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Face Off!




Good morning and welcome back to the sneak attack. Yesterday's rise chewed through the few flies that littered the tape and quelled prior tries. "The trannies were just too strong from the start," said Hoofy the bull feeling all kinds of smart, "the only wisdom that's left to depart I will do with young Boo with a quick heart to heart:"

Hoofy: Cookie-please don't get stubborn again and draw a line in the sand. I know you see the same things I do. A bevy of charts (including the all-important BKX) has more reverse dandruff than a Head & Shoulders convention! It doesn't matter if you believe the've gotta climb into the mindset of the masses. People are confused and quarter-end is approaching. Have you ever heard of inertia?

Boo: I agree that it's perfect. Think about it--the hedge funds are lining up to buy the telegraphed acne, sentiment is lopsided, volatility (fear) levels are at their lowest level since '96 (VXN at all-time low), insiders are dumping, rates are rising, geopolicial risk remains (which should, by definition, price a 'risk premium' into stocks) and many feel we're looking at a double dead end politically. I know--let's buy stocks!

Hoofy: You just don't get it, do you? The stock market is the world's largest thermometer and the powers that be will make quite sure that we're flush with liquidity. Besides, history dictates the most structural shifts will ripple through the credit markets first and if you've read Professor Reynolds, you'd know that they're relatively sanguine. I would urge you to read his morning missive today as he weighs both sides of the trade rather cogently.

Boo: The risk is in one of two scenarios: Either everyone is loaded up for the quarter-end sprint and the ref blows the whistle (offsides!) or we get the breakout and upside capitulation. If the second script unfolds and we make marginal new highs, there will be NOBODY left to cover. That would set the stage for a particularly painful 'pop and drop.'

Hoofy: One step at a time, right? If this is indeed liquidity driven, global equities would rally (see Brazil and Asia), the metals would lift (gold poked through the 200-day), the small caps would sparkle (the Russell took out the June highs yesterday) and an ever-present bid would exist (you tell me).

Boo: I've got eyes, bro, and I can see the same things you do. But everyone is looking at the VXO chart (breaking down) and piling onto the sell side of volatility. It's so inexpensive that protection can be purchased very, very cheaply. It's a small price to pay for defined risk, in my view, but that's just me.

The two critters eyed each other and both knew that they were in for a dogfight. The next ten days would usher in the Iraqi semanticfest, quarter-end, Elmer, earnings and a long weekend (posturing included). We've been drifting sideways for over a month and energy is sufficiently stored for an outsized move. I would simply remind ye faithful that discipline is the common denominator of any successful trading strategy.

Good luck today.

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