The Oxycution Resolution
I hope you're not talking about me!
Good morning and welcome back to the Oxy moron. With last week's outbreak head fake, the Minxy pimple wasn't quite that simple. Indeed, it seemed that Thursday's data was all that mattered as the bears scattered and poor Boo got battered. As Hoofy prepared to leave the station and preached the virtues of validation, the supply in the sky waited nearby. When the technical faction failed to find traction, the ursine reaction was sweet satisfaction. Is this the beginning of a bovine spinning or will Hoofy's crew muster a rally redeux? It's a new week of flings and swings so settle in and lets see what she brings!
We've discussed many of the elements in play--the liquidity fluidity, the strange range, the bubble trouble, the full bulls, the scared bears, the fear nadir, the technical spectacle...you name it. We've assimilated our trading metrics, discussed the dichotomy among professionals, opined on the future grind and muddled through the everlasting muck. And this is supposed to be the slow summer season?
Last week, as everybody and their ferret was awaiting the next leg higher, the hip bone failed to connect to the thigh bone and the foundation suffered a trendline fracture. We know from experience that, at different junctures, various metrics assume a unique weighting in the trading brew. I chalk up this latest balk to the juxtaposition of psychology and technicals. With sentiment figures indicating that most everyone is bullish and vols pointing to an overt complacency, the marginal buyer didn't have the oompha to bust through major resistance. Put another way, if everyone expected a rally, the liklihood is that they were already positioned for it.
While my big picture bearish bent digs deeper than a few disheveled levels, I'll continue to use the charts as a backdrop with which to trade. As we ready for the zigs and zags, we've stumbled upon some new found flags. The NDX has peeked through the trendline from the March lows (on a closing basis) and while it's currently "close enough" to warrant instant replay, a decisively lower close today will turn the trick. The S&P, by failing to hold the G-spot (S&P 1000), confirmed (on the downside) the pennant formation we alluded to Thursday (it also closed under the 50-day moving average for the first time since the Iraqi invasion). Finally, the financials ducked under their 50-day moving average Friday and we must appreciate when the piggy banks quack.
Now, I was clearly too suspect during the springtime sprint and, calling a spade a spade, that was wrong. Regardless of what happens from here, there was money to be made there and if we're to focus on the journey (rather than the destination), there can be no rationalizing. The faux pas of moi? Not respecting the potential for the liquidity flood to swamp psychology and drown the sorrow of yesterday's past with promises of a better tomorrow. While that lesson is learned and returns were earned, we can't project that respect into future risk neglect.
I've been less aggressive with my commentary the last two months and, in hindsight, I was a prudent student (we've gone nowhere fast). While we're still very much in the recent range (read: no resolution yet), my eyebrows are starting to lift as I watch this lethargic drift. Yes, this may prove to be (yet another) pause that refreshes but that buzz you now hear are fresh flies in the ointment.
The bonds, for one, have made equities relatively less attractive (on the margin) while "shocking" a system that had grown complacent. Pay particular attention to the financials, be it money center banks, brokers or the Fannie Mae's (FNM:NYSE) of the world. If they start to slide, the bears will go for a ride. Also note the soft ticking sound in the background. With each passing minute, the famed second half recovery is running out of time with which to shine. As such, the onus of a bonus will be on the bulls as they've gotta prove their recent groove was a rational anticipation.
As we roll up our sleeves and prepare to do battle, please take a moment to review the ten trading commandments. Remember, our goal isn't to tell you what to do--that's for you to decide before taking the ride--but I will always offer my thoughts with hopes that they add value to yours. My longer term concerns have never abated and I still feel that we're in the early innings of a multiyear malaise. With regard to this latest phase, I opined last month that it would top this summer and, from where I stand, there's a good chance that it's already happened. As always, just one humble trader's opinion.
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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