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The Jigsaw Jamboree


It's like a dynamic three dimensional puzzle!


Psy·chol·o·gy n. pl. psy·chol·o·gies

  1. The science that deals with mental processes and behavior.

  2. The emotional and behavioral characteristics of an individual, group, or activity: the psychology of war.

  3. Subtle tactical action or argument used to manipulate or influence another: He used poor psychology on his employer when trying to make the point.

  4. Philosophy. The branch of metaphysics that studies the soul, the mind, and the relationship of life and mind to the functions of the body.

Good morning and welcome back to the flickering flack. The Minx has been tri-polar of late as she assimilates the bearish vibes, bullish bent and conditioned complacency into a cohesive, if not entirely clear, mandate. With structural imbalances on one side and a spigot of crisp greenbacks on the other, traders are caught in the crossfire as we search for clues and eye the fuse. Nobody ever said it was gonna be easy, we know, but the crosscurrents are particularly fierce as we dig in for another day in the frazzled fray.

A consistent theme in the 'Ville has been the mounting compression resting under the seemingly calm financial surface. We can measure that dynamic through various lenses, including the chasm between perception--as measured by volatility indices--and reality, which includes a seemingly constant battle between inflation and deflation, geopolitical risk and the elasticity of debt. Indeed, as Professor Succo and I often muse during our weekly 'fests, this juncture in financial history is getting interesting and interestinger by the day.

As discussed yesterday, a growing chorus of savvy seers have opined that a top may be in place. It's a viable thesis, to be sure, but one that's increasingly unpopular as the stakes have never been higher. With our collective fortunes tied to financial asset prices and leveraged to interest rates, a ripple in either will have profound ramifications for the consumer and, by extension, the economy. It's a matter of time, in my opinion, but therein lies the difference between profitability and loss. As we know, the only difference between being right and being early is whether you're still there when your trade comes in.

I opined in January that the perception of an accommodative Bernanke--and yes, despite the rate hikes, his mindset is just that--could usher in a strong first half of '06. That variable is intangible, as the conditional elements of a meaty decline have, and continue to be, in place. The wildcard is psychology or, quite simply, when investors deem these issues to be problematic. I see and feel vibrations in the hull but passengers in the first class cabin have yet to affix their life preservers. And, as we know from history and cinematic analogies, the life rafts clearly won't fit everyone on the cruise ship.

So, the question becomes one of timing and trying to dance between the elephants of reality. My growing sense is that March expiration will provide some stickiness as the path of maximum frustration dictates that front-months put must be laid to rest before Boo can press a downside test. I share this with March paper in hand and the humility to understand that we'll take each step as it comes while staying true to our disciplines and conscious of the big picture pitfalls. And, in the vein of providing and provoking the thoughts necessary for Minyans to make better decisions, I'll share these recent vibes from two of the better times I know:

Why doesn't anyone like me anymore?
By Jason Goepfert

More signs of increasing risk aversion despite a flat/rising market...the Investor's Intelligence survey reported another increase in those bearish on the market, and that bearish percentage is now the highest since the spring of 2003.

As I've noted previously, this is very odd behavior - we just don't see traders become more bearish as equities in general rise. When we do, it has not always preceded a major bull run like the "wall of worry" theory would have us believe. In fact, those times that it did result in a rally, the gains were given back within half a year every time.

Another possible sign of this was seen yesterday. The DJIA closed positive on a day that NYSE breadth was skewed 3 to 1 negative for only the third time in 60+ years. The other two times were 02/22/80 (after which the S&P 500 lost 13% of its value over the next month and a half) and 08/25/81 (after which it lost 9% over the next month)."

One the great parts of the Ville is the discussion among Professors Toddo and Blue Steel
By Bennet Sedacca

I took a rare afternoon off yesterday to slash around 6 inches of rough at Bay Hill in Orlando yesterday (the PGA boys are NOT gonna like that rough - trust me). When I left, the SPX was -6 and when I returned, +2! So Snapper did a good job of relieving oversold hourlies. So I went through the Buzz and read my great friend Toddo's piece - kidding me with that 'Blue Steel' stuff again - and he wondered aloud if I were right on my 'call' that a bear market in stocks could ensue.

Here is the deal. I think we are BOTH potentially right. Toddo's point (well taken, my friend) is that the March expiration is gonna pound some folks hoping for the 'Ides of March' theory which I think, personally, is bunk. We use, as we have been saying, a combination of cycles (annual, decennial, and most importantly, Presidential cycles) to look for important cycle points. As I have been saying, I am looking for an April top in the S&P.

I am not much into giving out targets as that is dangerous, but given the weakness in major groups and the move in rates that I mentioned here yesterday, a top IS forming, I believe. Will the March options get toasted? Don't know honestly. But we are on record as using strength into an April 1 top to reduce exposure for clients. I have no interest in March expiration personally. This is NOT advice, just what I think. And if I don't do what I think, I should hang up my boots and move on down the road.

For my part, I'll be keeping close tabs on CRB 320 (reflation proxy), Google (speculative proxy), the financials (for signs of smoke), the chips (tech leadership), breadth (single best intraday tell), and the energy/metal duopoly (where I wanna add some long-term exposure in time). Again, if you're pressing, guessing or simply stressing, take a deep breath and a step back. When in doubt, sit it out or, at the very least, trade "in between." When the volatility arrives--and it will--we need to be in a position, both financially and emotionally, to view prices as an opportunity rather than a hindrance.

Good luck today.


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