If my buddies are gonna get their groove on, we'll need to see the XBD jig through 130.
"Mongo only pawn... in game of life."
Good morning and welcome back to the ducks that quack. The fourth quarter kicked off with a stunning upside rally as portfolio managers relaxed their risk grip and put some coin to work. It was an impressive showing by the Matador crowd as the breadth was inclusive, technical levels were mounted and tensions were--at least for the time being--relaxed and released. Now, as the three sisters dance on either side of unchanged for the year, it's time to dig in for the final drive to '05.
We mapped out a few alternative scenarios a few weeks back that attempted to provide a road map into the election and beyond. While plenty of time remains on the clock, Hoofy seems to have stepped forward to gain some sponsorship. The action in the small caps, cyclicals, banks and trannies--all of which logged (or are in the process of logging) important technical milestones has buoyed his hopes. And if they can do this with crude at $50, he'll argue, imagine what he'll do if crude spills before the November polls!
Given that portfolio managers have three months to make their year, it would be myopic to ignore this evolving momentum. For as long as the internals are strong and the leadership remains, the bulls will be on offense while the ursine cool their heels. The key levels to watch (for critters on both sides of the fence) is XBD 130 and S&P 1140. That's the bulls eye on the back of the bears and mission critical if this rally is to self-fulfill and get people paid.
If this latest lift fades and traps the optimists leaning the long way, the writing on the wall will seem obvious in the rear view. The IMF stated over the weekend what many of us feel but can't find in the conventional media or from our fabled Fed's vernacular. They offered that the global economic recovery is at risk unless governments address the growing trade imbalances, budget deficits and exchange-rate inflexibility as they relate to the energy crunch and interest rates. "The recovery has been uneven and with oil prices doubling and global imbalances worsening, we agreed that action must be taken to address the risks to the recovery," said British Chancellor of the Exchequer Gordon Brown, "And bold reforms on a wide front are needed."
All of this is occurring, of course, with complacency (as measured by volatility indices) at nine year lows, geopolitical tensions unspoken and chicken little getting crispy. Indeed, the lack of intensity on the supply side has all but removed the sizable short bets in the hedge fund community. Will the path of maximum frustration squeeze out every last bear before a legitimate scare? Perhaps--we've seen larger disconnects in our lifetime--but we must respect both the consensus (momentum) and the herd mentality (sheep to slaughter). And we must remember that the greatest "shocks," by definition, occur when they're least expected.
We power up this Monday pup to find the world awash with green. The Nikkei started the new semester with 300 points of love, Europe is, for the most part, up a percent (FTSE laggin'), the dollar has grabbed some green back (+80 bips) while the metals are listening to some early chin music (after two week's of stubborn strength). We should see some follow through out of this morning's gate and then my eyes will settle on our mainstay tells for near-term guidance. There's a lot on the radar this week and earnings season is sittin' on deck. Think positive, think smart and, above all else, think for yourself.
Good luck today.
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