Week Ahead in Stocks: This Bull remains Bullish

Volatile markets test traders convictions. If something different occurs, outside the daily rhythms of a market that have occurred historically, questions are asked about the viability of the given trading strategy a trader is employing as well as the level of conviction in using that said strategy. 2008 will go down as one of those years where everything was questioned and the basic premise of stock markets was tested. That premise: Stocks can actually go to zero. You see, in a bull market, very few companies actually trade to zero. If a company is in distress during a bull market, someone normally swoops in and buys them. On the other hand, in bear markets, stocks do indeed trade to distressed levels - just look at those busted dot.com's during the earlier part of this decade. However, in the end, there was value in their assets or their property (pets.com for example).

2008 has changed the rules of a bear market. It has taken companies, once considered the bedrock of the financial system, and put them under the bedrock, left with piles of liabilities on other companies balance sheets. Bear Stearns, a viable company for over 80 years, fell apart in a week. Lehman Bros tried to stay afloat but one speculative attack after another took them apart. Wachovia had a run on its bank and Washington Mutual had to be saved by JPM. Citibank a few weeks ago had a bailout from the good old US Government save them from "zero." Now there is talk that the CMBS market is having issues - combine that with a weak retail environment and you end up with yet another major real estate problem.

So how does one play this game? Well, in my stock portfolio, I am holding companies with good technicals and decent cash flow metrics, as well as some earnings. At the moment, my strategy is to buy the dips and sell the rips because we are in an environment where the uptrend is nowhere to be seen and the downtrend is quite intense. However, that does not say I am bearish at the moment. In fact, as I said last week, my view on the marketplace is a bullish one in terms of my outlook - till my premise is proven wrong (the lows of 770 hold). I continue to believe that the "rip" portion of the trade will be in the 925/950 level.

Intermediate to Long Term
The stock markets remain in a range I believe somewhere between 800/950. They remain plagued by weak earnings outlooks, a weak consumer and continued fixed income leverage issues. On a positive note, the markets lows appear to be in for the next few months so some stabilization in stocks could lead to stability in other markets as well. The elephant in the back of the room is the poor retail situation and in looking at traffic patterns in my area on Friday, I have to say that there will be some (or many) retailers remaining in the red heading into 2009. Some may even go out of business if the consumer completely retrenches.

So in total, the BB model remains on the bearish side. I would have my hedges lifted at this point but would not be going in full fledged into any asset at this point. Risk remains to the downside but even during a bear market, stocks do rally from time to time. I believe that we are currently residing in that "time" now.

Happy Thanksgiving

Happy Thanksgiving to everyone.

Twisted Chartwork: A View of Mother Russia

In times of market distress, it is always interesting to find certain charts that argue against the trend. For example, in today's twisted charts, there are a few charts, long term in scale that show something bullish could be developing. Technicians love to work with phrases such as trendlines, double tops, evening stars, etc....I myself like chart formations but there is one I particularly like called a "double bottom." Essentially, if an given index bounces twice off the same level of support from before and the long term RSI is showing a divergence (higher level RSI than the previous drop), there is higher probability that the said index will move back to where the selloff commenced, on this drop - thus the top of the trading range.

One chart that has caught my eye is that of the Russian Stock market index. As you can see, the 550 level seems to be providing some good support, even in the face of new lows on the S&P 500 the other day (or sub 4000 levels for the FTSE 100). One key drive of Russian growth is the level of energy prices. With energy prices falling of late (or for the past 6 months), the stock index has been leveled and the currency as been turned into rubble! However, I argued previously that I figured crude would find support around the $51/54 level and I still believe such. I have not really look at natural gas in a while but in reviewing the chart of NG, I think that the two major commodities of Russia are now finding support. Thus if the commodity prices find support, the earnings streams of the local companies should stabilize a tad - less volatility is good! Finally tying this together, if the Ruble is able to hold the 27 area, then we could have a very good basis for the local stock market to rally going forward. Let's review each piece.

Stock Markets
The RTS is down about 75% since June. The buyers have been stepping in of late as the currency has remained somewhat less skyrocketish (is that even a word?). A move back over the 800 level, argues for a test of the 1050 level. Given the level of volatility, +/- 25 might be a better argument...anyhow, given the lows of 550, I am looking for 800 next. Supporting this view is the RSI as you can see from above - the last two lows show higher ones! Generally speaking a higher low on the RSI, combined with support from below argues for continued upside momentum.

Commodities
In a piece before I argued crude holds the 51/54 area and I maintain that premise (and will elaborate more so later this week). As for natural gas, I have not posted much on this in quite sometime. so lets take a quick view of the chart. First and foremost, as the chart shows, the dive lower in crude over the past 6 months has been more extreme than that of natural gas. Natural gas has for the most part, hung around the $6-$7 range for the better part of the past few months - even in the face of weakening demand. Given my premise that crude should hold the $51/54 level, this could argue that if crude bounces, natural gas might bounce greater.

To support this or a leading indicator of such, is the price of unleaded gas. If this starts to rise, stronger than that of its sister heating oil, I think the consumer is back in play. If the consumer is back in play, there will be an increase in demand for energy and thus, lower supplies, rising demand = higher prices. Now, if you look at the heat and unleaded charts, that is not the case at the moment. So I am looking for crude to stabilize and natural gas to hang around to higher. i am not looking for a major rally...unless unleaded wakes up and starts outperforming.

Summing this up
So as the charts indicate, the Russian stock market looks like it could continue to climb higher, at least to the top of the 800 trading range. Support from the US markets as well as the crude and natural gas prices should put a floor under the index (barring any major devaluations - more on that in a second). A rising energy market, confirmed by the move in the price of unleaded versus heating oil (and rising demand from the weekly energy reports would help), then I could see this index really catching a bid.

