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Arg! The Market Beer is Gone, Pass the Kool-Aid Please
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Ed. Note: I'll be live on WCRX-LP radio,102.1 FM, (again) on Friday 7-13-2010 11:15AM EST, discussing some of our articles and likely results of recent financial policy decisions and their respective impacts upon the global financial markets, particularly the European solution/non-solution. Live call in will be available.
Arg! The Market Beer is Gone, Pass the Kool-Aid Please by LM Lupo, 5/15/2010 Never has a keg of financial stimulus been consumed so quickly as to make a frat house look civilized while the hoary politicians spew like barbarians at the gate. The Euro-Zone effort to staunch the flow of financial fear has been about as successful as BP's effort to staunch the flow of oil in the gulf. All of the market gains from the moment of euphoria created last week have evaporated leaving all global financial markets within a few trading minutes or less of new yearly lows. Impatiently the Euro currency has already printed new yearly lows and from a technical perspective has all the markings of the waterfall of death. Credit to Phil Volkoff here who has been noting and trading the foundational cracks long before the financial media and traders were even remotely cognizant of the possibility of a Euro melt. Those Annoying Fundamentals The fundamentals are obvious now even through the thick fog of orthogonal rhetoric. The only question that remains is how long before we see global financial gridlock and collapse: this week or next, before the Cantwell-McCain Glass Steagall vote slated for this week, or later? From a credibility standpoint, all of the central bankers and policy makers have been thoroughly impeached. But wait, a new financial guru, central banker, and multinational financial lobbyist enters...
Bob Defends: "There really is no policy problem here since 20% unemployment is good for multinational profits. Besides, when 1% of the population controls 99% of the wealth we enjoy a waft of sweet romantic memories from feudal history past where we quench our longing feelings for the bliss of the dark ages." Exit stage left. Quantitative and Technical Market Constructs Below is a weekly chart of the S&P 500 that reveals a textbook bearish pivot trade at the 115 price area, which the market closed convincingly below on Friday, 5/14/2010. The 115 price has proven to be critical support and resistance over the past several years, thus creating the definition of a true pivot point. Given the notes above, and the extensive fundamental analysis below it appears likely that a market crash (50%-80%) is coming in the very near future. In a sentence, the multi-trillion dollar fraud is on and I think everyone knows it. Note: Special thanks to the folks at WCRX-LP, Bexley Public Radio, Columbus, Ohio for sharing some microphone time with me and financialtrader.com.
Global Financial Collapse Imminent? by LM Lupo, 5/7/2010 Ed. Note: Given the weighty subject matter and final conclusions this article was withheld from the typical publication schedule to enable comprehensive fact checking, thorough analysis, and extensive peer review. Please see the original "Multi-Trillion Dollar Fraud" article below for more background on the financial research. I am a little short on time to send you all audience specific content, so I'll capture the high level risks here and you can go about your business, or follow-up with me when convenient. Also, since everyone is impacted I'll note only the Venn diagram type shared impacts and leave the granularity to either your own intelligence, or other authorities. As readers know, I have documented the real probability of a multi-trillion dollar fraud that will eliminate the current financial system as we know it. While this exposes an obviously inflammatory thesis statement to begin with, evidence dictates otherwise: the kings really have been naked for awhile. All empirical and qualitative models suggests that we are now on the cusp of reaping the whirlwind of global financial fraud. For those that missed the earlier warnings read the comprehensive analysis and community contributions here...
http://www.financialtrader.com/fraud/trillion-dollar_fraud.2010.html Just the Facts...Sovereign Debt a System Breaker 1..Greece admits to fraudulent government accounts and financial statements. In addition, the Greek bonds and derivatives were Goldman Sachs designed. Need I expound anymore? Oh, righty indeed, Goldman designed most of the European and American derivatives too. Thanks, I feel much better now. http://www.bloomberg.com/apps/news?pid=20601087&sid=a5MJFT2dMyIU&pos=1 Don't forget Italy's recent confession of exceptional derivative exposure. Already in bankruptcy, Abu Dhabi proclaims it will only pay 60 cents on the dollar, or not at all for its multi-billion dollar debt obligations.
Dillion Ratigan Reports a Multi Trillion Dollar Fraud. 3..Discussions abound for U.S. and Japanese debt downgrades.
