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Monday Morning Quarterback: The Market's Excellent Adventure


Since May, the market has vacillated between S&P 875 and 955


"Hi, welcome to the future. San Dimas, California, 2688. And I'm telling you it's great here. The air is clean, the water's clean, even the dirt, it's clean. Bowling averages are way up; mini-golf scores are way down. And we have more excellent water slides than any other planet we communicate with." --Rufus, Bill & Ted's Excellent Adventure

They say that time is the arbiter of all fate. Nowhere is that more evident that in the financial marketplace.

In early March, offering an optimistic opinion was heresy. Nobody wanted to know from a constructive stance and the mere mention of upside opportunity was proof positive that you didn't understand the depth of the crisis.

Three months later, after the S&P rallied 40% and probed the most important level of the year, cash positions once worn as badges of honor suddenly served as harsh reminders that the risk-reward sword swings both ways.

Since the beginning of May, the S&P has vacillated between the level from which it broke out, S&P 875, and our aforementioned level of lore, S&P 950-955. Never before in history has a three-month sideways swim invoked such passionate debate about the fate of the free world.

We chronicled this in the 'Ville a few weeks ago in "Make or Break the Other Way" when we mused,

"So, is it really that simple? As intuitive as S&P 950 was on the upside, so too is S&P 875-885 on the downside. Hold, and the bulls have a bovine backstop to lean against as they set their sights on an upside retest. Fold, and it's Sayonara Sally for Hoofy's Heroes, in addition to the likelihood that S&P 956 was the Widow's Peak of 2009."

A Cause for Paws?

Entering last week
, there were a slew of clues that the market might resolve its directional dysfunction to the downside. In addition to the potential problems at CIT Group (CIT), technically negative head & shoulder patterns got excessive exposure by major media outlets. With the perceived window of opportunity seemingly closed, the stage was set for some big-time fret.

Consistent with the path of maximum frustration, the tape flipped the switch and proved anew that if you don't stay humble, the market will do it for you. Spurred by better than expected earnings from Goldman Sachs (GS) and Intel (INTC), optimists awoke and choked the bears staring at the dandruff that didn't materialize.

Through an objective lens, the tape had every excuse to trade lower Friday but sucked up the supply and then some. CIT Group, Cali's credit downgrade and double Debbie Downers from General Electric (GE) and Google (GOOG) should have mattered but didn't.

The market is never wrong, remember, so please respect-but never defer to-the price action.

The asterisks on the equation are two-fold: unforeseen expiration influences (creating sticky situations around strike prices) and the CIT soap opera as it continues to unfold.

Given the proximity of resistance in the S&P and the defined risk in my trading positions, I carried some short-side exposure home for the weekend. I sensed some unresolved business to the upside (the reaction to news-or, lack thereof as the case may be-speaks volumes) but setting stops removes emotion.

I hit this week's field pounding my glove and bouncing on my toes like an old school Graig Nettles at the hot corner. As always, we'll chew through it in real-time on The Buzz and share our process with hopes it adds to yours.

And Here We Are…

Two items caught my attention over the weekend as I searched for clues to the next market fuse. The first was a technical observation as I flipped through the papers sniffing at the general tenor.

Broadening the aperture on the lens with which we watch the market, we see some potentially positive "reverse dandruff" formations in the S&P and INDU, which would "trigger" with moves through S&P 950-55 and Dow Jones 9K, respectively.

I would warn that, just as the downside dandruff didn't trigger a week ago, we must be equally aware not to anticipate breaks the other way.

Click to enlarge

Click to enlarge

The second is psychological. Conventional wisdom last week was that in the absence of government assistance, CIT would be fitted for a toe-tag. Hand raised here-I simply didn't see a solution-and this morning's announcement that they secured a $3 billion rescue loan (at 10.5%, mind you) is on the margin constructive, at least for the time being.

I offer these thoughts with a grain of salt and a shake of common sense. I believe there are numerous CIT-types out there that pose tremendous risk to the system. In my continuous attempt to see both sides, however, I offer this food for thought. Perception is reality, particularly when mixed with powerful agendas and performance anxiety.

The bottom line is this. Last month, a Minyan wrote,

"Toddo, remember five years ago when you said your single best thought would be to short tech and financials, buy energy and metals and open a taco stand in Costa Rica? Do you have similar conviction on any such thoughts these days?"

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