One word on a devaluation. There is a risk that a volatile and disorderly one could occur in the Ruble. If this occurs, my premise goes out the window because over the past 15 years, when the devaluation occurs in a currency, the local stock markets get very volatile and equally unpredictable - essentially raising the overall risk in the position. This is a major reason I have only gone with a 1/4 normal position in the RSX and I am treading lightly - at the same time, I see upside ahead which me putting the position on in my account. I might add to this as more clarity arrives on the side of the currency. Also, the currency looks like it is slowly stabilizing so perhaps this is a leading indicator? in any event, I am bullish but on my toes.

The Week Ahead in Stocks: Sling Shot?

I have a general theory of markets that I have employed into my trading models. It is a rather simple theory and not to be confused with a major finding that has occurred before. Essentially, it is the rubber band theory. When the rubber band gets too stretched, it can break or shoot back in the opposite direction. In regards to a company, if it is the former, the company is going out of business. If it is the latter though, the given company is about to shoot higher, much quickly than many anticipate. Now with that said, I have a model that measures the market relative to itself of the past week. When it gets to a certain level, too high or too low, either the former occurs (rubber band breaks) or the latter breaks (major reflex rally). So as I looked at the scary markets Thursday night, I debated which way the S&P 500 was going to track: The former or the latter?

It appeared to the former for much of the trading session as the bears came out swinging around the 770 level. This kept a lid on the gains and the market, by extension the bulls, threw up their hands and sold their positions - and down the market went! All of a sudden, a new headline came across: Tim Geithner, new treasury secretary for President Elect Obama. Well, it was the best news the market could have at the time as the power vacuum, so quoted by the talking heads on CNBC, had now been filled. Sure, Geithner does not take power till the middle of January. However, since he is the head of the NY Fed (nice rhyme), he can almost begin acting as treasury secretary as soon as he wants. Thus the power vacuum disappears and the S&P, manages another big rally, after pushing the rubber band too far in one direction.

So the question is this: Is this another sustainable bounce....wait, we have not had a sustainable bounce so let's rephrase: Can the rally continue? Now before you bears jump all over me for being stupid and asking such a question, ask yourself this: With thanksgiving coming up, a period known as a time where many funds close up their books for the year, what do you think will be the trade? Well, my thinking is this: The bears who have made a killing in 2008, will cover any position that has made them a good deal of money - only to lock in their fee they charge to their clients. This will put upward pressure on anything that is over extended on the downside and conversely, anything that has rallied dramatically will be sold into to lock in the gain for the year.

With that said, I am basically playing this market with a tight stop. First and foremost, I like my long position, entered around the 750 level Friday. However, I am carrying a tight stop on the position as we again bounced from an overextended rubber band. This such occurrence last showed its ugly face on October 9th and a rally occur ed 2 trading days later. This time around, the selling never materialized on the 10th - only a rally - so the circumstances are slightly different but at the same time, argue that they might be different as the rally of this current bounce occurred on day 2. This could mean the shorts are more willing to cover at this which leads me to my conclusion: I believe the market is very oversold. My indicators have me long and I shall stay such. I am looking for a move back towards the the 850 level over the short term. I would look to add to this position via a stop though given the level of the futures post C News, the add appears unlikely.

Intermediate to Long Term
On Friday as the market tore away from the lows, on the back of the aforementioned, I lifted my long term shorts on the market and covered my longs on the bonds on a hunch that we would be able to defend the 2002 closing weekly levels. The close at 800 sort of counts as as successful defense. However, in order to prevent the long term bearish trade from retaking control, the S&P must begin to rally back over the 850 level in the next few weeks. To me this would count as a reversal off the lows. The major headwinds in the way: The BB model which favors the bears and the financial conditions index which actually turned down for four of five days last week, after rallying for a good month.

Thus overall, the charts argue for some bullishness over the intermediate term. Longer term, we need to see a few things reverse course: Financial conditions improve more dramatically, corporate earnings start to improve and viewed risk removed from the marketplace. Till those issues occur, 1000 might cap any rally for the next year or two.

CRB Bottoming?

You know, it is really funny how everyone is panicking in the markets based on the huge moves in the bond, commodity, FX and equity markets. In stocks, well that story has been beaten into the ground. In terms of the FX markets, the Euro collapsed sending many currency traders, who follow ranges to the shower. In the rate markets, the long bond rallied significantly yesterday and gave back some today (I shorted it). What each of these markets behaviors have in common is this: Investor panic. Now in terms of commodities, while the collapse in the CRB has not helped things in the financial markets, it was not completely unsurprising either. The simple reason: What goes up fast in commodities, unusually comes down harder - just ask those in the bean and oil markets!

So as I reviewed my charts for the weekend, two charts really came to mind. First, the CRB is right at long term support and what was the bottom of a trading range in the early part of the 1990's. Gold has bounced off support that the market created over the past year around 670. It is my belief that the gold market leads the CRB so essentially, if gold sniffs inflation, it will be the first to rally and then the commodity sector, measured using the CRB, follows suit. Thus, the move in gold at the moment, fancy reversal it appears, could be the signal that the commodity sell off is about to abate and rallies in cotton, oil and wheat could be forthcoming in the weeks ahead.

Now this may be nothing. It may just be a bump in the road. However, I am watching this closely for a couple of reasons. First, if the CRB jumps, that means global demand is coming back online. How far these commodities move depends on global demand. A spike higher means people have come back to the table. A gentle move higher means less people are partaking in the bounce and do not believe it. Thus, as I will discuss over the weekend in regards to the S&P, Monday and next week in general, will be very key for the financial markets and a chance of a major 25% rally into year end.

With that said, if I were a betting man (I trade futures which is probably something to acknowledge), I would say that the gold market finds it way up to the 850 level and the CRB bounces off long term support at 230. From here I am looking for 257 over the next 3 to 6 months. We'll see if that forecast holds. Good night.

