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Make or Break for the Market


Watching with bated breath as market hovers around key levels.

"All great masters are chiefly distinguished by the power of adding a second, a third, and perhaps a fourth step in a continuous line. Many a man had taken the first step. With every additional step you enhance immensely the value of your first." --Ralph Waldo Emerson

We often opine that technical analysis is a better context than catalyst. Yet with so many crosscurrents competing for our collective attention, a reactive world is watching several levels with bated breath.

We offered last week that battles and wars were being waged, with the retest of S&P 875-where the market broke out-an intuitive first step. On cue, the market probed that zone Friday and bounced, which one would expect on the initial test.

That battle was circled on most major trading desks but the war will arrive at S&P 950, a juncture where a confluence of resistances, moving averages and trend lines intersect. As it will take powerful buying power to surmount that level, it may well be the most important crossroads of 2009.

As we edge towards the traditionally thin holiday stretch, investors are wondering whether last week's 5% haircut in the S&P was a pause that refreshes, as the bulls would like to believe, or the beginning of the end of the bear market bounce and the other side of the aforementioned "W" formation?

My view-one I secretly hope is wrong-is that contrary to popular opinion, the socioeconomic landscape is getting worse, not better. While price is the ultimate arbiter of variant financial views, the recent rally was synthetically manufactured, much like it was at the turn of the century.

The natural response to that observation is to highlight the sharp gains that manifested as a result of that coordinated effort. I would respond that there is a massive distinction between a legitimate economic recovery and credit-fueled growth that was masked by a lower dollar and skewed by the spending habits of a slimming margin of society.

Throughout the prolonged period of conspicuous consumption, cumulative imbalances continually built and the middle class steadily eroded until the debt bubble burst in 2007. It stands to reason that the aftermath of a grand experiment gone awry won't be cured by yet another grand experiment with far fewer able participants.

While the government bought the cancer and sold the car crash, the simple yet sad truth is that the system still has cancer. That doesn't mean it's terminal or even imminent, it simply means the inevitable medicine of time, price and debt destruction must eventually replace the multitude of drugs that are attempting to mask the disease.

As it stands, I see one of two options. The first is an orderly destruction of debt that will pave the way towards globalization and an eventual "outside-in" recovery. The second is the continued percolation of isolationism as foreign holders of dollar denominated assets scream "Uncle Sam" and the world fragments like so many pieces of a puzzle.

To be sure, the "easy" trade on the short side was a few years ago when the markets danced at all-time highs in the face of mounting evidence of an imminent demise. Conversely, the bulls should have licked their chops in early March when it felt like the end of the world was upon us and they were stopped out against Armageddon.

I've been operating through the lens of risk management over reward chasing with a steady eye towards financial staying power. With regards to the stylistic approach in my trading account, I recently made a subtle yet important shift.

After operating from the short side for much of the last two years (with a few notable exceptions), I "bought dips to sell blips" in February and March, balanced the process in April and began to trade from the short side anew two weeks ago, which I'll continue to do for as long as S&P 950 remains overhead.

It should be noted that I covered my recent negative bets into S&P 875 as a function of discipline and, as I'll be taking my first vacation of the year beginning Thursday, plan to "hit it to quit it" until then and enter the holiday stretch with a clean pad and fresh head.

As my close friend Raymond James Chief Strategist Jeff Saut likes to say, where you stand is a function of where you sit. I'll simply ask investors to keep one eye on a comfortable chair should the sound of music suddenly stop.

No positions in stocks mentioned.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at

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