FROM NEUTRAL TO BULLISH ON STOCKS
Last night I outlined my opinions on the broad, macro asset classes. At the time, I posted my opinion of stocks as neutral. I did state that the gap down this morning would likely be a buying opportunity due to the extremes in negative sentiment. In the previous article, over the weekend, I also discussed how the deception mechanism in the market may be alive and well. This very simply means that we should hold the August lows quite easily. A change in stance, as I was initially expected these to break in September. Following today's action, I am now bullish on equities instead of neutral. I will not be looking to initiate a position, however, as I am happy with the short long bond (long TMV), short Euro (long EUO) and short gold (long DZZ) positions I have. I may add to TMV long tomorrow. I believe yields are due to shoot up here soon. S&P 500 could move above 1300 in the between now and mid to late October. This scenario would catch a lot of people off guard and have fund managers rushing to make up performance. Don't discount the "I want to keep sending my kids to private school" phenomenon on Wall Street. Fund managers are desperate to keep their jobs in this environment. A sustained move up in the markets will have them all scrambling to make up performance during a year where many could be facing a future that doesn't involve the luxuries they have grown accustomed to. Underallocation during a difficult year can lead to market moves that seem like they are powered by jet fuel and driven by juice monkeys. Some thoughts to snack on...
OPINIONS, OPINIONS: STOCKS, BONDS, GOLD, SILVER, EURO, US DOLLAR
Stocks: Neutral. There are reliable sentiment indicators that began flashing near record amounts of bearish sentiment with respect to the equity markets last week. During Friday's decline, the put/call closed above 1.40 as we are nearing the August lows. This type of sentiment picture doesn't allow for a break of the August lows unless a surprise economic event takes place. Tomorrow's gap down is likely a buying opportunity given the vomiting sentiment that is sure to show up after Friday's decline. Bonds: Bearish. The bond market is discounted for the worst case economic scenario. Anything that makes participants feel that this worst case will not take place, will cause a substantial decline in bonds over a short timeframe. I expect bonds to decline substantially over the next 1-2 months. Long TMV Gold/Silver: Bearish. Precious metals in their current lifecycle are nothing more than an insurance policy against calamitous financial events. Gold/silver is no longer correlated with any macro asset class, be it the US Dollar, interest rates or commodity issues. Gold at 1900 is essentially a CDS contract on the European and US financial/governmental sectors. As soon as the attention to risk subsides so will gold...and perhaps dramatically. The decline a couple of weeks back was the first signs that gold is susceptible to a large run to the downside. Long DZZ. EUR/USD: Bearish Euro/Bullish USD. I remain long the EUO (short Euro ETF) from two weeks ago. The US Dollar will continue to gain as the problems with the EU become more pronounced. It is nearing some technically significant levels here around 1.40 on the EUR/USD. I'll hold this one for the time...
HALLOWEEN HAS COME EARLY THIS YEAR FOR THE STOCK MARKET
I get the sense that the market needs to eat more bears before the August lows are broken. I made the contention a couple weeks back that we are at a point where the deception mechanism in the markets is effectively broken. During one-way, maniacal bull or bear moves (think gold currently or the bear market of 2008), nothing matters except for the trend. Deception stops taking place. Sentiment numbers no longer matter. Oversold/overbought readings are useless. I was under the impression that the market had moved into its maniacal stage very early in August, I was caught off guard when the S&P moved back to above 1225. Under a "deceptionless" scenario, this type of move shouldn't have taken place. Now we see that the S&P is moving right back to the bottom end of its range (1140 on SP futures currently). If the deception mechanism is still alive and well - meaning we haven't entered the meaty phase of the decline where nothing but the trend matters - the lows of August should hold quite easily. There are simply way too many bears out there to see a sizeable decline above and beyond what we are going to get tomorrow morning. This is a shift in sentiment for me, as I was expecting these lows to fail initially. I am not going to be taking on stock exposure. However, I wouldn't mind adding to TMV (bearish bonds/bullish yields). I expect yields to continue their decline in the morning. The only way I see bond yields continuing their move down is with a fundamentally disastrous scenario of economic failure either on a large-scale corporate or governmental level. I think there is a better than even chance that the widening in CDS spreads and various other indications of fear we are experiencing here are traders looking back at 2008, making a comparison to 2011 and believing that the market is wearing the identical costume. Given all the fear the markets caused in 2008 with its most frightening costume in many years, the sight of anything similar will of course cause all the children to run home and hide under the covers. I believe over the coming weeks and months, the costume that the market is wearing will be revealed to be much more kind than what anyone is currently...
A BIG, GIANT QUESTION MARK
With futures down over 200 points on the Dow as I type, I will be delaying the weekly review until next weekend. We're making a move to the bottom end of the range on the equity indices. I do not know which way this will play out. It could go either. We're at a juncture that is very similar to fall of 2008, when nothing worked except selling with reckless abandon. I'm not sure if the end result will be the same. In other words, complete financial annihilation. However, the market is doing a wonderful job of playing the role of 2008 dressed in 2011 clothing. Obama's job speech and ECB meeting, both on Thursday, are major...