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Chaos Theory


Here we go again!


Total chaos -- no mass confusion
Rhymes so hypnotizing known to cause an illusion
Like a magician who draws a rabbit out of a hat, son
I'm drawin' more like a 44-Magnum


Good morning and welcome back to the slippy slack. The Matador Crowd arrived yesterday with stars in their eyes and something to say. They gapped the tape higher right from the start and gave it a try with all of their heart. "We had the ursine dead in our sights," said Hoofy the bull of his most recent fight, "but try as we may and try as we might, we couldn't ignite a strong upside flight." Will the stuffage continue to flummox the buyers who can't seem to close the Minx that much higher? Or can they now tap that upside desire and rally this pig from wire to wire? We'll know soon enough as we head up the hill and ready ourselves for the thrill of the 'Ville!

While earnings are coming out fast and furious, I'll again offer that the impact is stock (or sector) specific rather than a broad catalyst. Money--or lack thereof--seems to be moving through asset classes like schvitz through a goose. At the risk of oversimplification, the buoyant dollar has become a liquidity proxy that is taking the other side of the reflation trade. You've heard it all before....stocks, metals, Brazil, Cocoa Puffs--anything that trades as a function of supply and demand--has been the major beneficiary of Elmer's reflation effort (Crude* earns an asterisk as it's trading in a world unto itself). I think the Fed, the tape and investors are all trying to find a suitable balance as we edge forward through another year and deeper holes.

Heading into Turnaround Tuesday, the critters were relatively constructive on the rally attempt. After all, the stochastics were twisting like Chubby Checker, the NDX 200-day was within spittin' distance and the law of averages bode well for an upside retracement. The one element missing from the equation was the inevitable probe which typically follows prevalent trends. That hung over the tape all day long until it finally manifested in the late afternoon action. You could almost "feel" the hope out there as traders, many of whom have been tagged in '05, almost willed the market to close in the green.

I offered late yesterday that I was incrementally more bullish (for a one to three day trade) after we finally got the hard probe. I still feel that way although I'm conscious that Hoofy may be dancing between the elephants. Working in his favor are the aforementioned stochastics, constructive corporates, weaker dollar and desperate housewives. On the other side of the trade, Boo is happy to let our resident bull pick those dimes up as he powers his bulldozer straight into Red Dye. He believes that despite the fright we've seen this year, the market is massively complacent and conditioned for denial. Looking at sentiment figures and volatility levels, we should ignore him at our own risk.

We power up the Hump Day pup to find Europe hugging the flat line, the greenback giving some green back (-50 bips), metals bouncing a bit and the stateside futes green with envy. While further probage may be necessary to fill yesterday's gaps, I'm not as confident that we'll see back-to-back late day flack. In other words, if the bulls can hold their ground in the early going and we get confirmatory action in the breadth, financials and beta, the window of opportunity is there for the hungry bulls.

Good luck today.

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