Its the former that possesses more debt than the entire GDP of planet
earth. U.S. debt was downgraded here over a year ago at financialtrader.com, so you already knew this, but even the
mainstream cave dwellers
are now aware. As Ratigan reports on national T.V. below, the Fed gave banks access to $23.7 trillion dollars not $700 billion. It is critical--absolutely critical--to understand that the banks were multinational banks, some of which were domiciled in the U.S., but not necessarily U.S. companies. There are only so many lenders (a finite supply) and global lenders are now tapped out from mass consumption of both private and public capital. This borrowing binge by the sovereign governments is similar to the binge feeding seen at the gory all-you-can-eat buffet. The business model only works if everyone does not weigh three hundred pounds and eats their weight in food. Here we have dozens of three hundred pound, corpulent sovereigns, including the U.S., eating away at all global financial resources including even cannibalizing its citizenry. http://www.youtube.com/watch?v=lDJc0PZV-Bk A Haunting History of Failed Policy 4..Demonizing financially weak countries and cultures has already begun with the in vogue use of the word (PIGS). You know what happens next... 5..Most sovereign money creation machines have lost market credibility. If the taxing authorities fail, and I am including the multinationals, how will mere non-state-mortals perform? In other words, the top predator of the food chain is dead. 6..Global equities and particularly Credit Default Swaps (CDS) rates/spreads now indicate that financial failure is imminent. The CDS market is thin and can move on a few whims, not so for the sickly international bourses, and international currencies, particularly the Euro, which flashes numerous short term and long term sell signals. 7..As a friendly reminder, particularly for those of you that are historically challenged, the Euro zone has been the scene of multiple world wars over the past century as well as regional conflicts, as recently as a decade ago. Thus, they have been fighting, feuding, and fending one another for the past 6000 years, so the latest confusion is simply returning to the statistical norm, as the high frequency quant folks would say. When Money Fails, Warning? 8..Addictive and destructive behavior is never fully recognized until it runs off of the cliff, splashes into the water with survivors doing the 'bob' while looking up at their former promising position and perch. It has been written thousands of years ago that the day would come when all money would fail. The inspired writers were speaking of the distant future about a concept so abstract and unthinkable that even biblical scholars and the learned fail to comprehend and to apprehend. Yet, here we are and the words appear as though they were freshly printed for tomorrows news. Ezekiel 7:19 9..And the Good News is...
10..Solutions, Hedges, and Workarounds Read numbers 8 and 9 above, and avoid the new financial system of the Beast. Write me at the address below with any questions or comments that you would like to contribute. LM Lupo
Record Lows in Volatility Index (VIX), (VXN) Forecasts Market Drama How Low Will Volatility Go Before Drama Unfolds? by LM Lupo, 12/28/2009 The final week of 2009 provides a cemetery quiet volatility reading in the VIX and VIN indicators as well as a rather euphoric feeling amongst traders and the alleged business press. Clearly, this won't last, which prompts the obvious question: what direction (and when) will prices dramatically trade next? From an historical perspective, the equities market created low volatility readings in 2007 and 2008 with the VIX/VIN dipping below 20, which marked significant long term market highs; however, going back even earlier the index did print as low as 15-and-change during the lengthy uptrend after the dot com bubble burst nullifying the 'below 20 equals sell signal' axiom . It is the latter scenario that most market participants are hoping for at this juncture. Still, the current volatility readings tend to heavily favor bearish price action (83% to 17%, if you want the quant/probability numbers) but this is not a quantitative and technical signal with an unblemished track record. Timing of the Essence, Getting New Year's Help While direction is still somewhat in question, the timing of the market drama crystallizes at the beginning of the new year, now less than four days away. Anyone who has participated in markets long enough understands the significance of a calendar year change and its respective impact on prices. Currently, we have a featureless, church mouse quiet four day trading week that is sure to lower the volatility readings even further. It is always possible that the new year trading week will bring little in surprise for the market, and it is always possible that the majority of the sleepy market participants are correct in ignoring collapsed option pricing and volatility readings, but neither are very probable. Trading My Own Models & Eating My Own Cooking Going forward, the quant models and my own portfolio will begin to acquire January and February straddles in the major indexes and particularly the XLF ( lovingly known here as the eXtra Long Fraud ETF). As noted in the last update below, the XLF has traded sideways for the past several months despite the rally in most indexes. The odds of an XLF breakdown continue to increase, but given the exceptionally cheap option pricing from the low VIX/VIN readings it makes more sense to cover ones bases with a meager 2% straddle cost to cover the 14 put and 15 call strikes. The S&P's and QQQQ's currently cost less than 1.5% to cover a 2% price swing over the next three weeks. This is essentially free money on the table if the market were to trade 2.5% in either direction from current prices. I'll go with my quant models that currently forecast a 6% move in the next three trading weeks, thus I'll be stocking up on options and buying the current volatility throughout the latter part of this week. Happy New Year
Equity & Quant Sell Signals, XLF Leads the Way by LM Lupo, 11/29/2009 A picture is worth...at least a few sovereign wealth funds, but only if the going rate that was disclosed over the holiday is indeed the actual value, for it is hard to tell these days with pandemic fraud. As noted over the past several weeks, the equities markets (they are all coupled anymore, so choose your favorite bourse) have extended into extreme valuations and ranges, some of which were forecast here over the summer, particularly with the Dow Industrials trading recently above 10250.
The XLF Tells the Dead Man's Tale
The real story though, is Humpty Dumpty, otherwise known as the XLF index. After all, the stocks that comprise the index were fattened by the largest bailout in western economic history, and yet they stagger like the glutton and drunkard. I suppose the trough of free taxpayer funds created this condition, and saturnalia. And perhaps this might have something to do with the billions in stock offerings and sales to shore up the financial sectors respective capital requirements. But one has to wonder, and I certainly do, if these stocks received free money, tax payer assistance, and tender loving care from the U.S. Fed, and the U.S. Treasury, and still fail to recover what will it really take to put Humpty Dumpty back together again? We all know how the story goes from here. Summary The quantitative models are now short the board with the XLF and S&P500 receiving most of the short sales. The technical models and fundamental models are bearish as well. In my opinion, this is likely the wave of recognition that Volkoff pointed to over the fall and summer, with the resumption of the bear market to resume in force. The XLF's breaking below 14 should lead the way for the rest of the equity markets to trade sharply lower. Now is the time for extreme caution. Currently, I am with the quantitative models with a net 50% short looking for opportunities to add shorts on lower trading action.
