark is all it will take to spook this market. "Just as the Yen rang the bell back in July '07 -- it started strengthening, showing increasing risk aversion and an end to the carry trade -- the USD could ring it this time with an unexpected thrust to a new yearly high. After all, we have yet to see the commodity trade, Forex market, or the bond market truly snap to attention and show some fear."

It started today.

The Euro contagion is spreading, the US dollar broke through overhead resistance, and our bond market got slammed (shown above). The Yen broke 200 pips. EUR & GBP melted. Oil, gold, platinum, and palladium got hit too. It's clear that something shifted today. Though you'd never know it by looking at the chart of the S&P E-mini below.


As usual, the immediate effects on the equity markets are delayed, while most other markets are flashing warning signals. In the E-Mini, there are 2 Fib zones roughly at 1180 and 1200, so I will not rule out another high. In fact, I hope we get one. But I am getting ready for a significant change in market tone.

I'll leave you with an insightful quote by Jim Rogers. "It's my experience that the things that are always in the press are usually not the things that bring on a crisis. Something else breaks the camel's back, and then the crisis really hits."

Nasdaq Composite Prints Last Engulfing Pattern

I'm watching the canaries -- the NAZ and the RUSS -- at this point for clues on the near term direction. The NAZ may have just dropped a feather: it made a Last Engulfing pattern today. From Matheny Enterprises, note that the Last Engulfing pattern "is found after an extended bullish trend [and] represents the bulls final attempt to drive the market higher. If one is long and a Last Engulfing Bullish pattern forms, one should identify a protective stop level near the lows of the Last Engulfing Bullish pattern to protect any profit in the trade." A nice pop in the S&P tomorrow above the highs of the 17th with divergence would suit me just fine. I would then be looking for a Turn Around Tuesday.

Though it appears that the markets may well move higher longer term, I feel risk is high, and at the very least, we could correct. Therefore I am looking for opportunities to establish smaller short positions, buy volatility, and trade against these with calls on dips, knowing there may be an End Of Quarter markup to contend with as well. Lest anyone think I'm some sort of perma bear, I do still have 33% of my long position from the March '09 lows. I merely prefer to establish positions and take profits at sentiment extremes.

A Near Perfect Reversal

This is what I was waiting for. The strong move up from 2/25 needed a last gasp, and we certainly got one. But do I think this is THE final high? Maybe. . . maybe not.

Friday's action was typical of what goes on behind the scenes in the S&P. S&P options expire in the morning; OEX expires End Of Day. As much as I'd love to chalk it up to the magnetism of the Equniox, the opening gap up merely squeezed the most possible $$$ out of the expiring calls, sucked in new longs, and flushed them. The late afternoon down/up spike was the most incredible OEX option action I've seen in a while. Too bad my trading plan didn't allow for it. OEX 530 calls, expiring in less than 45 minutes, went from .01 to close at .50 bid. Do the math.

No, Friday I went with my intuition that it would be a trend down day and tried to avoid getting too cute and overtrading by trying to hedge it. I really just wanted to see what the decline had in it. Still, that last spike down felt like a real suckers play. In hindsight, I wish I took a shot there.

Here's what I'm noticing: we didn't reach a higher high on Friday. Had we, I'd be much more bearish. Also, volatility as measured by the VXO made a shooting star, not what I'd like to see at a top. Nor did I like the action in my VXX position. Some traders whom I respect say the VXX is very flawed. Maybe it is, but I've done quite well with it up until Friday. Perhaps volatility is saying there's some complacency yet to be dealt with?

I still want to allow for an End Of Quarter markup. We're too close and too high for one last attempt not to be made. But we are setting up for a nice correction. We came down on big volume: a classic Wyckoff sell signal. It doesn't matter that it was op ex and there's usually higher volume anyway. The market spoke loudly: get ready for supply to be in control.