Twisted Shorts: Looking for a Bottom

So the selling continued for another day and the lows from 2002 were sadly obliterated, if you were long - happily if you were short. The system is broken at the moment as the long bond races towards zero and the corporate bond market does the same, only that its prices are going to zero! For the most part, my equity portfolio has now going fully invested as I have built up a decent position in the financials. On the futures and currency side, I am shut down for the rest of the month as historically the last 10 days of November have not been my best - thus I do not trade. Sometimes if I have a position, entering this time frame, I will hold it into this window but I will not add or reverse such.

And in this market, why the heck would I want to reverse a short or anything into the downward trend? Maybe because I am an idiot? Today I was out buying the financials UYG and XLF along with some other positions. I was stopped out on a few of my oil names as the market continues to pummel crude lower - by the way, this is getting somewhat absurd with crude and much to easy to short the commodity. Another day, another selloff and a destruction of my thesis on black gold to hold the 51/54 area. Now what? Well, I hate to say this but the armageddon scenario is now on the table! $34 next! This very well could drag stocks through these lows today and down into the 6s on the S&P. Speaking of 6s, do you think the devil is behind all of this wonderful market action? Just kidding but here are a few other thoughts on the day.

• Another day, another 3000 decliners on the NYSE. I cannot get over how many stocks are going down in a wholesale liquidation. That would be about 95% of all stocks. Oh, did I mention that volumes today had the bears controlling 98% of the volumes of the NYSE and the ND? Bottom line; I think we are close to a bottom. we'll see what transpires in tomorrow's session
• Even as stocks got tattooed into the close, the Euro and GBP remained remarkably stable. This could be a leading indicator that stocks are finding support and not all assets are falling.
• IN regards to the Yellow metal, I continue to be a believer in the Meta after it once gain held the 766 level

Gold Deflating?

I have a general rule about commodities. Whatever gold is doing, it is generally a leading indicator for what the CRB is going to do. So for example, when gold shot to the moon a year ago, that to me indicated the CRB would be making a big move upward as well. Sure enough it did. Gold then plunged and so did the CRB. Interestingly though, the CRB along with most commodities has continued this move lower, while Gold has basically hung around the 700-750 range. Now I heard on Fast Money tonight that gold is doing nothing. Well, doesn't that tell you something? If the market were truly deflationary, would gold be trading somewhat strong relative to other assets? That is the question I am asking myself tonight. This is not to say that I am about to get real bullish on gold but it does beg the question: what is gold telling us now?

Now before I proceeds, lets get something out of the way; this market sucks, plain and simple. Today was another vicious drop in the S&P and it appears we are at least poised to test 800 tomorrow and perhaps the 770 level of 2002. I remember that time period all to well as I was trading it via the big S&P (when the mini was basically in its infancy). Swings during that time were much the same today, if you adjust for the volatility of the periods (obviously now being much higher). The 800 level became a pivot of sorts during that time and the bulls bears volleyed back and forth. Meanwhile, gold was finding stability, after selling for for a while - that stability, combined with Mr. Green's affinity for flooding the market with cheap credit, led to the 400% move from 250 to the eventual 1000 level mentioned earlier. The S&P interestingly has done and round turn back to the 850 level - conversely, the gold market has not down a round turn and has held basically 3x its value of 2002. What does this indicate?

It indicates that perhaps all these deflation scares are unwarranted. Many are saying that the drive lower in the bond market is an indication that deflation is taking hold. That is all and good but lets review some facts. First, Copper is still above 2004 levels. Crude is roughly 100% higher than 2002 levels. The long bond and the 10 year are now getting towards the 2003 deflationary scare period; 3.20% and 3.80% respectively. Lastly, if the US economy were deflating, the USD would be sinking - just ask the Japanese about their deflationary problems and the movements of the Yen! Now, if you happened to look at the level of the CPI month to month, it was down the most in 60 years. At the same time, the year over year figure is 2.2% on the core - that is not deflationary by any means. The consumer could retrench dramatically, which I guess is already occurring judging by the daily bankruptcy toll in retail - a factor that could drive core inflation lower. But that is not occurring at the moment.

So again, what is gold telling us? Well I think it is more complex than just one factor. First and foremost, it is arguing that there is much demand for gold and bullion these days - that makes sense given the volatility in the marketplace. In addition, there is demand for gold on the inflationary prospects side (money supply figures alone could lead to this conclusion). Finally, there is the fear factor of other assets deflating. Countering this is the CRB broad commodity deflation - I believe if the CRB were steady, gold would be over the $900 level and not the current $740 area. However, since every hedge fund who was bearish on the markets is in liquidation mode (even the winners are liquidating), that puts additional pressure on the price of the yellow metal to rally. Thus with these factors running into each other, you get a gold market that sells off one day and then rebuilds over the followings days.

So what is my outlook for gold? Well with each day that the yellow metal holds the 700 level, I get more opportunistic. I would be very encouraged to see gold rally with the stock market on a bounce (if that is indeed coming). The meaning of a gold bounce could mean much of anything but the bottom line, it will bounce which is what the inflation bulls have wanted to see. This in turn could levitate other commodity markets as they buy into the gold as a leading indicator story. In any event, I see gold at least stable around the 700 level with the potential to trade to the $900 level within a month or two.

Twisted Shorts

As I get ready to close my eyes and sleep, I am left wondering what the heck happened today. The S&P was once again slammed down from the highs only to find buyers around the 825 level in the futures (the NDX found support around 1120). In looking at the markets tonight, all I see is Red as the buy programs that drove the thin market higher into the close are now being unwound. Overall I ask, is it really worth it to trade this market? On the rally today, the buying was so condensed that my portfolio remained lower for the most part. A few names did well but the performance of the whole remains less than satisfactory.