Market Reaching For Extremes by LM Lupo, 11/11/2009 05:14:56 The one forecast that you can always count on when dealing with human beings: look for the extremes. This is the crux of trend following (and all addictive behavior for that matter) and an apt description of the current equity markets. The bond market short positions have continued to provide protection against equity market upswings; however, the quant models are now neutral with respect to equities while maintaining a short bias in the treasury bonds. The Dow Jones 10250 price objective has been reached, which was the extreme target for the quant models captured in our September 2009 note, yet the technical and momentum models show little pause at this juncture. We are currently stretching the trading bands to extremes, but that does not preclude blow-off type action where the market trades briskly higher. Given the extreme risk to both long and short positions, and the model recommendations I exited the short SPY's at above the 109 close while maintaining the short bond positions. I have had better weeks, and so has the black box that appears darker by the hour. If a true economic recovery is in the near future, the bond market will be the first to ring the dinner bell and higher yields should prevail, with a nice return on the TBT long position.
Sniff Sniff, Smells Like Bear Per last week's note, the quant models added to the bearish positions reaching a 75% short portfolio in the SPY's. As of this writing, the stock indexes continue to trade lower with all technical models now resoundingly bearish, particularly the weekly charts. I published an article a few years back in an international press that details the psychology and the math behind exactly these scenarios where the probability outcomes are highly favorable to the bears. I would provide the link, but I do not receive any of the royalties from the copyrights and I am just too darn cheap to see those dollars go to some rusty database. Anyway, the DJIA 200 point headline rally was eliminated in roughly 2 hours on Friday, 10.30.2009, confirming that this market is headed much lower, if not beginning a new bear market leg. Given the short term oversold condition the quant models will await (and so will I) for either a corrective bounce back to the 106 area in the SPY's, or a close below 104 before adding the final 25% short. The first week of November should provide another short entry opportunity. As a hedge, I am shorting the Treasury Bonds to provide some offset if the markets were to surprise here and begin another leg higher. Thus, the models are long the ProShares UltraShort 20+ Year Treasury ETF (TBT) at 46.02 today. To answer last week's question, its now clear that the bear market has returned. The best case for the bulls resides in a 10% to 12% correction. For the bears, a retest of the 600 area in the S&P500, or 60s in the SPY is the first stop. < Equity Correction or Return of Bear Market? by LM Lupo, 10.25.2009 The forecast from last week to sell the good news has now come to pass, with overall bearish price action and the Dow Jones Industrial Average price of 10,000 revealing resistance, rather than support. This is classic topping action from both a fundamental and technical perspective. For the record, the quant models are adding from the 50% short level of last week to nearly 75% for this week, and will remain short with a DJIA 10,100 closing stop, and SPY closing stop of 110.00...and of course, I will exit there too if the forecast fails. Binging the bottom line up top, the intermediate technical models dating back to March 2009 are still in an uptrend-- the only remaining bullish trend--- thus overly aggressive short positions are not currently warranted by the quant models. Besides one never knows when the next euphoric fraud will take place shoving the indexes to even loftier levels. However, by almost any metric, fundamental, technical, and quantitative, the equity markets are at price extremes and in danger of collapsing back towards the multi-decade bear market trend, which if history and addictive behavior have any forecast value--and they always do--the bear market will prevail sooner rather than later. I won't harp or chime on the bearish case that has been thoroughly discussed and detailed below, but I will add this simple fact: a generation of lost investors due to massive fraud will not be recovered in our lifetime, thus the money parked on the sidelines will never enter the equity game. No, not under any circumstance. Standing in the Gap, Two Market Trends Now Collide by LM Lupo, 10.18.2009 It took a year, but we have returned...to the price gap created in the major indexes when the ugly financial panic grew teeth, hair, and diabolical horns in one of the greatest panics the modern world--old and new--has ever seen. The question that confronts us now is simple: which trend is dispositive? The nascent six month one, which is bullish, or the multi year down trend dating back to 2000, which is bearish? As I wrote last week, (10.11.2009, see below) there was a high probability that investors would sell the good earnings news in the gap, and we saw the evidence on Friday after the year long DJIA 10,000 gap was filled and the multi month SPY 109 gap filled. But the question still remains unanswered, with two different highly critical trends converging at the psychological junction of Dow 10,000, which trend will prevail? Why the Price Gap Matters While I pay very little attention to market gaps or other technical babble such as "break way gaps", "measuring gaps" etc., I do sit up and take notice when a gap is created at a critical psychological number and formed on extremely heavy volume. Thus, the Dow 10,000 gap has real significance. My quant models and software output a bearish scenario this week, and as such I went short on the close Friday 10.16.2009 in the SPY's at 109.20. This does not mean that the long term down trend will redevelop, but rather the probability favors a sell