Monday Morning Quarterback: Bulls Fight Back From a Tight Spot
Following a freaky week of valleys and peaks, we power up this five-session set with fresh eyes and uncertain skies.
She cuts you once, she cuts you twice
But still you believe
The wound is so fresh you can taste the blood
But you don't have strength to leave
Good morning and welcome back to the flickering pack. Following a freaky week of valleys and peaks, we power up this five-session set with fresh eyes and uncertain skies. Indeed, after a multitude of triple digit swings, the pre-market futures are curiously tame. Suck down that joe and get ready to go, Minyans-we won't be flat for long.
By now you know the twisty turns of the recent squirm. Boo had the bulls on the ropes, pummeling 'em with hedge fund redemption chatter, concerns over hidden risks in money market funds, Countrywide Financial bankruptcy chatter and, just for good measure, a moody 'tude from Mother Nature.
While we've been monitoring many of the current risks for a mighty long time-and trading them accordingly-we asked the question Thursday afternoon, with the DJIA off roughly 300 points, whether the worst was over. I was trading 'em from the long side with a stop below BKX 101.50 (the obvious-in-hindsight double bottom) and, well, it's sometimes better to be lucky than smart.
A few hours later, we wondered aloud what would happen (and which sectors would benefit the most) when the "surprise rate cut" arrived. While I flattened my trading longs into Thursday's close (discipline over conviction), I faded (read: sold) the opening during Friday's gap higher with a stop above the S&P 1455 (200-day) or BKX 111.50 (which I believe to be the more important level).
Finally, and to bring the swing full circle, I punted half my puts when the S&P filled that gap (and tried to sell more as that was likely the "easy" trade of the day). Alas, the bulls held their ground (which was massively important from a Fed credibility and collective sentiment standpoint) and we drifted higher to close out the week.
As I eyeball a second cup of coffee and take a look around the world, I'm operating under two assumptions. First, this rally will ultimately fail as history and mystery will offer a rhythmic downside rhyme. Second, I don't profess to know the timing of the decline so I will continue to use technical levels as a context for risk definition.
I enter the session with a partial put position, the intention to add to my downside exposure (with defined risk) and the humility to know that I know very little.
Is there a solution to this mess? Only one, as far as I can see- the transfer of wealth. China and other large holders of dollar-denominated securities will begin to accumulate stateside assets, be it Hampton Real Estate or troubled financial firms (as was rumored last week with Bear Stearns).
While nervous hedge fund investors punched their tickets last week, the supply side of that equation will take time to manifest. Some hedge funds will proactively sell while others will wait until the final date. Just know it's "there," even if you can't see it.
Hey, Mr. Glass Half Full! The "flight to quality" that has pressured rates may potentially push out the pain from the adjustable rate mortgage resets. That is a tangible positive that needs to be noted.
Watch Goldman Sachs (one of their major players flew the coop) and JP Morgan (their global equity strategist did the same). I continue to believe that long-term and big picture, the financials have more risk than reward.
Good luck Minyans.
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