Going into the rest of the week, I am left wondering if I should just turn the computer off. however, I don't believe that will be the tact I take ultimately. I am looking for a breakdown in the dollar and remember a few years ago around thanksgiving the dollar gave in to the bears and dropped. the move today from the lows, a negative momentum divergence, could come into play more aggressively now if the Euro and GBP find some footing. Those two markets remain oversold so I am trading them from the long side - with little luck of late! Anyhow, enough rambling. Here are a few other twisted notes for your reading enjoyment.

• Tomorrow the 850 level in the S&P could become major support - there was some big selling there near the close tonight that got ripped into the close. If it holds, it could cause the shorts to run for cover again.
• I am impressed with the action in gold of late. I still believe that crude holds the 51/54 area which means that commodities should start to spurt up sooner than later.
  
• What the heck is wrong with the CME? I really like their company and earnings picture but the rumors of the government creating a central clearinghouse seems foolish to me. I trade in and out of this name as my stop was tripped.
• Copper is holding in around the $1.66 level which is impressive given the fact that the gap still argues for $1.40. If this contract bounces from around here, we could see economic output pick up - essentially what I argued yesterday in my crude piece.
• While I am impressed with copper, I am not impressed with the action in stocks overall. Breadth has stunk and even when HPQ and HD report decent numbers, the sellers come out and hammer away.
• On the realmoney silver board, I am finding traders to be very cautious. Perhpas this rally does have legs? Even Cramer, Mr Bull himself, is arguing against this market.

That's about it. Have a good night.

To MUCH Interest in Rates?

I had a friend the other day just come out and say to me, "stop complaining, the trend is down." Well, this friend, call him BS (and he is not full of BS), has been doing quite well on the short side over the past few months. Being a contrarian trader that I am, I have missed some big parts of the move lower - taking the much maligned path of jumping in front of the train for which I have been bruised and beaten. These stock markets are plagued by apathy, despair and opportunistic trading. The first two are self explanatory and I could easily make the case that the environment is very similar to the late 2002/early 2003 period where markets went sideways for a while and several tests of the lows were attempted - meanwhile, people gave up with every subsequent dive downward towards 800. As for opportunistic trading (or manipulative trading), lets just be frank; when someone comes into the mini S&P market and drops 7000 contracts constantly hitting the bid around 4pm, nobody is going to step in the way. The opportunity to trash the market is there and to make 10 pts in a few seconds, is a bonus!

This is just one example of the opportunities this market is giving traders. Short momentum players are jumping all over stocks because there is just no support with apathy the ruler at the moment among the bulls. The fear level is high so shorts can pretty much do whatever they want. To be honest, my best trades over the past few weeks have been feint sell signals that turned into amazing three day gains. This is not normal by any stretch of the imagination or at least relative to the trading markets of the go go 90's which had a good deal of volatility. If you combine this free money on the downside with the very high volatility, you create markets of fear and thus support wilts in the face of a sell program. Now, I have benefited on the short side of the NDX and the S&P over the past few months so while its sounds like I am blaming someone, I am instead just chalking this up as pure hard core capitalism - survival of the fittest so to speak. Sure the SEC could look a bit closer at the manipulation around the close or the CFTC could enforce some rules on the trading platforms but in the end, it comes down to the economy and the market conditions. We know how horrible the former is and the latter is not much better.

Which leads me to the point of this story. In markets with tremendous uncertainty and high momentum to the downside (ie equity destruction), treasuries become the soup du jour for the panicked investor. What we have been seeing over the past month is a decent amount of buying in the bond market where volumes are half the norm of the past 6 months - in other words, what you see in stocks with high momentum in thin conditions, you are seeing in the bond market in much the same way - just look at the action in the long bond over the past month. It almost looks manipulated! At the same time, when the average futures volume for the bond has been around 400k earlier this year and then drops to half that in an very high volatility environment, you get exaggerated moves. This current move on the curve has created scenario's now where 2s, 5s, 10s and the bond could all break lower substantially and nobody is in the way to sell it!

So what will draw some volume into the bond market? What will be the catalyst that sends investors out of the bond and into another market? Well, Doug Kass in a piece on Real Money yesterday said that the returns on the BAA rated bond was now higher than on regular stocks, since 1980. That is an amazing fact that argues it was a waste of time to take risk in stocks over the past 28 years! He says what could break up this party is inflation - and I tend to agree. Essentially the conditions are ripe for inflation with inventories shrinking and competition evaporating across industries. A sharp turn in demand opposite falling inventories could create a price spike and break this condition between stocks and the Baa.

In addition to the inflation threat from the supply demand side, there is also the potential monetary inflation predicament. What do I man by potential? Basically, there is a ton of money on banks balance sheets that is not being lent out at the moment. The latest data from the Fed shows excess reserves sky high and if you compare this number to demand deposits, the ratio is almost 1 for 1 vs 6 for 1 over the past 10 years on average. Basically, the banks are hoarding the cash. This is not exactly earth shattering news. So what happens when the first good bond deal hits the market? This could lead to a lending spree by the banks as the money will be available. We saw that in the case of dividend paying stocks with high yields, where it took just one company to trigger dividend cuts across the banking industry - fashionable if you will, to do so. Anyhow, in the early 1990's, during a banking crisis in Sweden, when a deal when through on the lending side, the markets began to thaw. A lending spree could create an inflationary problem as credit hits the economy. Credit expanding, demand rising and falling supply = potential inflation spike.

So the question is this: When will a deal go through that is meaningful to the market? Further, what company will be the leader on this end? That is the ultimate question of sorts and I will have my eyes pealed because if a few deals go through, the money might start coming out of the spigot and guess what, inflation, could come running right down the pike. So in the short term, the bond market is telling us that conditions are very frozen, thin and scary everywhere else. The more they rally in my opinion, the more likely we see a deal come to market because of the lower rates of the long end. The longer treasuries rally, the higher the risk that a reversal and violent one at that, comes.