off while the market decides which trend to engage. Market Warns as Retailers Buy There were several indicators that flashed warning signs last week, and chief among them was the option trading that I alerted earlier. In fact, while the market was trading lower on Friday, calls were trading 2 to 1 over puts and the volatility index was dropping like names at a politically charged party. In other words, the retail investor and market as a whole was buying the downdraft. How often do these folks buy at a discount? There are other quantitative and qualitative evidences for the bearish case, where the primary ones are captured in the October update "Top 10 Reasons for a Bear Market", below. The Quantitative and Software Sell Signals For this week, sentiment and prices will tell whether or not this is the resumption of the long term down trend or simply a correction in a new bull market. The fundamentals, technicals, and quantitative models all favor the bearish case, but since no one knows what a day will bring, or what financial fraud lurks, I am staying modestly short at 50% until the weekly and daily bullish momentum is reversed, at which point more aggressive short positions will be warranted. Sentiment and Option Volatility: The Broom of Destruction (Selling the News & Buying the Cheap Volatility) by LM Lupo, 10.11.2009 Future events cast their shadows, or as King Solomon wrote, when pride cometh, then cometh the fall. The markets are no different its only a question of timing this 'pride' factor since the measures (volatility and option pricing) are well established facts. The week ahead, 10.16.2009, should continue to create a sense invulnerability in the equities markets evidenced by the falling option premiums and volatility models: obviously, this will not last. The quant models suggest an exhaustion high supported by feeble investor volume, which is typical bear market mentality. Bottom line up top The quant models--and I--closed last weeks modest long position in the SPY's generating a decent short term buy signal from trading extremes at 102 basis the SPYs. This week the models and I are completely flat as earnings are likely to generate trading activity at key resistance levels above 108 in the SPY's and potentially 10,000 in the Dow Industrials. Selling the News Google (reports earnings this week) and Apple currently trade at over 30x earnings and continue to be bid in near vertical fashion. As I have noted before, these two index heavy weights have lead the markets higher masking overall weakness in both the economy and the overall indexes. The trend favors 'good news' to be reported followed by the dinner bell and cash register ringing at these lofty price levels, particularly given the option pricing and volatility models throughout the entire equity complex. In other words, the good news headlines should create an excellent selling opportunity in the major indexes just when all things seem well. Custer's Last Bull Market Stand by LM Lupo, 10.4.2009 General Custer is a typical American hero: a foolish glutton, and a drunkard, with a propensity for very poor showings in historical style. The final days of this bear market rally engages the Custer metaphor while Wall Street itself challenges the creation of any meaningful metaphor. The fundamental news continues to reveal a broken system with equities rising mostly on hope while organic earnings growth has withered entirely. Green shoots have been shot down now--alas--and the reality of an abysmal cost cutting environment (mostly resource based) will force investors to readjust the PE multiples of the major indexes. The long term reality is grim for the bulls, since most bear markets end with PE's near 5 to 8 rather than the 20+ now seen in the S&P 500, QQQQ's, and the DJIA. Improving Numbers? We all know, readers here anyway, that much of the published financial information continues to be heavily scrubbed and remains suspect as facts continue to diverge from the daily headlines. However, the good news here is that one can trade what one sees rather than what is said, and right now the quant models see the breach in the SPY's at 104 on Thursday, 10.1.2009, as a significant break in the bear market rally momentum. A very short lived blow-off top can not be entirely ruled out if 105 resistance is cleared, but the odds do not look too promising. As of last week, the market did rally from an oversold condition only to become even more oversold. Thus, the top ten reasons for a major bear market written two weeks ago persists. Two Scenarios This Week For now, the two most likely scenarios for this week include the following: The market trades either (1) higher, or (2) lower...just fooling. 1. A typical market 'set up' develops where the major indexes trade higher for three to four days (reaching near 105 SPY, 1050 S&P500) and then turn sharply lower trading through key support at 100 in the SPY's and 1000 on the S&P500 within the following week. 2. A blow off top develops in very fast action with 110 and 1100 briefly printed in the SPY's and S&P500, respectively, before the bear market ensues with force. The quant models favor the first scenario by a 70/25 probability outcome, with a 5% probability that the market continues to trade straight down without a technical relief rally. For the record, the trading models and I have a slight swing trading long position of 5% established as of Friday's close 10.2.2009, with the objective of being 35% short by the close of the week. Noteworthy It's worth noting the negative divergences in the mining shares versus the precious metals complex. Most mining stocks are now sitting at critical price support with the metals themselves ignoring the sell offs. If this trend continues, and the miners break, the commodities will soon follow the shares lower, in a flash. At that point, the deflationary forces will overwhelm all things equity and the bear market will be visible to the naked eye. This week is indeed a critical trading week.
