Freaky Friday Potpourri!
One of the caveats of a "steady and consistent" tape is a conditioned complacency.
Before we get started today, we would like to feature some visual magic of the Minyan sort. Sometimes pictures speak a thousand words and I think that this spot sorta sums up the tape. So without further adieu, Minyanville Motion Pictures presents:
The Financial Fabric, staring Gene Wilder as Ben Bernanke and Peter Boyle as the stock market.
We now return to our regularly scheduled scribe...
I thoroughly enjoyed the article penned by Ryan Krueger because he sees a lot of the stuff I see and makes me wonder where the disconnect is between the statistics showing the piling of debt and the shrinking consumer and then actually going out in the world and seeing the consumer in action.
I see the same signs as you, higher debt, higher mortgage default rates, higher gas prices (that is pinching me the most), and on and on. It seems like the easy trade would be to the downside, which was my initial conclusion. It's been my experience that the easy trade is almost never right, thus the reason I expect the market to be higher in December then it is today.
I am theorizing that since housing was the biggest beneficiary of declining interest rates, it will take the hit (as is already evident in the CA market) but I am not so sure that the stock market will see the brunt of it because they were not the major benefactors during the last several years. The capitalistic economy is extremely dynamic and will almost always adjust itself to fill a market need. For example, we both know a small percentage of consumers purchased homes that they could not afford and "will" be in big trouble once their adjustable interest only loans readjust, but just like that the market has come up with a 50 year 5.625 percent fixed loan (yes it's 50 years) but that right their will allow the consumer to keep on consuming. Thanks! Minyan Brent in
Thanks for the input. Yes, Ryan is a superb thinker as he sees the world through real eyes. I'll humbly offer that the day of reckoning (structural imbalances, immediate gratification lifestyle, living beyond our means, the "massaging" of the business cycle) is a matter of when, not if, but that doesn't preclude the potential for a rally into year-end. In fact, as I wrote yesterday, there IS another side to the ride---led higher by homies, fueled by a sloppy greenback and playing into year-end performance anxiety.
I'm not playing it that way--I'm currently bangin' with Boo in the context of defined risk--but I'll likely 'step aside' if:
A) We poke back through S&P 1300 (where I slapped on the meat of my exposure).
B) The CRB holds the 5-year trendline (where it's currently sitting) and recaptures the 200-day (CRB 337)
C) The banks continue to grab green (BKX 114 is an all-time high)
D) Billy opts to stay in Greece and secures work as a Myknonos cabana boy.
I'm not smart enough to "know" which way we'll go but I'm disciplined enough to manage my risk and appreciate the entire spectrum of potential outcomes. Trading is a game of consistency---particularly in these tough times--so I continue to take my shots (on the trading side) in the context of capital preservation being the first step towards prolonged profitability. It's not sexy--I used to be sexy, but now I prefer wisdom and experience.
One other thing that you said stands out. You opined that the 'easy' trade is almost always too obvious to work, which is why you're expecting a rally into year-end. One of the caveats of a "steady and consistent" tape is a conditioned complacency. That, alone, doesn't constitute a danger but it creates conditional elements that will exacerbate volatility when causation (or exhaustion) occurs. When we talk about compression, note the low volatility (VXO 11) and monitor the open interest of underlying leverage, it's to highlight the prevalent mindset that is currently in place.
It's gonna be thin and thinner today (and next week), which raises the potential for some whippage. Factor that into your style (smaller size, wider stops) if you're actively involved in the flickering ticks.
Will the approaching tropical storm jack commodities higher? I mean, geez, natural gas is already 6% higher and we haven't even opened yet? I'm watching this complex closely, as you know, and while extraneous factors are clearly at work, I won't rationalize if the CRB trendline "holds and go."
It's SushiFriday in the hallowed halls and you know what that means. Shoes off, chopsticks up and heads high as we end this five session stretch with some jingle in our jeans.
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 firstname.lastname@example.org.
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