In the meantime, the bond market remains a market where the buyers remain in control. There is an options expiration coming up later this week which could slow things down but til some resolution in the bond or other asset markets materializes, it is a buyers market. Here are the technical particulars.

• 2s look like they want to break through further to the downside. The 2003 lows sit around .70% and it looks like the same test now wants to be set by traders. This could also have the Fed move on rates again though that would leave them with roughly the same ammo the Bank of Japan had in the late 1990's - in other words, not good.
• 5s are in similar rally mode and it looks like the 2% level is the target...again from 2003.
  
• 10s are on the cusp of moving lower aggressively and testing recent lows around 3.20%. A finish below the 3.50% level would give me greater confidence that things are about to erode further in the asset markets.
• Bond remains thin in trading and long on the traders list. 3.88% looks like the next target.

Crude Oil at $55

As I watched the markets fall apart in front of me Friday, I summarized some extreme ideas that are currently making their way through the marketplace. First, the world is coming to an end. Yep, they have called it. The credit waves are going to send stocks to zero and there will be very little or no economic value left in stocks, bonds and the banks. Commodities will sell of nothing and since there is no demand for commodities, you will be able to pick up some gold, copper, corn and beans for a grand total of nothing – after all it is being given way. Oh, did I mention that the US Dollar is all powerful and is the reason that the world economy has gone to zero? Oh, that was the fascination with things back in the 1930’s when the Fed hiked rates to defend the dollar! Finally, there will be no more need for gasoline. Everyone will walk to work, just like the days of yore!

Ok. I say this all in jest but this is what I am hearing. The bears are clamoring that debt is going to take us all down to abyss. Since I am a trader of futures, I know all too well how fast someone can lose tons of money all too quickly as the power of leverage can be, well…very powerful. That is the scenario that many are building for the current marketplace. I just had a friend email me and say that he sees Dow 3750 and S&P 650. Those would be extreme levels and probably feed into my crude oil to $30, if the economy dives to oblivion. Perhaps it happens. Perhaps it does not.

So what does this have to do with the price of gasoline or the price of crude for that matter? Well, in the opening missive I mentioned that there will be no need for gasoline anymore. Based on the selling in the pits today, that is now being confirmed in the heat market as well, even as the temps are supposed to be lower than a year ago. Now, I am being overly simplistic about the current situation, but these are the thoughts driving things at the momentum. However, I believe that crude is getting somewhat interesting at this juncture. This is coming from a guy who has been bearish on the energy markets for quite sometime. I believed that crude should have never rallied to $140 and $80 was more appropriate – that is if the economy performed much like it did in 2002 with the shallowest of recessions but as we all know, that has not been the case.

Demand for everything, as shown by the declining Baltic dry, has dropped significantly. Now the assumption out there is that the demand comes back slowly as the bounce back in the economy will be L shaped and not U shaped. This is a viable theory but I look at the cold (or warm) numbers of the distillate and gasoline areas to determine if crude is heading higher – global demand figures form OPEC and the IEA are nice but are on a delay. In addition, I watch the action in the price of copper for a clue as well. Generally speaking when both copper and crude are rallying, global demand is rising as well. Now, many will indicate that the hedge fund community can put the price of high grade around as well as the price of crude but historically these two have helped in determining and economic or demand low of sorts.

So what have the two been doing lately? Well, as the chart shows, stabilizing. Now before I get buried for declaring the recession over, take a look at the chart. Longer term you see decline. Shorter term, the Baltic dry, copper and crude have all come together and the momentum of the decline has slowed. This is something. It is not everything. Now, if we start to see gasoline consumption pickup and heating oil demand rise just a bit more than the norm, this could be an indication that the consumer is finding some support. The real test of the consumer will be next Friday when I believe we see some sort of low in retail – big discounts, big crowds.

Aside from this retail call, let’s get back on the crude story. Essentially I think, based on the various measures of economic output, that crude’s support sits in the mid 50s. If the economy rebounds, much better than the common belief that we are seeing depression #2, then we’ll see crude migrate back towards the $80 level over the next year. If the economy dives and my indicators in the chart fail again, then we are looking at a much steeper level in crude – perhaps somewhere down near the $35 level. I don’t expect that at this point and thus I am getting constructive on energy in general.

One last demand note. If the thing with Petro Canada is a leading indicator (postponing drilling in the oil sands), we could be positioning ourselves for higher prices again down the road as other oil sands projects get cut, based on lower crude prices. Without the oil sands, we are slaves to the Middle East in terms of supply. IF the oil sands become a boom, then supply is spread out among our neighbors – thus less geographic risk so to speak. Anyhow, less supply with a spike in demand (might come if the credit buildup I am hearing is real) could lead to a big move in crude or at least a rally.

Do I have an outlook then? Well, I would really like to see crude get back above the $60 level and the products find some demand which lows the relative inventory levels year over year. The best rallies I have seen in this market occur when demand is rising and inventories are falling – simply supply and demand. We have the stability on the copper, crude and Baltic dry index. Now we need to see the cold hard facts of the heat and gasoline market support for higher prices in the future. I remain ready….question is, will the consumer step up?

The Week Ahead in Stocks: Ugh!

This equity market has been the most violent of any type I have ever seen. The S&P 500 on Friday had a destiny with the big 925 level and all of a sudden, it reversed course and dropped 55 points to finish at 860. This was the ultimate kick in the stomach to the bulls, like myself, who thought we put in a short term low around the 820 level the day before. The selling was swift and most buyers just stood out of the way (as shown by the 90% down volume in the NDX at last read). It once again turned my stomach upside down and removed a little hope that I had for stocks in marching back to the 1000 level. I was truly left with hopelessness all weekend thinking that once the markets reopen, they would continue to drop hard making Monday a terrible day to remember.