A Blow Off Top in the Offing? by LM Lupo, 9.27.2009
Those barbaric, illiterate Americans are back at the crap tables again guzzling their favorite insanity drinks. They went broke after round one in the financial markets and now they've broken out the visa card to play round two. You know it and I know it, and as they say in hockey, "game on". Even after last week's slide of 3% from my last update the market action suggests higher prices in the near term. In fact, a blow off type top might now be forming, which is not atypical given the equity momentum and market construct. A number of factors, both technical and fundamental, reveal that the market is likely not finished with the bear market rally. For one, the market has decoupled from oil and commodities in the short term. For two, sentiment turned overly bearish per the put call ratios on Thursday and Friday morning. Finally, bearish news was digested with an orderly decline that supported an upward bias in prices on the close. Quant Models and Fundamentals No, I am not micro trading just watching the actual trade flow and market rhythms which suggests a temporary regrouping of prices for another assault of key resistance levels. At this point, my quant models are once again at +3 standard deviation, which is exactly where we were at the last market extreme in November 2008 and March 2009, within a whisker of a major low. In summary, a push higher of 5% to 7% can not be ruled out here, and as such I covered short positions on Friday's close (emerging markets, SPY, and mining shares) and even flipped the gold mining shorts for a light long position on the close. Gold remains one of the few fundamentally, and technically sound bull markets despite the talk of an over zealous commitment of traders report leaving the market vulnerable to sell-offs. The Numbers Forecast: Probabilities favor the DJIA trading (briefly) through 10200, the S&P cash index through 1100, and NASDAQ cash at 2200. These numbers should generate capitulation for the remaining shorts, albeit not many left, and provide an outstanding selling opportunity. Most technicians and quants are looking for slightly lower targets, but since markets have a tendency to overshoot I'll position around the extremes. The risk of cashing out profitable short positions too soon is one that I am willing to endure given the action, and even if we do break significantly lower there is always the counter rally that can be sold with even greater conviction and safety. See the note below from one of our readers discussing last weeks article. 9.26.2009
Dear Financial Trader, Thanks for your note, Granny. I almost always defer to my elders and this will be no exception. But if I could humbly add, I think you forgot to add commercial criminals and serial fraudsters to your list, otherwise I could not agree more. LM Lupo
What Evil Lurks Now For Equities, Sell? By LM Lupo, 9.16.2009 As of this writing, the S&P500 is up 8% in just nine trading days, 25% in two months, and 62% since March, six months if you're still counting. One needs to comb the record books and blunder over 1987 and the 1930's to avoid any frighteningly similar equity scenarios. Needless to say, the resolution of such vertical moves bode very ill for future prices. Bringing the top line up front, I now have a significant short position in the stock indexes including the S&P 500 (SPY) @ 107.24 and emerging markets (EEM) @ 39.13, which I added to, as of today's close. In addition, the long gold bullion trade is closed leaving a primary short in gold equities such as Newmont (NEM) and Barrick (ABX). For now, the long natural gas remains intact since more liquidation is likely to occur. As a trend follower (and quantitative trader) selling here appears to represent style drift or at least demonstrate a lack of adherence to basic trading rules. But, there is far more bearishness and opportunity here than simple quant signals dictate. I have bulleted below some of the key bearish elements. 1 The put call ratio collapsed today (again) to the low 60's and the VIX implied volatility traded at a 12 month low--pre Lehman numbers, of course. 2 Fraud, including government, corporate, and private continues to undermine long term confidence in the financial system. Thus far, the lurking multi-trillion dollar fraud has not been exposed, but it is a certainty that it exists and is even working right now. The retail investor is a lost generation with no funds coming into the market or their personal pockets. 3 Bond prices are factoring in a depression not a recovery. Even though the Federal Reserve added trillions in new bond supplies, prices continue to rally. This might have something to do with number two above, or simply smart money hiding out with a 3% return. Whatever the case, there are no recorded recoveries with bond yields falling, not one. 4 There is no industry leadership in the market place representing innovation, wealth creation, or efficiency. No bull market really develops without these fundamental drivers. 5 Valuations are through the housing roof as the markets price in a GDP of 5% to 7% in the U.S. and even higher in the emerging markets. Does that appear likely, with the U.S. consumer dead? 6 Staggering depression like unemployment (10% to 20%, depending on your source, the government or the worker) undermining bullet 5 above and building ever higher on a monthly basis.
8 An absolute feeding frenzy in cadaver stocks such as AIG, FNM, FRE and even Lehman!, where speculators reveal desperation and recklessness to recoup losses from the bear market. This wounded lion mentality continues to stalk the markets even at the institutional desks. 9 The massive derivative volcano soon to blow--see the Chinese repudiation of derivative contracts for their state sponsored enterprises (SSO). This also might represent the multi-trillion dollar fraud yet to befall the markets. The markets could handle a communist revolt better than the contractual nightmare presented by massive contract welching that leaves the Goldman's of the world with no legal recourse. This should be a familiar theme to taxpayers though.
10 Finally, from the enterprise
perspective, the Dow Jones closed at 9605 on September 11, 2009 and again
at the same price, 9605, on September 11, 2001. This is what is known as a
nine year bear market, or more correctly, a generation of lost investors. LM Lupo
Which Fundamental: "We're all Short" or "Fundamentals Are Miserable?" by LM Lupo, 8.25.2009 Almost cut my hair...a melody line that evokes giving up the ghost and conforming to a faceless marketplace now stands front and center. While every major equity market and commodity market has bounced over the past nine months, only natural gas remains the bear market hippie. I have resisted any bottom fishing attempts until this week, mostly based on computerized quant signals and the fundamental one sided trade in the natural gas futures. But the trend in the overly bearish commitment of traders report (COT) and business breaking contango skews now show significant potential. This does not mean that the bear market is over in natural gas, but rather that a highly explosive situation has developed that is simply unsustainable. Resolution of prices could be sharply lower or higher, but the odds favor ruining the positions of the shorts since they make up the majority of today's trade and we all know how markets treat the majority. The entire commodity complex and equity complex shows weakness right down to the emerging market level, which now reveals poor relative strength to the big brother S&P indexes, (SPY). The quant models are neutral here, but the sentiment and fundamentals reveal topping action that is worth speculative consideration. For the record, all commodity longs have been exited including crude, gold, and the forex Euro. New adds include long natural gas (yes UNG), short emerging markets, (EEM), and short major gold mining shares with a (GLD) bullion call as a straddle and hedge. Minimizing risk here is key, so live to fight another day and don't drink the kool-aid that all is well, even Joe Lunch Bucket knows better. We are almost at the bearish levels seen at the 2007 highs, only price differs now. Note: Commodities Hold Ground...New Highs Ahead By LM Lupo, 8.13.2009 Whether or not the 'all clear' economic recovery siren call remains valid, market perceptions, the trend, and sentiment currently support the ongoing bull market in commodities and equities as noted below. By almost any metric (reasonable) the markets remain in an established bullish trend, with the S&P 500, commodities, and the Forex trading higher. In addition, many markets are trading near critical break out points that should create some significant near term opportunities. On the bullish quantitative radar screen is GLD, USO, and the Forex, particularly the Euro. The implied volatility in all three of these markets are well below historical norms, with gold leading the way for the 'snooze button' award. In addition, many investors and traders are expecting the fundamentals to prevail here, but given the fact that markets almost always trade inversely to common knowledge expect the breakouts to the upside to come with force.
