Diary of a Financier

Engineered Markets

In Economics on Mon 16 May 2011 at 08:49
  • Risk trades are cracking under the pressure from a confluence of events.
  • A renewed rally will have to come from new sector leadership–again the sector performance in 2011 resembles 2007.
  • It’s as if an invisible hand engineered the exogenous events of late: to open the door to QE3? relieve the USD? stoke Treasury demand?
  • With SPY opening below support & ES/1 looking even uglier, we could slip into a short-term spell.
  • SPY weekly chart looks overbought, suggests this is just a pullback.

We’re experiencing a buildup to something here.  A confluence of events which I’ve documented well in my recent entries.  Note some of the following discussions, in chronological order:

  • 3/25– “Precious metal/commodity bulls, USD bears & the inflation camp are so firmly entrenched and unopposed that I’m compelled to evaluate the contrary… [including] the bulls riding commodity currencies & economies (i.e. CAD & AUD). “
  • 4/7German 5-year CDS @ 37bps underpriced; now 53bps.
  • 4/19– Kyle Bass’ very public Gold purchase “mark[ing] a major market reversal… Leverage, misincentive, assets with multiple claims upon them.  I’ve heard this story before.  Gold has gone parabolic of late… wait until it goes vertical.”
  • 4/26– Falling Rates coming, Buy Bonds in 10-year space.
  • 5/3Osama bin Laden rally reversal characteristic of a market top.
  • 5/5– Long USDJPY (Short Yen) @ 79.70; now 80.92.
  • 5/9– Ben Bernanke’s inaugural press conference as the Butterfly Effect changing the market’s trajectory/fundamentals.

So, I just sat down last night and laid out all the new pieces to our puzzle here:

  • CME multiple margin hikes on Silver (SI/1).
  • CME multiple margin hikes on Oil (CL/1) & Gas (UL/1).
  • BEA reported the US Trade Data, including record exports (c/o weak USD), but rising imports (c/o rising energy costs) still add to the deficit.
  • Having led the equity rally since November 2010, energy stocks & the commodity complex slide.
  • IMF chief Dominique Strass-Kahn arrested on rape charges just before the biggest week in the short life of the Euro (EUR).

To be honest too, I had planned to trim-back my long volatility hedge by about 50% in exchange for long-dated Treasuries.  However, I never got filled on my limit order on Thursday, then I liked the following day’s action in SKEW & VIX, so I stuck with my entire VXZ position.  Happy to have it still, all of it, because here’s this morning’s tone:

Futures (% change)

First, if SPX cares to rally beyond its multiple top, it will have to be under new sector leadership–specifically laggard Financials (XLF).  I got lucky in stumbling across this, but compare the S&P Sector Performance from 2007 to 2011:

S&P Sector Performance (2007)

S&P Sector Performance (2010-11)

Next, might the sequence of events listed above fall within some grand scheme from Washington DC? A coordinated sequence to engineer a new sweet spot in which some government arm can pursue some new liquidity program like a QE3? or just reprieve for the dollar (USD)? or engineered demand for Treasuries?  The answer is likely affirmative to all counts.  Either way, the last two years have been an awesome display of the US government’s ability to assert its will, and any short-term dislocation will be met by intervention. 

That all aside, SPY will open below critical support this morning.  That ain’t good.  Neither is the chart of S&P E-mini Futures (ES/1), which holds the key, so I’ve said:

ES/1 daily

…I wouldn’t invest in that if it were a stock.  The weekly SPY chart makes it look like we’re just overbought & due for a short-term pullback, so I’ll withhold longer-term judgement:

SPY weekly


  1. […] Futures (ES/1) charts to illustrate the continuation of the bear trend that worried me back on May 16: SPY will open below critical support this morning.  That ain’t good.  Neither is the chart of […]

  2. […] in April, I hit a home run in calling for the decline of long rates. In review of my outlook, I expect that we’re currently […]

  3. […] remember a comment I made back in May: [I]f SPX cares to rally beyond its multiple top, it will have to be under new […]


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