Interestingly, I have had these gut feelings for the better part of the past few months. For the most part, I have been making money on the S&P but the times I have traded against the trend, that being a downtrend, I have felt like I am sitting in the middle of a highway waiting for car to come at me at 100 mph and there is nothing I can do about it. The government is to blame with their constant changing of the rules; wall street is to blame for taking the credit bubble to far; and main street is to blame for being sucked into the euphoria that took the S&P to 1559 not too long ago. All of this has created an environment where memories are as long as the next trade and conditions are the most treacherous I have ever seen.

This is not to say that things cannot improve. However, the decline in the economy has been so swift and efficient that one cannot help but wonder what earnings are going to look like for the likes of IBM, Mr. Softee and King Google. One wonders if fast food giant McDonalds can constantly keep up the earning pace. Will Lowes and HD have issues? And can GE survive when the corporate world is frozen? Essentially, we have been given the ultimate of unknowns and very few are sure what is next. When uncertainty is high, most people sell. Generally speaking that is the time I buy and I did just that the other day on the reversal. I added to my positions on the dip Friday only to be punched once again and left wondering - when will the next dive occur?

Now I sound very pessimistic but to be honest, it is hard to be an optimist these days. While credit conditions continue to thaw and a credit demand level continues to rise, the banks refuse to lend - to individuals and to each other. This lack of lending combined with the fear of job loss has lead to a freeze on both the corporate and retail sides of the economy - 100% of GDP. What does that mean? What will the effect to GDP over the short term? I am reminded that from 1932 thru 1937, the US Economy following three years of problems, averaged growth of about 6% or so. The 1929 thru 1932 period was depressionary with negative growth for 8 straight quarters at one point. I have to wonder are we up for the same fate? Are we at the point where growth does not occur and stocks essentially move back to book value plus cash for valuation - ie liquidation value? The longer this freeze persists, the more likely this occurs.

So you could say that this technician has panicked though my returns are not to blame on that end (I am in the green for the year thankfully). That is truly possible. My charts look horrible across the spectrum. I cannot make a bullish case for the broad indexes using weekly and long term charts. I can tell you that the low we saw Thursday was very interesting on many levels - it essentially was a bottom in stocks and a top in the dollar, simultaneously. Since the dollar has represented fear of late and stocks have been a beneficiary if you will of that fear, it was a major turn. I still believe that is the case. However, the dive late on Thursday means that the road traveled going forward will require a seat belt!

The Short to Long of it
The markets remain dislocated but as I mentioned, I believe we put in a significant turn on Thursday. Thus I have moved to a much longer position for my money in quite sometime. I got bearish on things back in late 2007 when the VIX became too complacent and my bull bear model turned down. Now, with my bull bear model extreme, financial conditions improving (need that corporate bond index to follow) and the turn from the lows this week, I believe we are moving upward and now setting a date with the 1000 level sometime in the next few months. Of course, I am going to put out there a quick caveat; If the 817 level does not hold, all bets are off and there is a very good chance I will be liquidating as I believe the 650 level in the S&P will be next. This will also tell me that things in the economy are getting far worse than I believe.

In terms of the medium and long term, the bears continue to control things. The bull bear model is pretty extreme at the moment which argues for some moderation but over the longer term, the bears still control things. As the short term indicates, I am looking for the stock markets to bounce higher, even in the face of a very weak retail environment (though in looking at Target today, I did not get the feeling that people have completely retrenched - just switched to a cheaper store).

Twisted Short: A Buyer Today

So I came into the market today thinking that since the bond market was closed, trade would be somewhat limited to a range of sorts. FX, Stocks, metals and other instruments would perhaps swing from high to low but then end up near unchanged when all was said and done. What happened? Anything but such. Markets dived from the open and bounced back thanks to some good ole government manipulation/intervention/bailout talk - talk that has been constantly pushing stocks around since the beginning of October. At the end of the day, stocks finished lower in a hard way, the Dollar was very strong and commodities for the most part deflated.

So why was I a buyer today? Because a few things struck me. First, the bearishness in this market from a sentiment standpoint is so unbelievable high. People I talk with are all throwing in the towel. Most traders that I know have gone to cash and are unsure of what is next. Talk on the boards at Real Money and Jim Cramer most specifically, sound downright desperate. Rev Shark is sitting in cash and Doug Kass, one of the better traders on the street in my opinion, was not exactly sounding the bullish card, even on a bad trading day. On the buzz and banter site, the bulls are basically backing off and the bears are unsure of what is next. Overall, a mismash of negative thoughts.

So as the afternoon arrived and signals started popping up telling me that the selling was just to extreme in certain parts of the market, I started buying. I picked up three stocks that are trading under 4x trailing earnings; I bought an entertainment company; and some financials to boot. I am using stops on each position but if my call is correct, then those stops should not come into play and some of the stocks could rise (I am looking for S&P 1000 sometime in the next four weeks).

In addition to this contrarian move on my part, here are a few other thoughts to consider.

• Answer this question: Which stock will go to zero first; Goldman Sachs, Best Buy or General Motors. Obviously the answer is GM but if you had to think about it first, I would not be surprise. Things are ugly on the consumer and credit side - the perfect nightmare for GM. Deflation is hitting technology thanks to the bankruptcy of CC. Financials continue to get hammered hitting Goldman Sachs.
• I covered a short in the Euro on the close today as I think we'll see some moderation in the trend of the selling. I also do not trust the move today in the FX markets. Plus the dollar index still has not taken out the 87.60 level which has contained each and every rally thus far. I said yesterday that I was still dollar bullish and will continue to hold this stance. However, short term, a correction is in the cards....perhaps.
• Here is an interesting thought: Is there a pent up demand for credit out there? If so, when credit unfreezes, will credit growth explode? And what will the implication of such be? Food for thought.