Imminent Market Reversal Alert for Commodities? By LM Lupo, 8.9.2009 After breaking through multi week resistance, many widely followed commodities demonstrated a false break-out week by the close of trade on Friday, 8.7.2009. I did note below, particularly based on the Volkoff report, that a weekly reversal was a probability, albeit slight, at roughly 15% versus the continuation of the trend with an 85% probability. But not to be dismayed, the $US dollar, gold, and crude oil all placed key reversals (anyway) regardless of whether one is a technician, quant, or even a fundamentalist. The only question now is whether the commodity and equity markets fall under their own weight or hold recent support. Given the machine like nature of trend following systems and quant systems, it seems likely that a significant flush could occur in relatively rapid fashion. In fact, few markets are as relentless and unforgiving as a failed breakout, and that is exactly what will face traders come the blurry eyed Monday morning trade screens with negative P&L statements. The technical breakout is always risky and this is why Turtle traders prosper so well; for the risk is commensurate with the reward. However, it appears as though the uptrend in commodities has run out of fuel for the near term. If solid support is found below current prices another sharp reversal upwards is clearly a possibility, since that is the direction of the trend. But again, all of the fundamentals, technicals, and quant models differ with that scenario. For the record I follow my quant models: short the Euro, short crude, and short gold as of 8.7.2009. Hot Money Trades To Flood Commodities Market by LM Lupo, 8.1.2009 The multinational mantra remains the same: a lower dollar creates bullish equities and often times bullish commodities. If one were to take the currency gains from the S&P 500 the negative results over the past 10 years would look roughly 30% worse. Gold and Oil Most Bullish Forecast This week should see a dramatic breakout to the upside in many commodities that have been consolidating over the past few months. The primary driver will be a sharply lower U.S. dollar. Most notably, and probably the most surprising move will come in the gold market as gold's best opportunity in months to knife through the psychologically thrilling $1,000 resistance will be this week. I am certain crude oil will chime in with some gains as well, but the dramatic gold move should be the trade of the year. GLD, GoldCorp (GG) & Kinross (KGC)
The most dramatic moves should come in the gold spider (GLD) followed by GG, and KGC as equities. Models favor least resistance overhead for KGC while GG and even AngloGold Ashanti (AU) also show strong relative strength versus gold peers. All of these stocks as well as the complex could trade vertically higher once the multi month resistance of $1,000 is broken. I am personally positioned with option straddles given the risk on both sides of the trade, particularly with volatility near all time lows in the gold market: options, proprietary models, and ADX indicators all show extremely low readings. Rationale...Currency Based & Psychology Most of the impetus will be derived from quantitative and technical systems (such as my own) as well as the euphoria and greed that the bullish equity markets have placed in the heart of the hot money traders. Risk now remains with the bears as Saturnaila takes hold with the bull juices flowing like a cat in heat. There are no real fundamentals here to support a reinflation, lower dollar, or even higher equities, but this is exactly what makes markets so irrational and profitable. The currency futures of Australia, Canada, and Britain all broke out of a multi month range on Friday with only the Euro trailing by a few trading pips. The dollar index chart below tells the tale: the multi-decade downtrend resumes. Expect fireworks either way it goes this week in commodities since a failure in the markets at these price levels plays directly into the Volkoff scenario captured here.
The Trend Reverses--A New Cheap Labor Driven Bull Market
by LM Lupo, 7.25.2009, The week could have been far worse for the bears, for I too could be mistaken for "not allowed" in my wonderful neighborhood, but I doubt the president would make a phone call on my behalf. No, its not my color, I just refuse to water the grass and adhere to other anal retentive neighborhood activities. But back to the bear case, which is now dead. The quant models turned bullish in almost every time signature after last week's intrepid rise. The S&P 500 (SPY) has another 25% upside target, as do the other major indexes before running into some resistance, and that terrible liquidation reality check. The trend is now higher technically, and quantitatively; however, 950 (SPY) will remain critical support going forward. Markets are most vulnerable to reversals after a breakout so any close below 950 would turn the quant models negative. And the fundamentals? Fundamentals are dubious here given the lack of real earnings growth, but my hypothesis going forward is that corporate profits will grow based on the lowering of most businesses highest cost item: resources (aka, your job, and wages). While this logic appears perverse for the majority of main street, it remains the multinational mantra derived from outsourcing, and efficiencies gained through downsizing, thus creating overall higher corporate profits. As for risk, I still find that 1860 type social unrest continues to lurk as the chasm widens dramatically between classes. It is indeed the ultimate risk, but that is for a later time.