Option Expiration and the Vernal Equinox

While the new moon seems to have come and gone without causing a major trend change (it merely reversed last Friday's decline), Satuday's Vernal Equinox -- occurring within one day of Friday's Triple Witching op-ex -- could be the real magnet. The above chart shows both Vernal and Autumnal Equinox dates and both Winter and Summer Solstice dates on the S&P E-mini contract. With the market this stretched, it could obviously turn at any time. But I will give it some lee way into Friday. I continue to buy volatility against calls as conditions allow.

New Moons, Full Moons, and the Markets

"As Above, So Below." The ability of the planets to affect our daily lives was closely followed by the ancients. The same is true today. If in doubt, ask any farmer, commercial fisherman, police officer, pickup artist, or veteran trader about the significance of new moons and full moons. I guarantee you'll learn a lot about life.

Here I'm referring to the influence of the lunar cycle, the 28-day phase of the moon, on the markets. In the chart above, I've shown each new moon as a dashed line and each full moon as a solid line. For illustration purposes, and since nothing is 100% in the markets, I've only included "direct hits." I didn't have to delete that many.

Since trading is a business of probabilities, I present this chart only as something extra to consider in your daily preparations. The way I use this information is that I simply circle these two days on my calendar each month. When we become overbought or oversold, I check to see if there is a new moon or a full moon nearby. If so, it can add a bit more to my conviction, that's it. But in this particular case, I find it interesting that it lines up with the Ides of March and a record number of up closes on the S&P.

ESH10 Hits a Bull's Eye, But Will June?

The expiring March ES contract hit the top end of the Fib zone from the chart I posted last Tuesday. The question is, will the June contract hit it too? Is March telling us where June will end up?

Is the Market is Speaking Kiwi?

Today the NZDUSD had a beautiful shooting star reversal. GBPAUD made a hammer. USDCAD reversed. Gold reversed below yesterday's lows. Oil reversed. The VIX closed up. What's going on?

The market is always giving us clues, and sometimes you have to look farther than the end of your nose for them, meaning beyond the stock market. Yes, the smaller indexes (NAZ and RUSS) are at new highs. That's as it should be. Everyone's bullish and chasing risk. Yet the Big Kahuna -- the currency market -- may be saying something different. And it dwarfs the stock market.

Commodity currencies, as well as gold and oil, may be suddenly hinting at risk aversion. In last night's post I mentioned that the Yen did the same thing back in July '07 when the party was still raging. Perhaps the market is singing a different verse in a similar tune.

In today's trading, I bought IWM puts and hedged them on the intraday breakdown with TNA longs and closed both legs at a profit. I also bought more VXX and let some go as it went green, continuing to manage the position. I will continue this style of "defensive offense" until conditions warrant different tactics.

Russell Index bounces off 27% Fib extension

The Russell creates some beautiful patterns from day to day. Today's Fib extension was a perfect example. Although it doesn't look like much on this chart, it seems to have set up a classic Turn Around Tuesday. As I explained in the previous post, this market needed to show me the money before I continued to build a short position. This afternoon's action -- and afternoon action (the big boys) is what you want to take note of -- went a long way toward that. While I took a small put position just after 1:30pm EST, I booked profits before the close while my VXX position finally went green. I will continue to build this VXX position as a medium term hold.

The market is a fractal, and the action right now feels like early 2007. Whether or not it echoes that form and pattern, or is affected by an exogenous event like the Chinese stock market correction in Feb '07, the Yen disruption in Jul '07, or by China's trade balance figures in the early hours of tomorrow morning, I continue to feel the market is priced for perfection. One spark is all it will take. Just as the Yen rang the bell back in July '07 -- it started strengthening, showing increasing risk aversion and an end to the carry trade -- the USD could ring it this time with an unexpected thrust to a new yearly high. After all, we have yet to see the commodity trade, Forex market, or the bond market truly snap to attention and show some fear. Stay tuned.

The Dead Italian vs. the A/D line

There is a confluence of Fib levels above in the 1150s, while there is marked deterioration internally. A truly healthy market would have more breadth. I won't even comment on volume. Short-term gyrations aside, the market is in a spot where it needs to show me the money if I'm going to continue building a short position.