Hot Tomato Soup

I have a myriad of rules and strategies I follow with my money. Each one of them has been put to the test over the past few months. Some of the signals that used to work, have becomes run over by the freight train we call credit. Other signals, once considered unreliable, have become very accurate in predicting market direction. Like the model, the markets have been equally screwy with crude trading in line with stocks and the dollar trading with a negative correlation to the S&P. The long bond is being run higher in price (lower in yield) and very few understand why. And while this soup is cooking, the US Government is buying AIG, Freddie Mac and Fannie Mae. Irrational trade rules supreme - and this soup is far from plain tomato.

So as this far from plain market chops around, it makes it hard for anyone to find out what the overall direction of things is. For example, the dollar has screamed higher even as the US government takes on more and more risk from the financial markets. The Yen was the strongest global currency even with overnight rates around .30% and deflation setting in. The Euro, overly extended in the 1.50s, has corrected more aggressively than I could have ever imagined. And as the Bank of England attempts to stem the decline in the Uk Economy, it appears the market is saying that the decline will be much worse than many believe.

This makes the process of understanding the next direction of the currency markets extremely difficult. Sure, one could ride the trend in the dollar higher or continue to press their shorts in the Euro but each case, the index or currency is much extended. For the dollar, the move higher off the lows has been very powerful. It has run over the most experienced of traders. While some were bullish on the dollar (and not super surprised about the first 10 pts - me), the continued move of the greenback higher is beyond understanding based on the many fundamental factors sited in the opening. So while I may be confused by the move of the Greenback over the last 5% or so, that does not matter much. What is next is important.

The Verdict: Dollar Bullish
So in an environment where memories are short and the trends are strong, I will continue to remain with a dollar bullish bias. Longer term I have very serious reservations as the Federal Reserve is playing with fire on so many levels. However, given the continued problems in the world, my notably the failing economic situations in Europe and the UK, the greenback is finding buyers and I think this should continue through....tomorrow. No, actually, I believe the dollar index will continue to find buyers as long as the 85 level on the weekly chart holds. A move below that level and then things get interesting on the downside.

As for the implications here, a dollar bullish bias leads to a bearish bias versus the Euro and the British Pound. The Euro's trend still points lower but the long term cycle trend, positioned around 1.27 remains a support of sorts. In fact the strength in the Euro over the past week around this 1.27 level has been impressive and has stalled the advance of the dollar index each time the Euro has come down. It appears that even the ECB is finally gaining some credibility in actually noticing that the zone is in recession - even though that was not the case when they hiked rates back in June! Overall, I remain skeptical of the Euro to advance much overall. I continue to believe that we are targeted for the 1.21 level at some point.

As for the Pound, things are horrid economically in the UK. This has put the BoE on the offensive recently cutting 150bps (whereas the ECB only cut 50bps when they should have come in equally aggressive). Unemployment is rising and prices appear to be crashing lower. Year over year growth was around .5% which while not contracting, is not exactly earth shattering growth. Trading wise, the pound has represented risk of late so when conditions become "fearful" of sorts (that means lower stocks and a higher yen and dollar), the Pound has taken a harder hit than the Euro (as evidence of the rising Euro/GBP rate). Major support comes in around the 1.55 level that if not held, leads to a waterfall move below 1.50. This could coincide with a drop in the Euro through the eventual 1.27 level.

A few FX Views in Brief

• The Yen has stalled its advance around 98 lately. I believe if par is taken out on a weekly close, this could set the broad currency markets to rally - versus both the Yen and the US Dollar. Till that happens, the bulls control.
• It appears the .70 level is become a roadblock for the Aussie to move higher versus the dollar. I had a friend yesterday try to compel me to become bullish on this currency. Till .70 is recaptured meaningfully and not followed by a 500 pt dive, I remain bearish. The RBA has been aggressive on the cutting side which may have put a floor on the Aussie around the 61 level (roughly where intervention occurred) but with the overall financial conditions in the marketplace elevated, the AUD remains risk to hold at this point. I would change my stance with a move over the .70 level, weekly close.
• After holding in for the most part as everyone else dived against the dollar, the Swiss is finally relenting and coming lower down towards the .85 level. Up til this year, when there was a crisis in the world, people ran into the Swiss franc. So does that mean that the risk in the marketplace is unwinding? Could be. Trading wise I remain bearish looking for the Swissie to move towards .85

Twisted Short: A Turn?

Sometimes sharp moves at the close are just that, sharp moves. They sometimes mean something but often do not. in fact, many late day moves in a given currency commodity or stock are generally unwound to some extent in the days that follow. So when I see something, like the late day rally in the S&P from 920 toward the 936 level on the close, in the last 30 minutes of trade, I say to myself, "is this a useful meaningful bounce" or "is this a head fake to set up a short?" In a bear market, the easy answer is that the move was a short squeeze and a great setup for a sale. In a bull market, the buyers would take it to buy more the following day.

So in looking at things on the close Friday, I could make a case for both side of this. In terms of the bullish case, here are the facts

• The Yen hit lows this week and never really recovered for the most part. Sellers came out near the end of the day keeping the level down. Meanwhile the Euro was modestly higher meaning the Euro yen was moving higher on Friday.
• With the bounce at the end of the day, the FXI was able to finish up on the week. Given the meltdown in the Dow, S&P and NDX, this could be a strong statement on stability in China. Adding to this was the EEM's move past trend. A follow through in the open could indicate further strength.
• Two sectors with much stress lately: Real Estate and the Financials, both had big moves with the former breaking past a major trend level and the latter jumping hard (with more improvement needed like the SKF breaking down).
• The DIG shot up on the close while the DUG collapsed on the close. If these undervalued stocks jump (their PE's are way to compressed), then this could provide a lift for the markets to bounce higher.

