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Eyes
Wide Shut?
By
Gary Tanashian
http://www.biiwii.com
October
28, 2007
If
there was any doubt about the true nature of this market and this
financial system, there should be none now. The market reversed
higher on rumors that the Fed planned a rate cut and then zoomed
even higher on Mister Softie's quarterly results and some happy talk
by Countrywide Financial. Bulls are desperate to keep the drunken
party going and perhaps they will with the likes of GOOG, RIMM and
AAPL - fine companies all - leading the way. But there is one
problem for the bulls however; this was all in the script. Reference
the note
from last weekend written as those slap happy bulls were being
led to a short term mini-capitulation by the major financial media
and its constant harping on the anniversary of 'The Crash of '87'.
As noted on the blog, I
covered the majority of my short positions by the close on the 19th
for good profits - when this dream machine gives you profit as a
bear it is advisable to take them because hope is a powerful
aphrodisiac for this market - and then covered the final position
for no gain upon seeing the "whites of their eyes" along
with a glint of rampaging greed.
As noted, there was little chance that the most recent leg down was
going to be the big one and instead, it was just more manic behavior
by the alternately greedy and fearful bulls. Now we witness a quick
reversal to the opposite pole. Do you think this is healthy
behavior? I took new short positions this past week with the
assumption that our scenario (support and a bounce to noted
resistance) would hold. We are there now but to complicate matters
we have a Fed that is being seen as the embodiment of everything we
thought we knew about Heli-Ben to begin with. It appears he will err
on the side of rampant liquidity creation; a luxury afforded him by
the something-for-nothing fiat regime in force throughout his
academic career and which he apparently does not question, along
with perhaps 90% of the public and official sectors.
Without further delay, on to some charts. First up we have the
S&P 500. In last
week's note the Dow was shown. Here we take a look at the broad
S&P 500. Support at 1490 held with no problem, except in the
minds of manic and emotional bulls. But now we watch resistance at
1540, a weekly close above which would get me looking for the exit
signs on my short trade (SDS ultra short SPX) on this index. But
again, there is nothing here as yet other than a predictable bounce
and some still turned-down momentum and trend indicators for the
bulls to hold onto. The bulls refuse to loosen their grip on Dr.
Bernanke's punch bowl. This is one FOMC meeting that is very
important in that it could well decide whether the broad market
rejoins other assets in blow off mode. But if that committee ever
grows a collective backbone and at least acts like it cares about
the US Dollar, watch out below. In other words no rate cut = no
continued party (in the short term) for the bulls. In the meantime,
along with the bearish momentum indicators on the chart the bulls
face a still-bullish (bearish for the markets) VIX, possible double
bottoming long term treasury rates and a put/call ratio 20 day
moving average that appears to have bottomed and is turning up (.94
exponential and .90 simple).
The next chart I would like to look at is the NDX, of which I am
short via QID (ultra short QQQQ). This is a chart that kept me
tempered on the short side once I saw that inverted head and
shoulders formation beginning to form (those who cared to open their
eyes could see what
the bulls were up to back in early September). And here is a chart
from mid September that clearly shows when the bulls took
control as they held the inverted H&S neck line. That is the
'whites of the bulls' eyes' if I have ever seen it - a glint of
greed and fury that would not be denied. But the formation has
expressed itself to our target and is forming a small, tight reverse
symmetrical triangle, which being of modest duration is not cause
for any great bearish projections. In fact, I would be happy to get
the two noted gaps filled and then go back to a more routine risk
management regime (after all, I am primarily short the market to
protect gold and silver miner positions for which the macro becomes
better every time Bernanke's backbone looks a bit rubbery) as the
performance of some of the captains of the NDX like Google, Apple
and R.I.M. is very impressive. I also took a new long position in
Texas Instruments (TXN) on the day it was torpedoed, as owning this
semiconductor (I am aware the SOX
is bearish) company is akin to holding a bit of relative
value against being short an index of high fliers. It should be
noted however that if this does indeed whip itself into a bull
frenzy/mania, the high fliers are likely going a lot higher relative
to the likes of TXN. But until the bulls show me the whites of their
crazy, lunatic eyes, I'll hold short the index here. The whites of
their eyes would likely be a break above the top line of the reverse
symm-tri.