Is it 2007 All Over Again? 7.19.2009, by LM Lupo If one were to scroll down to my October 2007 bearish report on equities one would find an almost exact repeat of the forecast and quant model readings of today. Yes, it is 2007 all over again. While the QQQQ's were printing new highs the past week, the broader indexes actually traded lower on Friday. In addition, just as in 2007, we have only a handful of large cap stocks such as Apple responsible for the majority of the gains: vintage unsustainability. There are obviously some differences, though, from October 2007; primarily in the fundamentals (they have gotten worse) and the technical constructs, (we are in a well defined downtrend) and of course, valuations are far more slippery too.
As a result, all of the short term buy signals noted last week are now void as the quant models sold the QQQQ's at 37.22, the emerging market index (EEM) at 33.35, and the S&P500 (SPY) at 93.80. As a caveat, the quant models will exit all short positions with an S&P weekly close above 95.00 basis the SPY. The odds have changed slightly lower for the bear case given the QQQQ closing high; however, the VIX, and VIN models continue to support the bear market case. A perceived Apple earnings miss might be the fundamental catalyst for sharply lower prices, but then again, the market is pricing in perfection and markets do fall under their own weight. In Case You Missed It... 10.22.2007, LM Lupo This is my third equity market update in yet a third financial crisis. First, we had a China based sell-off and as I noted then, it would be quickly forgotten, and it was. Then we saw the sub prime market rattle the cages of confidence and again I wrote that the market would make a new high, and sure enough the S&P's and QQQQ's printed new highs. But now cometh the fall-out of the lending bubble with many SIV's, hedge funds, and greedy financial institutions performing Enronesque belly up routines from an over indulgent, Fed induced collateralized debt market binge and purge. So, is this yet another buying opportunity, and if so will the indexes trade to new highs with impunity in the next quarter or two? Valuations Wax, Market Wanes From a fundamental perspective, the S&P 500 is still overvalued at 17 times earnings (now lower, but still high for a bear market), and valuations are rich throughout several sectors, including the leveraged financial sector, and technology sector. Specifically, several of the QQQQ's technology leaders such as Google (GOOG), Apple (AAPL), and Research and Motion (RIMM) don PE's that average near 50! AAPL alone accounts for nearly 10% of the QQQQ's valuation followed by GOOG and RIMM at 4.3% and 2.8%, respectively. This concentration of wealth (three stocks account for 17% of index valuation) cloaks severe fundamental weakness in the current market. The situation improves little when analyzing the concentration of wealth in the SPY, and SPX. As I noted before, this is a classic late stage bull market phenomenon that always bodes poorly for future performance.
Autumn's Fall of 2009: S&P500, SPY, QQQQ, and DIA New Lows Ahead By LM Lupo, 7.12.2009, FinancialTrader EIC Bottom Line Up Top Before I get into this week's negative quant model forecast, bearish technical models, and miserable fundamental models lets get to the heart of the matter first. You know you're in a vicious bear market when several generations of equity investors have been permanently lost. The multi-decade marching parade of 401k buyers has come to end: some through attrition, some through panic selling and forgetting, and others through termination and conversion of 401k savings for mere survival in a job market that makes this depression hauntingly familiar to many grandparents. Fundamental Analysis
It's not about the economy, grasshopper, it's all about fraud. It's not about green shoots; it's about the need for striped jump suits; it's not about regulation and transparency; it's about trust, which will always remain the foundational cornerstone of any business transaction. That's why the retail investors and many high net worth professionals will not return to the equities market in this lifetime, at least with any meaningful impact as they have over the past 30 years. They will continue to nibble timidly at ETF's and black box solutions but not with the blind equity exposure so thoroughly propagandized by several U.S. government administrations which often seduced investors by peppering them with allegedly favorable tax laws. Even Obama continues to play this Three Card Monty with investors...see link below, investing is now made mandatory? The soon to be retired generation (50+ and up) have also limited their equity risk and continue to purchase bond funds shunning all things equities even at marginal percentage allocations. This market is not going to show its hurricane back wall and then blow over as some optimists hope, and the double dip recession crowd forecasts. No. Each primary stock investor class will see systematic elimination from equity exposure in the coming quarters. The next class to fall will be the institutional investors, particularly those--the greedy ones-- that created guaranteed annuity contracts on the premise that 8% rate of returns were achievable over the long term in equities. Think here of major insurers such as Hartford (HIG), Prudential, (PRU) and my favorite bubble about to burst, Buffet and his insurance companies. Remember, the S&P 500 has traded in a long term bear market since 2000 and several of these institutions have flatly stated that as long as the S&P500 can achieve 950 this year (we are now at 880), business will stabilize and normal returns will again be the rule of the day. But... Technical and Quant Models S&P500, QQQQ, SPY, DIA Below is a weekly chart of the SP500 ETF, (SPY). If you ask any child which direction this chart is heading in a simple game of "higher or lower" they will instinctively say "lower", because even children can spot trends. Try it. Show this basic technical chart to say, CNBC, and all sorts of specious logic will spew about how the downward momentum has slowed and higher prices are on the horizon and after all "look at that moving average", a quip sure to inspire trader confidence. As of this writing, the market will likely bounce in the very short term off of the 87 area only to trade lower to 85, which is support layer one in the chart below. Layer number two is where things really get interesting, and I'll definitely have my bag of popcorn and favorite beverage at the ready when we get close (TV off , of course, since it will ruin the experience, but all wire services fully loaded). This is the area where the insurers like Buffet and a host of institutional investors made their bets for higher prices and this is the area where they will meet up with their new found hero, Colonel Custer. Keep in mind, nothing fancy here at all but simple trend following, technical analysis 101, and a basic understanding of pre-college business, not necessarily in that order.