On the bearish side, there are still some lingering problems

• The Euro/Yen rate moved higher on the close but both the Yen and the Euro sold off versus the dollar simultaneously. Generally speaking, this is a change in character as the Euro has been rallying with stocks and the Yen has been rallying when stocks sold off. Thus, perhaps the guiding light of the Euro/Yen might not be as strong as it was before which could create some extra volatility. This leads to another never ending level of uncertainly.
• Treasury yields sort of held in all week and did not rally much on the close Friday. This could be an indication that many are not sold on the rally.
• The semiconductor stocks remain weak and without a rally in this sector, then tech stocks cannot get out of their own way and thus the NDX 100 will not rally.

So as it appears there is evidence both ways on this subject. I am positioned in what has been a bearish position lately versus stocks. However, if the Euro/Yen cross does not matter as much, then my position really has not forecasting ability in this case. On the stock side, I am long stocks (having covered all the shorts Thursday) but not long the indexes - the tides just don't look strong enough yet. Thus the bounce may continue into Monday but I remain skeptical beyond.

Random Notes: Thinking that if the Yen can get over par, things will really starting motoring on the stock side...interesting action in the gold market these days as it won't give out beyond the 700 level - thinking that the copper market needs to bounce for gold to bounce....Option compression on Friday, even with the rally was remarkable. The bears continue to hold the keys.

Anecdotal

Since this is my first note on the market since September, I wanted to make it interesting for the reader. Essentially, I was looking for something that was "catchy" and perhaps a note that will help me in better understanding things in the marketplace. After all, a blog, to me anyhow, is a way to organize one's thoughts and develop ideas and theories so that I am able to better understand what is occurring in the various parts of my trading universe.

So taking this into account, how can I draw you the reader into this note? One word: Anecdotal. Anecdotal by definition, according to wikipedia, is "Evidence, which may itself be true and verifiable, used to deduce a conclusion which does not follow from it, usually by generalizing from an insufficient amount of evidence." So what is my premise for the anecdotal evidence that I will present? Simply, "fear reduction."

Fear has dominated the marketplace over the past two months. Whether it is the fear of bankruptcy, the fear of a systematic collapse or generally a fear of losing money, it has trounced any confidence that existed in the hedge fund community and sent many value players wondering what went wrong as the likes of AIG, GE and Goldman Sachs collapsed from high prices even with low multiples. Basic material stocks such as FCX and energy names like Transocean, both sporting single digit PE's, trailing and forward, have found only sellers and historically PE levels have not applied. And do I need to rehash the story of FRE/FNM or LEH?

In short, fear has driven many people to drink, into bankruptcy or out of business. The fear of the unknown arrived from what droves us up the chart: Credit. As risk levels dropped, more credit was used. As the markets fell apart, everyone saw the party ending and dumped credit. Fear took off as people did not know where or what power credit had. When Bear Stearns went out of business overnight, we learned that credit was indeed powerful. When AIG and LEH went down in the same week, we saw that credit was unforgiving. And now with the economy falling apart, we find that credit pounding away again - all contributing to the fear in the marketplace. That fear disappears when the credit contagion ends.

Since the middle of October, financial conditions have begun to improve, as measured by various instruments (I use one that is too complicated for print) which argues that the contagion is losing steam. Sure, the unemployment report for October was pretty rough and the ISM was equally weak but those were backward looking - the anecdotal evidence has been developing over the past week. Is it good evidence? it is just a generalization?

Well, the Japanese Yen and the VIX have both backed off dramatically. They both measure various levels of risk in the marketplace. Given the fact that the Japanese economy already went through a decade of deleveraging and now is just coming back, people ran into the Yen globally thinking it was the safe haven. Also, those who were short, the proverbially "carry trade" had to cover putting even more pressure on the Yen to strengthen. So as the Yen has slowed its rise over the past few weeks and migrated back towards the par level. This represents less pressure to cover shorts as well as to short other currencies in favor of having long Yen exposure. On the side of the VIX, as the dives on the stock market have been met with some buyers over the past few weeks, overall option conditions have become more orderly - thus a more relatively stable VIX.

Now these two variables will not ultimately determine if the S&P 500 will trade higher Monday. However, there were some interesting things that developed late day. First, the Euro/Yen cross remained elevated off its lows - even as stocks dived downward after President Elect Obama's useless press conference and then late day, even as stocks shot higher into the close (with some very key indexes jumping aggressively), the Euro and Yen went downward. Basically, traders were buying the dollar as the stock market rallied - this generally has argued that growth is returning. Now perhaps this was no more than a typical Friday and short covering on the close was the reason for this move. however, if you take these moves, combined with the VIX, JPY and my financial conditions model, you are getting some evidence that things are improving.

The question of sustainability though needs to be mentioned here. Earnings stink. Goldman Sachs trading behaviour is downright strange and the selling in the JPY has slowed over the past few days. The S&P made a nice move past the 925 resistance and now targets higher but it remains in neutral so to speak (925/950 region is basically no man's land). The NDX 100 remains stalled under the 1300 level. The Dow is stuck. On the economic side, long term issues like unemployment and growth are not on a market side. Overall, things are ugly.

However, they are improving and that is a start. I will remain cautious with my trading doing what Doug Kass has been indicating via Real Money over the past few years - buy teh dips and sell the rips. Most importantly, I will be looking for the S&P to get back toward the 1000 level and then hang there for a while. Following that, a continued bounce higher could give us the same bear market low we saw in 2003. So far, the anecdotal evidence argues such.

TC's Market Views are now Twisted Markets

I have changed addresses so that I might have a fresh start on the marketplace going forward. You can find all the old posts from earlier this year at http://tcsmarketviews.blogspot.com/. Thanks for reading - TC