David Rosenberg, Chief Economist at Gluskin-Sheff commented this morning on the continuing similarities between now and the surprise crash of 1937-1938 that wiped 49% from the Dow:
"Where were "real" short-term interest rates heading into the unexpected 1937-38 collapse? How about minus 200bps? What was at play in that recession was not inventories, the curve or real rates — it was the sudden withdrawal of fiscal support after years of massive New Deal stimulus."
Sudden withdrawal is never good. At some point, the Fed and our government will need to do it to save themselves. That means backing off the monetary and fiscal support when they realize their piddly fire hoses are unable to stem the falling tide. Until then, the market will do what markets do: go higher or lower than we think possible.
Europe is mixed this morning. The FTSE is up, DAX down, and the CAC is sending some disturbing messages. The message is nothing new, but I try not to tune it out. The question is: when will it matter in our markets? Luckily, the clues may be starting to emerge.
Yesterday continued a small sell off that started at Friday's 1406.64 high. It's a somewhat sloppy decline, but it does count as an impulse. Now it either succeeds or fails. Success is lower lows, ideally below 1375.57. Failure is a new high above 1406.64.
I'm not sure at this point whether a high just above 1406.64 would say game on for the bulls, just that the current pattern would fail. Perhaps there's another one that will become clearer with more information.
For my part, I have a short position and have SPY 140 calls against it. Any lower and I'll use SPY 139s. Now that I'm off the road so to speak, I will work on increasing the size of both positions (known as hedging and parlaying in poker, even though I don't play it) until the market gives me a firmer sense of what's what.
Aside from all this, it's absolutely mystical waking up just before 5am here in Scottsdale and watching the desert come alive. No sign of Jim Morrison, yet.
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