Connect the Dots
No soup for you!
Good morning and welcome back to the yawning. Despite all the fright that's making the rounds, the Red Dye soiree has failed to compound. "I've bought all the dips and it's worked out just fine ," said Hoofy the bull as he smiled with pride, "and while I am tired and sometimes get fried, this measured approach has prospered worldwide." Will Snapper be able to pull from the hat the rabbit that saved him from going ka-splat? Or will the ursine, a patient bunch still, force feed the bull breed a most bitter pill? It's tricky, it's Tuesday, a most minxy thrill, so settle on in for our romp in the 'Ville!
With the S&P officially closing below the 200-day for the first time since April 2003 (memories), you would think that tension levels would be kicking into high gear. That simply isn't the case, as measured by volatility and sentiment, and it leaves the great debate wide open for discussion. Does the complacent environment represent a tradable disconnect (between perception and reality) or are we, once again, readying to climb that ever-present wall of worry? And how can we approach it such that we maximize our reward relative to the incremental risk?
A quick assimilation finds that the ducks have developed a bit of a cough. There's a name for the lower highs and lower lows that have permeated the '04 landscape--it's called a trend. Add that to the decelerating earnings, complacent psychology and structural imbalances and, well, there is ample reason to believe that this dip is, in fact, different. But is it as easy as a "stop, drop and roll?" Doubtful--this is a bear market and the most classic definition of such is that nobody makes money. Not even the bears.
I'll be the first to admit that there may be a relief rally approaching. It is, after all, turnaround Tuesday and these days are known for their counter-trend qualities. With Elmer taking the hill, the short base in fixed income high and alligator tracks in the mud, we must assign a probability to that outcome. The more important question, in my mind, is how we should approach that bounce should it come and, for that matter, if it doesn't.
There is surely supply waiting patiently (or not) on the sidelines, long money that was trapped from the end of June. Taking a giant step back, a similar dynamic exists all the way down the slippery slope. Somebody bought the NASDAQ comp at 2000, 3000, 4000, 5000....you get the drift. There's only so much demand that can be derived from artificial stimuli and incessant jaw-boning. Sooner or later, that dynamic will invariably reach an inflection point and the supply side of the equation will reassert itself.
The key to the vault remains the financials. They were the primary beneficiary of the easy money all the way up and their action is telling as we start to back down. For purposes of our discussion, please pay particular attention to XBD 120 and BKX 96. Any rally should retrace these key sectors back to their breakdown points and we'll know, from there, if Snapper is alive and well or destined for the soup kitchen. I will also urge you to watch the BKX--if it can put in higher low (if and) when the S&P retests its '04 low (1080), it will be a positive divergence for the piggies.
We power up this Tuesday pup to find the tricky Nikkei with dandruff, Europe slinking green, the metals under a bit of pressure and the dollar index edging back towards DXY 88. Elmer will paint the tape starting at 2:30 and set the tone as we head towards the bell. Lots going on, lots to digest, lots at stake. Screw your head on straight and think positive, Minyans, as the games are set to begin.
Good luck today.
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 email@example.com.
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