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Eve's Reprieve

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Fare ye well into the bell!

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You take my hand, I'll take your hand
Together we may get away
This much madness is too much sorrow
It's impossible to make it today.


(Neil Young)



It's been a while since we discussed the three phases of a trading move and the current juncture is a perfect time to circle back. As most old school Minyans know, I've always felt that denial, migration and panic were the psychological hallmarks of each minxy move. This can be applied to both the intermediate-term and longer-term trading cycles and understanding our placement on that curve can be a profitable observation.

I bring this to your attention as we are at a critical juncture for the financial markets. In short, we're either firmly in the denial phase of a bear cycle (bulls continue to buy dips on faith) or remain in the migration phase of a larger trade to the upside (and this is healthy fear). The smell test for where we are is simple if not always easy: Are traders rationalizing their positions in the face of metrics that are pointing in the opposite direction?

Think back to March '03 when the markets began their ascent. The bears--and there were a lot more of them--looked at every bounce as an opportunity to put out more exposure. The technicals were turning up and upside momentum was gaining traction. Still, the folks from Red Dye were resolute in their belief that it was only a matter of time before the previous trend asserted itself. Now hold this column up to a mirror and please tell me if it looks familiar.

I don't know which way the next few percent will play as there are reasons to be cautious (technicals, fundies, reality) and pangs of optimism (pressy, credit spreads, stochastics). I simply want to plant the two-sided seed such that Minyans appreciate that if, in fact, we've entered into a period of denial, it has the potential to last much longer than the current complacency expects. It all comes back to identifying the disconnect between perception and reality and capturing that spread.

We've got a slew of earnings this evening (Int'l Business Machines (IBM:NYSE)) before a sleepy summer expiration Friday. Boredom doesn't qualify as an actionable catalyst so please take this down time to look at your book and your attendant risk. We remain in the early innings of the weeding out process as the overcapacity in the financial industry remains outsized. Bummer? Sorta, but accepting you have a problem is the first step towards dealing with it.

As always, I hope this finds you well.

R.P.
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