Quantitative Forecast The quant models, the same ones that called the bear market break in 2007 (see below) and kept us out of trouble for most of 2008 and 2009, reveal a poisonous elixir of seasonal autumn weakness, cyclical pressure, bearish religious festival influence, and a VIX and VIN sentiment reading seen only at market tops. Note that just this past week while stocks were trading lower volatility actually fell, one of the best predictors of lower prices I've seen in either real time trading or positional investing in over 40 years of back testing. At what price would this forecast be toned down? At the S&P 500 level of 950 on a closing weekly basis (the institutional line) or the ETF SPY closing above 95 on a weekly basis. Currently, the odds stand at 83% for the bearish forecast and only 17% for the inverse bullish forecast. Inflation, Deflation or Stagflation? Updated June 23, 2009 by LM Lupo "Future events cast there shadows", as
the saying goes, thus many argue that inflation is the rule of the day, or
at least in the foreseeable future. But honestly, when has an
economy ever wiped out trillions of wealth and then promptly--or even
slowly--experienced inflation? It has never happened, save for the
exceptional banana republic, (but we're not really talking trillions
then.) The reason is simple, the machine that created the credit bubble no
longer exists and it is unlikely to return for several years, if at all.
Thus, no jobs, contracting wages, downsizing, liquidation, and all things
deflationary. How then could U.S. bonds fall in such an environment.
In a word, supply. Also, one needs to consider that stagflation is a very
real possibility where there is a trickle of job losses, no growth, and
high government spending and more bond sales, and more bond sales,
and...you get the point. No, not at all. Funds are chasing commodities right now
and will continue to do so in the foreseeable future. It is also
worth noting that many of the large bond players are talking up TIPS as a
safe way to play the potentially inflationary bond market. TIPS are
for grandmas not professional investors. Also, consider that the ETF's in crude and natural gas are supporting prices that fundamentally would be unsustainable without these extra market levers exploited by the new hot money. Business is always one step ahead of the law and its clear that the trading business is playing a significant regulatory loop hole to create these pocket bull markets. I remember when
overzealous commodity players required literally parking a train
load of commodities on the tracks in order to avoid the 'cornering' rules
of the CFTC, NFA etc. Still not convinced, take a gander at the DBA ETF
which represents the
Deuthche liquid index of agricultural commodities. This 'deflationary'
environment has brought prices back to the 2007 level when corn and beans
were at all time highs! Who let the dog and the air out?
by LM Lupo This clear perversion of the rules on a global scale is exactly what will crash Treasury bonds into the abyss of African regime change economics, and with it all things equities too. The primary debate has focused on debt to GDP for various sovereign nations including Britain. Wrong, Wrong, and Wrong again. Business is built first and foremost on a foundation of trust, whether sovereign nation or not. These old fashioned words (concepts) are now pejorative to such an enormous degree that as an American businessperson your honesty is seen as ignorance, kindness is perceived as weakness, and patience plain stupidity. If you thought the last financial crises was dramatic and replete with fraud I would liken that to a modest upstream overflow compared to the biblical deluge of Noahic proportions that is about to unfold. Credibility Demolished No one believes anymore, not from mere cynicism, but by experience and truth. Does anyone remember the U.S. Treasury downgrade based on favorites being played by Paulson, Treasury, and the Federal Reserve with their Goldman Sachs buddies? In less than six months it is revealed that the primary beneficiary of the AIG bailout (roughly $250 billion) was Goldman Sachs, particularly as it relates to their counterparty (betting partner) risk with AIG. What a surprise, but I told you first all the way back in September of 2008. It is worth noting that Goldman also required personal corporate TARP funds from U.S. taxpayers to stay alive. So, the U.S. taxpayer bailed out Goldman not once but twice with only a few people like Warren Buffett profiting from the inside information and government largess towards Wall Street. Here is the quote of the day from goldmansachs666.com Timothy Geithner as reported by the major wire houses.: "The decline comes even as Treasury Secretary Geithner commented this morning in a CNBC interview that Chinese officials remain supportive of the U.S. dollar and that there is no risk in monetizing debt in the U.S. Geithner went on to say that TARP funds should be allowed to be repayed quickly." But wait, did not most Wall Street banking and brokerage leaders speak to the press about their strong financial solvency only to "move on" and file bankruptcy a week later? I agree that people are sheep like, and I agree that for the most part they would rather live in denial, but I can assure you that no one is so stupid as to continue to imbibe the poison spewing from leadership today. No Taxpayer Base to Support Debt Debt to GDP? What ever happened to
supply and demand? The GDP numbers are corrupt by design since
almost all U.S. products are developed overseas by the multinationals and
yet are considered U.S. gross product in one ledger. But remember,
that's the same ledger method that created tulip sized housing prices. The
U.S. tax base is shrinking dramatically with the unemployed who can no
longer buy that product or pay the tax required to support the Treasury
since their jobs went overseas too. It really is that simple. End of
game. No one believes the government story line anymore. Owners of
401k tulip accounts and
We make market order out of market chaos.©
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