Next up is oil, another asset rising in bullish fury but which is in
reality likely another manifestation of the sacrificial status of US
Dollar. I am bullish on oil (and any other precious commodity) for
the longer term, but folks, this thing is rising now in a furious
and desperate speculative environment. In my book the rise in
stocks, oil, the Euro... they are no different than what is
happening in China, and what is happening in China is a bubble. A
bubble that I have shorted - in very modest doses - of late. I think
the US Fed's true nature has been exposed; they simply cannot wait
to save the day for asset owners and leveraged risk takers at the
continued expense of savers and non-speculators (if you own what you
think are sound mutual funds but haven't gone through all their
holdings with a fine tooth comb, you are a speculator - and
a risk taker). People managing other peoples' money tend to go for
the gusto; go for the performance. But sometimes performance and
sound risk management are mutually exclusive. But back to oil; the
goopy stuff continues to frustrate me as a good chunk of my
investment stance is predicated on oil topping out and/or declining
(like any energy-dependent business, the gold miners do NOT like
higher oil [edit: or more
accurately, higher oil vs. their product, gold]). Biiwii.com
guest writer Bob Hoye's Institutional
Advisors have been constructive on uranium vs. oil, and as far
as energy goes, my few holdings are indeed in the u3o8 sector.
The airlines have not yet gotten the memo and remain a bearish
divergence for oil as long as the short term uptrend remains intact.
I am long JBLU and LUV until such time as the XAL breaks down.
Painful as it has been, the grind continues and I remain bullish
until the chart tells me not to be. As noted on the blog, this Airline
trade has been a grind. But that is the life of a bottom feeder,
which in trading practice I tend to be (as opposed to a momentum or
new highs breakout trader). Patience and ultimately having to
possibly admit I was wrong are part of the equation.
Next we have a chart for gold, a traditionally counter-cyclical
asset that is either aboard the speculative blow-off trade or is
simply biding time as it prepares to decouple from all the other
nonsense on fiat planet (think Euro). But if the Dollar ever catches
a bid - and catches the multitudes of Dollar bears on the wrong side
of the trade, gold will receive one of those hard whacks that its
ongoing bull market is noted for. I had projected $900
off of an ascending triangle break but a symmetrical triangle
works as well or better and targets the same level. This is among
the reasons I hold my core gold stocks no matter what.
The gold bug camp appears have a lot of people who consider it
healthier for silver to lead the bull market in precious metals. But
gold is the 'monetary' metal and its real bull market
is and has been marked by its enduring value in the face of the
wholesale compromise of global fiat currencies. Again, I would like
to emphasize the value that Bob Hoye and fellow Biiwii.com guest
writer Steve
Saville (there are others I am sure, but they are a minority)
have provided to those willing to open their eyes - as they in my
opinion correctly analyze the dynamics of gold as counter cyclical
and counter confidence and the importance of the gold/silver ratio
in divining whether we have a real gold bull or merely a rising
component in the commodity complex. As long as broad market
participants choose to believe all will turn out well, Google can
make them rich and silver is going to $100 any time soon, then gold
will not distinguish itself. I am not bearish on silver by any
means. But in a contraction environment, which I believe will
persist, I am less bullish silver than gold. Our often-watched
gold/silver ratio remains in an uptrend. But that fact and others,
like the bullish stance of the Yen are merely inconvenient and
boring details as the bulls prepare for a hoped for next leg up in
their fantasy where an all powerful Fed actually can micro manage
assets of all kinds to the inflationary heavens and a certain
despised debt note to the gates of hell.
But what if the GSR continues upward, the Yen continues upward, long
term treasury yields do not make a lower low and the manic whites of the
bulls' eyes once again turn yellow? This is not a doom and gloom
forecast, but it is best keep your feet on the ground, understand
the risks and proceed with your eyes wide open. Money is scared
right now and it is stampeding into the hottest plays it can find.
But it is not sound money, it is just too much funny munny, created
out of thin air and seeking to transform itself into something real
and productive. Funny munny fuels private equity. Funny munny
promotes stock buy backs, funny munny creates Euro and China
bubbles. Some of the munny will manage to become money, first and
foremost by denominating itself in gold. But also silver, oil and
productive resources of all kinds. This munny will also hide in
good, solid debt free technologies that enable the interconnected
world we are heading toward. So you won't find me writing a total
Armageddon piece. Look at it this way, in an age where the world's
reserve currency has come under the gun and its major competitors
are not much better intrinsically, this is a game of musical chairs
and the time is now to have your eyes on the chair you plan to sit
in. When the music stops you do not want to be stuck with the wrong
'assets' or obligations.
Secular changes are at hand in how we define 'value'. The above is a
TA piece that became a bit long winded (it's not the first time). I
am interested in effective short term trading/investing and in fact
enjoy few things more. But I always operate against a backdrop where
I keep a sober eye on the macro framework. In a soon to come weekly
letter, this framework will be kept in focus along with shorter term
trends and trading ideas. If you are interested in joining me, watch
the website, TA
blog and Commentary
blog for details.
PS: As if his ears were burning at the sound of the bubble talk
above, yet another Biiwii.com guest writer, Clif Droke checks in
this morning with his views
on matter. Mr. Droke, while maintaining a differing perspective
from my own as to the implications of liquidity creation, has been
one of the most consistently correct analysts I have seen in recent
years as far as calling the direction of what he would call a market
and I might call a casino.
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