Educational use only. Never intended as advice.
The stock market and the economy are not the same. It's sometimes difficult to sift through real profits and real growth after companies massage their messages with pro forma earnings and charges to present a more pleasant picture. Add the Grantham warning that profits and margins are mean reverting, coupled with the deflationary competition from Chindia, and you get a market priced for perfection.
Meanwhile, amidst a sea of global liquidity, gold, silver, copper, and palladium frolic as 'wealth alternatives' to fiat currency. Abandoning the gold standard, central banks have the opportunity and the political support to create dollars out of nothing at all, in a desperate effort at currency debasement. Gold finds that hard to stomach, and creeps steadily upward (
net long NEM via options, and a variety of gold mining shares).
Meanwhile, far offshore, our country's biggest threat, ecological warfare in the form of the H5N1 avian influenza (hemagglutinin and neuraminidase), percolates threatening to become a global pandemic of epic proportions.
Closer to home, Congress elects to fuel the liquidity fires with tax cut extensions, bigger than their proposed spending limitations, those often at the expense of the poor (Medicaid) and students. Investors don't seem terribly concerned, with the VXO closing at 12.02 (200 day average of 12.60), a 15 period high with a close lower than the open (historically a bullish result).
Add in a dash of Dow component Intel lowering their estimates on the high end, and it could make for a volatile Friday. As of now, 93 of 213 ETFs made at least 6 week highs and stand below their open of 5 days ago. I'd guess that the Plunge Protection Team may be warming up the Cayman Island futures-buying operation while Boom Boom Bernanke has the helicopters on the pad.
Will the 'Channel Changers' be out to breakdown the mighty SP500 (weekly chart)? Note that recently I posted the heavy short position taken by the commercials on SP500 Emini futures (thanks to B. Gross).
long SP500 2006 puts, long BKX puts, net short RTH via options.
Dynamics:
Weekly stochastics: SPX 92% (and curling over)
Stochastics oversold: SPX 11%, NDX 17%
Worden T2108 (stocks over 40 day average) 71% (rolling over)
Close > 50 day average: SPX 81% of stocks
Equity only 21 day put-call ratios: rolling up (sell signal)
What to Expect
I expect strong statements from multiple Federal Reserve governors about the need for the Federal Reserve to maintain both price stability (this clarion call is basically a joke as the Federal Reserve IS inflation) and FLEXIBILITY to adjust to varying economic conditions. There will also be a lot of discussion pro and con the YIELD CURVE as representing (or not representing) a slowing economy going forward.
As for market action, we'll have to determine which is stronger, the desire of the herd for perceived 'safety' in bonds, the rise of the 4th option (not equities, bonds, or cash, but gold), and the desire to pump up the end of the year bonuses. It should be a great game to watch.
When we hit economic crossroads, where we may be now, I'm not going to focus on 'tradeable patterns' as I think pure price action will be where it's at.
Good trading and great risk management to all.
