Diary of a Financier

S&P 500: Have Some Fear

In Capital Markets on Tue 15 Mar 2011 at 02:15
  • Bahrain/Saudi Arabia/Iran & Japanese nuclear crisis are a big deal.
  • A lower close in SPX will confirm a new bear trend, which will drop all the way to support at 1225.

Having trouble sleeping tonight.  I have a bad feeling about Tuesday’s trading day.  At the end of last week, I posted an entry entitled “S&P 500: Have No Fear (Yet).”  This was before the fallout of the tragic Japanese earthquake, the subsequent nuclear meltdown threat, and this messy Saudi/Bahrain/Iran matter.  A summary of my entry can set the stage:

I’m still relatively constructive on the stock market… I find it ironic that everyone was panicking about the downside engendered by soaring commodity prices & oil; and now that these inputs have all come off highs, everyone is panicking about… the downside!?…

Back to the S&P 500 (SPX)… My last note was one of uncertainty… The muddled signals (waning momentum v. resilient bull trend) hadn’t given me a definitive entry for a long or short position.  A tradeable development is nigh, however.  We’re at a critical level of trendline support for SPY, with indicators at critical support, as well…

I have purchased SPY June 125 puts moments ago at $3.60/contract [now at $4.09]… With that in my back pocket, we’ll continue to ride a large 20% cash position, selective single name equities, and floating rate bank loans.  Since I expect the renewal of the bull trend in SPY soon, two very important technical notes persuade me toward this bullishness:

  1. This market continues to fade the negative news, rallying on the positive…
  2. …the Cycle of Psychology dictates that we’re not at a point of collapse in the markets, because with a bull/bear tug-of-war still en force, we haven’t yet transcended ”Confidence” to “Enthusiasm,” nor the far reaches of “Greed & Conviction.”

As I lay tonight in the quiet of my own home, I’m overcome with a peaceful uneasy feeling.  It all started this past Friday morning when I decided to post a critical STRATFOR article, “Bahrain and the Battle between Iran & Saudi Arabia.”   That night, I was all alone in the office when the news broke about the Fukushima nuclear reactor issues.  It was intense to flick through the channels, all of which were airing uninterrupted footage.  Then, Sunday night, I was overcome with more quarky emotion, of which I noted in awaiting the midnight release of the Anonymous data, “I have some nervous energy, some anxiety, some incertitude.”

This is an important recognition of my own self-awareness: undoubtedly, I’m attributing foresight in my selective recollection of my daily emotional rollercoaster; I don’t need Nassim Taleb to dub me “Fooled by Randomness.”

This is all just too much for the printing press at the Fed to manage, too much for Mr. Bernanke to add to his heavy shoulders, too much for the White House to bury.  You know where I’m going with this.  My partner wanted to go [at least] market neutral last Thursday.  It was “a feeling” of his, but I shunned it in favor of more scientific indicators. (Maybe I do need Mr. Taleb to remind me that markets are an exercise in behavioral science, far from a perfect science.)  I bought SPY June 125 puts as insurance, rotated out some of the names in our portfolio in favor of a few cheap value plays, and our portfolio is trading up on the month despite puttering indices.  I’m vindicated therein, but I, too, now have a “feeling.”  I look at the SPY chart and notice a captive bearish trend, if anything.  Further, my own repeated warnings ring in my ears, “the two risks I’ve been harping on: waning momentum in MFI and the rounded top in MACD. Not only is the price action fighting to hold trendline support, but indicators are about to break support.”  A lower close tomorrow should adamantly cast equities into a hole, because the price will break its trendline support and indicators will come crashing down.

I can see the bottom from here, luckily.  In my 2011 Outlook released on January 6, I concluded:

…shorter-term weekly & daily charts echo SPY’s shaky ground. While the price has moved up through a double top at $123, MACD divergence is setting-in on the weekly chart. This alarm is very premature, and should take a while to develop. That $123 mark represents first support, and when tested early in 2011, that support’s strength will say a lot about this Market. I expect a 1q11 bounce off $123 before SPY heads to longer-term resistance[.]

I grew uncertain as the trend gained steam, and as a result, the uncertainty led us to keep plenty of capital on the sidelines:

For the SPX , my target is still 1425.   My expectation is a result of indicators (SStochastic & MFI) having turned up recently, with MACD holding on resiliently.  These indicators should break their resistance and lay waste to their troublesome rounded/declining tops.  My downside support is the last (61.8%) Fibonacci threshold at 1225, which has been substantiated as a bumper on three occasions in the past.  We decided not to take broad SPY exposure because of the wide bandwidth for this risk/reward makes it an unattractive bet.

It’s hard keeping up with this diary.  Sometimes it feels like an empty exercise.  But in composing this entry tonight and combing through the evolution of my Market opinion since the start of this year, I get the sense that it’s all worth-while.  First, it’s allowed me to refine my investment process.  More importantly, it’s affirmed the veracity of my process.  My eyes have been on all the right balls, I’ve filtered out the noise, and I’ve patiently awaited confirmations of my theses before putting money to work… tomorrow, one such confirmation should arrive, technical indicators breaking support, ushering in a bear trend to take us down to SPX 1225.

What a tremendous rambling I’ve put together here!  I was happy with the rally into the close today.  A low volume 2% sell-off by noon fought back to a mere 1/2% loss for American indices at the close.  Maybe it was the Fed swooping-in to save the day, since I noticed the E-mini S&P 500 Futures kicking into overdrive at 2:57pm today, more than three minutes before the SPX itself.  (Very few people even know what that means, but it’s the cheapest way for an institutional sized buyer to manipulate cash markets by via futures.)  I’ve grown accustomed to a mass buyer being there to paint the tape, so I left the office tonight comforted by the familiar late-day rally.

I went to the gym, ate dinner, opened the computer.  Reuters headline:

Japan hurts markets,

but selling could wane

Are the markets that bad, I thought to myself, that the main-stream media has resorted to cheerleading?  They’re relying on hope.  They’re like conditioned lab rats hitting the “Easy” button whenever they want the Fed to show up with a treat.*  With all the buzz around Washington DC, budget issues, QE2 expiry, I just don’t know if the Fed will be there tomorrow.

Japan pumped 12 trillion Yen into its markets yesterday.  They have to rebuild an entire domestic region.  And, Lumber (LB/1) traded to a loss today.  What?!  Maybe markets are just adjusting to discount all the geopolitical chips on the table… but I know that markets don’t adjust like notches in your belt, they trend like traintracks.

Jeesh, I need my rest for a long Tuesday ahead.

–Romeo

*I love mixed metaphors.  I also love splitting infinitives.  I remember an 8th grade english teacher lecturing on all these grammar rules, and for every rule, I could think of a famous exception.  Catacheresis lays claim to some of the most sophisticated phrases in the English language.  To grammatically tidy-up “To boldly go where no man has gone before” is to emasculate its punch.  Just sayin’.

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  1. […] I said Monday night before this hellish skid: “Maybe markets are just adjusting to discount all the […]

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