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A Bear Market Fortune, Cookie!


As the Chinese proverb says, "May you live in interesting times."


It's official-almost. Late last week we called a Time Out for Truth, seeking to peek behind the curtain at what makes the market tick and why.

On Monday, while pundits discussed traditional parameters that define bull and bear markets and debated conventional metrics of our economic status, we offered further perspective on our prickly path, a cumulative comeuppance that bears watching.

While it's easy to get caught up in semantics, we wake up this morning to find China's Shanghai Composite dropped an additional 4.3% overnight, taking its lump sum slippage since August 4th to 19.8%, just shy of the widely held road map to Red Dye Junction.

To be fair and balanced, we must remember that since the US and Chinese governments plunked down more than $13 trillion, the nine-month rally in the Shanghai Composite pushed its price-to-earnings ratio to almost double the valuations of the S&P, according to Bloomberg. Year-to-date that index remains 53% higher for the year.

We've long maintained that China is the dog that wags the US tail, an unpopular perspective a few years ago but one that's since gained credence. And lest you were napping, the notion of decoupling has been exposed as the myth that it is. In a finance-based, derivative laced global economy; we're all in this together.

I recently wrote about both sides of our stateside ride, a bifurcated outcome that has now been outsourced. We noted:

The risk to the transference of obligations (to future generations) aren't the motivations of our policymakers but frustrated holders of dollar denominated asset classes and, more to the point, the tipping point when they'll finally cry "Uncle Sam." They've taken it on the chin since 2002-the greenback is down 35%-and if they could extricate themselves from this tangled 3-D web (debt, dollar, derivatives), they likely would have already done so.

The debate will continue to rage whether this-and by "this," I mean the global price action-is a healthy pause that refreshes or the resumption of a grizzly that has been hibernating. In the bull camp, you have a perceived government backstop and credit markets that, while off their best levels, remain firmer than a college cheerleader.

In the bear camp, you have cumulative imbalances that continue to build. If you subscribe to the notion that we continue to give the economic patient drugs that mask the symptoms rather than letting it take the medicine of time, price and debt destruction, one could argue that no amount of health care reform will foot the tab for what's to come.

And of course, the US dollar remains the contextual qualifier of this entire discussion. Investors around a world are picking sides on inflation-deflation debate and while a seismic currency adjustment is more than likely years away, it's something to file away in our crowded keppes for future reference.

If you thought there was Shock & Awe when they declared Martial Law for the markets and we awoke Back in the U.S.S.A., messing with the global measuring stick will make those days look like tinker-toys. But alas, I digress.

The Here and Now

Yesterday, in real-time on the Buzz & Banter, I re-initiated some short-side risk in the technology sector. While I covered up the meat of my downside heat into Monday's crimson swim, I offered the following thoughts as we edged out of Turnaround Tuesday's gate:

I bought some Powershares (QQQQ) October puts with a hard stop on the other side of NDX 1585, which is the lower band of Monday's opening gap. The thought process is that I'm willing to Risk ten handles to potentially make 75. At the very least, Fletch and I are expecting a probe lower and from there, we'll finger the pulse of the tape and take a fresh look.

Later in the session-towards the end of the day actually-I followed up on those vibes in response to Minyan CC Rider who asked, "Toddo, Where do you stand in terms of the "W" playing out?" To which I answered,

I'm still there and foresee it playing out, barring my perceived 1-in-4 chance that we power straight through to hyperinflation. That 'could' happen (if the dollar debases) but I don't see it yet due to the lack of legitimate end-demand.

The timing of middle peak is dicey, due in large part to credit market improvement, but in terms of the "up, up and away" scenario, I give it 25% odds. I'm not betting that way with my long-term bucket (opting instead for capital preservation and financial staying power) and my short-term bucket is still more active than the Arenal.

Speaking of the short-term stuff, I'm still lugging the QQQQ puts I added in and around NDX 1575 despite the tape ticking near my predetermined ripcord (the other side of NDX 1585, or the lower band tag of yesterday's opening gap).

I'm nothing if not disciplined but I'll offer a few thoughts. First, relative to the bet I made at NASDAQ 2007 (NDX 1630), these are small spuds. Second, hands over eyes, today's action isn't all that inspiring (low volume on Turnaround Tuesday). Finally, the broader picture continues to warrant caution.

With that said,, I'm not opposed to honoring the process and trading a little "in between" given 1) tech earnings Hewlett-Packard (HPQ) and 2) the potential for overnight gap risk.

Water pistol to head, however, we have unresolved business to the downside. I offer that through the lens of discipline over conviction and the mechanics of the swing being more important than the results of the at-bat.

Actions speak louder than words, right? Walk the walk and talk the talk.

Some Random Thoughts

  • Minyan Adan asked "Why are you using October paper again rather than November or December?" My response was "I plan to flatten my book by the time I take my Colorado camping trip (the week before Labor Day) and I desperately need a sans risk vacation."

  • In terms of my current bet, I plan to take some risk off the table into the opening swoon as a function of discipline and play with the leaves with the same stop as yesterday.

  • Expiration may well be "for sale" but I've had better success batting for average rather than hitting for power. Just remember that the looming option expiry will exacerbate volume both ways. Trade-and size your positions-accordingly.

  • For those with Mini-Minyans in your midst, it's week four of the Scavenger Hunt in Minyanland and a new character named Milton is hiding in the hood (hint: he's carrying a balloon that says "Get Butter Soon"). Consider this an official "edge" in putting a smile on your child!

  • I added a little twist to our five-year NASDAQ chart-you know, the one that offered the best set-up of 2009 on the first probe-and that's a (very steep) uptrend line from the March lows. We're right in the wheelhouse of the "make or break" zone so I highlight it for the benefit of ye faithful.

  • Is Hong Kong a "purer" emerging market play than China?

  • Memoirs of a Minyan Chapter 11: Behind Closed Doors is the apex of the arch in terms of my hedge fund days but the nadir of the nature of who I am today.

  • I wonder if Janice Rossi ever found true love?

  • Keep an eye on Deere (DE), dear, on the heals of earnings, as well as Caterpillar (CAT) and the other industrials for peripheral pain.


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