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March Madness: Beware of a 20% Move in the Markets!


Se both sides of the upcoming binary market event.

"Beware the ides of March." --William Shakespeare, "Julius Caesar"

With two months down and ten to go, 2009 is already shaping up as one of the wildest rides in market history. And yes, that's saying something following the astonishing year that was 2008.

In early February, I spoke of a monster move coming in the market. The vibe was akin to a similar feeling entering September, an intuitive sense that something significant was afoot.

While my gut was that it would be higher-into a window of opportunity-I drew careful attention to the distinction between trades and investments, as well as the importance of trailing stops as a stylistic approach.

We indeed saw a sharp pop-Bank America (BAC) rallied 85% in the following three days-but the market failed miserably thereafter, registering double-digit losses in the DJIA and S&P.

In some ways I was right (the initial lift, a monster move) and in other ways extremely wrong-or perhaps early-in offering that the lift could extend the S&P towards 1000.

Either way, those thoughts pale in comparison to what we may see in the weeks ahead.

At the top of our catalyst list is AIG (AIG), which we'll be watching to see how the government treats its Credit Default Swap obligations. Through our lens, there are two potential outcomes:
  • As floated last week, the government could backstop AIG Credit Default Swaps and bail out those who bet against the company. While this would seemingly stem systemic risk in the short-term, it would burden taxpayers with huge liabilities and give credit bears fresh ammunition with which to reload their arsenal.

  • The government could choose not to backstop AIG Credit Default Swaps, which might light the fuse on further contagion and potentially trigger a downside slide towards our perceived 2009 nadir of S&P 600. While this would be a near-term negative, it would administer the medicine of time and price that is necessary for a natural bottom.

The unknown in this equation is the treatment of Credit Default Swaps as a whole, which is what I'll be watching. I've offered in recent weeks that there are two invisible catalysts lurking-the treatment of CDS and the 'relaxation' of Mark-to-Market accounting. If either is introduced, the market will explode to the upside, if only for a trade.

The script is being written as we speak and the stakes have never been higher. The takeaway is that we're approaching a binary event for world financial markets where a 20% move could conceivably manifest over the next few weeks.

See both sides, manage your risk and remember that discipline must always trump conviction.

Random Thoughts:

  • Over the weekend, the University of Arizona advised students to avoid Mexico during spring break. I use that as an opportunity to remind Minyans to keep an eye on our neighbor to the south, as the risk of civil war is very real.

  • We've been wary of General Electric (GE) for some time-first flagged in 2005, along with General Motors (GM) and Ford (F) as financials in drag-and it continues to be a focus. Professor Bennet Sedacca sent me this chart of General Electric Credit Corporation CDS and a picture speaks 1000 words.

    Click to enlarge

  • While Warren Buffett has struggled of late, his words of wisdom should be shared with ye faithful as we edge through these trying times.

  • I enter today's session light, tight and ready to fight with my finger on my short-term trigger.

  • If and when we see harsh downside towards S&P 600, I will deploy 25% of my long-term nest egg, which has been heretofore 100% cash.

  • R.I.P. Capitalism?

  • eBay (EBAY) can't seem to get out of its own way. You would think auctions would be good business (Pawn Shops) but the lack of buyers is noteworthy.

  • Awesome Unplugged.

  • Mur-MAN! I tossed the Minyanville Underground Railroad last week and the response has been amazing-600 Minyans across 50 states and 30 countries. If you would like to get involved, let me know as we continue to build The Critter Express.

  • This crisis is no longer just financial or economic-it's social. Honesty, trust and respect, Minyans, as society is simply a sum of the parts.

  • Achtung Baby! Germany's finance and foreign ministers called for an introduction of the trading tax, along with tighter and tougher regulations.

  • One of my best friends, who separated from his wife, said to me, "I can't decide if I'm more miserable with her or without her." I responded, "You're looking at it the wrong way-ask yourself if you're happier with her or without her-then, either way you either win." I share this analogy, as it is apt across the spectrum of personal perspectives.

  • Enjoy the journey, for by the time we get to where we want to be, the trip will be over.

No positions in stocks mentioned.
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