Quick Look at Technicals -Short Term Risk/Reward not attractive yet

Lately I have been very focused on fundamentals and political influences on the market, but not ignoring technicals. I turned and a bit cautious on the near term market technicals and have been reducing some of the exposure over the past few days. I have already been short both puts and calls to collar some of my positions, but finally had some time to look at the technical picture.

Below is the chart of SP cash index. The intermediate trend was broken back in mid January...so the top for now is at ~1150...I think it may take awhile to get back to it, so for now we are boxed in between 1040-1045 and 1110-1120. We are clearly overbought (see stochastic at the bottom) and rolling over. I am not rushing out to buy (except some of the special situations)until the risk reward is back in favor of bulls - first support around 1070'sh...will go from ~55% to 70-80% net long. I am not changing my bullish view on 2010, just don't care for volatility to eat away my profits and raising cash and buying some protective ETFs to really pounce when the time is right.

The Smoke Signal - Should the Markets Care?

In my recent post titled "The First Post of 2010" published on January 29th, I outlined a few themes, including a possibility of a market correction in the first quarter. Here is a quick excerpt:

"After the correction in February/March, the market will likely make the necessary adjustment to account for the eventuality of higher rates, stronger US dollar, and potentially sooner than expected inflation, the equities should rebound strongly and and continue to attract capital flows from bonds, which by then will be publicly neutered as an investment choice. This will be a healthy and necessary pause and adjustment to the investor sentiment, but I don't think this will be a return of the Ursa Major."

The whole post could be found here: http://themrktmaven.blogspot.com/2010/01/first-post-of-2010.html

Looks like the prediction was off by a few weeks, but the precise timing is always a bitch to nail. The SPX was down around 9% from intra-day high to intra-day low, which is about right, but it could have easily been 12-15% as well. And it still might be. Many widely held stocks have lost much more than 9%, so watching the indexes doesn't really tell the whole story. The markets remain jittery and seem to selloff aggressively on any kind of bad news. ON the other hand, since everyone wanted a correction to take some steam off, it was a healthy way to do it.

While over the last few weeks many investors focused on headlines from Europe and China, some may have missed Bernanke's testimony outlining potential moves for the Fed's exit strategy. What he basically said is that the Fed is ready to consider raising rates and he was telegraphing his intentions to the markets. A few days ago, the FED followed the words with action by raising the discount rate. The media, called this move 'surprising'. But no one should have been SURPRISED. When the latest FOMC minutes came out a week ago, and influential Kansas City Fed Governor, Thomas Hoenig, clearly dissented from the rest of the Fed by saying that he doesn't see a need to keep interest rates low for an 'extended period of time'. In Fed's parlance, 'extended' usually means 6+ months. The market seemed to have shrugged off the news, and accepted Fed's explanation - 'no worries, be happy' and that no consumer will be hurt by higher discount rate. It is true, that the discount rate, has no bearing on any other rate benchmarks like the Prime or the Fed Funds rate does, since its only affect the the rate at which banks borrow from the Fed. But one should see it for what it is - a symbolic 'smoke signal' that the Fed is sending to the markets that the pace of economic recovery is showing signs of life and could potentially accelerate to the point where inflation will be higher than the bond markets and the equity markets are currently pricing in.

Yes, we may not get the Fed funds rate increase for 5-6 more months, maybe even longer, but no one should be kidding oneself that the rates will remain this low by Christmas. The markets will have to start pricing this eventuality, so expect the dollar strength to continue, since I don't see how EU could raise rates now. The EU is still dealing with a plethora of problems, while the economies of even countries like Germany are still in a flux, let alone the PIGGIES.


A strong dollar has been negatively affecting the returns of the US equities as of late. The reason is none other than the dollar's impact on commodities, commodities producers, and by proxy, on some of the cyclicals. These groups have been been the leadership for SPX, before the dollar turned up as a result of the weakening euro and improving US economy.

I THINK THAT OVER THE NEXT TWO OR THREE MONTHS WE WILL SEE EQUITIES DISENGAGE FROM THE USD as each asset class will start trading more on its own fundamentals and less on a technical relation to each other. Frankly, as our economy continues to get stronger, its reasonable that the dollar comes off its multi-year lows and settles in a range, probably slightly higher where we are now, but not much higher. The equity market should continue to get boost from strong earnings that we have seen in Q409 and Q110, and as estimates and multiples get revised higher, the prices will follow.

I believe there is a good chance that will see another leg down when the Fed sends a more clear signal that a higher interest rate environment is coming to the 'theaters near you'. Commodities will be in greater demand again, as the same economic recovery that will cause Fed to eventually raise rates, will start fusing into the manufacturing costs, putting inflationary pressure on producers, that eventually will have pass it on to consumers. By then, everyone will be able to see it in the higher PPI and CPI indexes. The bonds will take a hit as the yields move higher at both ends of the curve. The exodus from longer duration fixed income will likely prove to be a boom for both the money market funds and equities.

So this my view of the world. I have correctly expected the Fed to send the first rate increase signal to the markets in February, but since we have already 'corrected' in January, the market didn't react as much. Don't be fooled, the next time the smoke signal will be more of a 'smoke from the cannon'.

Will the PIGS Die or Fly

I just could not resist the PIGS reference, although its admittedly getting a bit overused. Anyone following the global events that dominated the market sentiment and action over the past two weeks, know that PIGS refer to Portugal, Ireland, Greece and Spain. Yes, these four little piggies showed a complete lack of fiscal responsibility and got themselves in a big mess. The fear of either a massive bailout or some type of technical default by one of the piggies, especially Greece, has dominated the headlines and put a lot of pressure on the euro. Conversely, it gave a boost to the USD, a typical knee jerk reaction to USD as a safe haven currency. Yup, the world still wats our dollars when the shit hits the fan, despite its obvious longer term issues. The inverse relationship between the US equities and the USD has played out as well, as has been the case now for almost a year. While historically, this relationship is not always inverse, and actually, has a positive correlation, it has become a very predictable trade to short the market into the dollar strength. There are several reasons for this: 1) Commodities, especially oil and gold, which have assumed market leadership over the past few months, have a negative correlation with the dollar, so when commodities get hit, so does the market. 2)Carry trade - as we continue to maintain near zero interest rates, investors continue to borrow dollars and invest them outside of US, converting them to euros, pounds, aussie dollars, yen, etc.

I believe, that sometime in the next few quarter, this relationship will loosen up, as the interest rates start slow, but inevitable march higher, especially as we start seeing more signs of economic recovery in US.


As far as the PIGS are concerned - they will not die. Just like the financial crisis in Iceland, Ireland, Dubai World, and before that, Russian debt crisis, it will go away.

The PIGS may not fly again for a long time, but as long as some type of aid solution is found and it does not became a contagion, this European crisis will fade. The Germans, ECB, and IMF will find a way. After all, who do you think holds most of the Greek paper? I bet that German banks will take a nice hit if the Greek paper becomes worthless..and then it would require a German bank bailout. So no worries, be happy!
Countries don't go bankrupt.

At the same time, the market, as it always does, will find something else to worry about. Again, I see it as a healthy way for the market to adjust to new risks and avoid complacency we saw before the meltdown of 2008 started.