The Market's Persistent Uncertainty
Markets around the world attempted to respond to Fed injections but the reality is that many of the best and brightest funds are in trouble and down on the year.
Is it the fingers, or the brain that you're teaching a lesson?
Oh, can't tell you how proud I am,
I'm writing down things that I don't understand.
-Black Math (The White Stripes)
"I've got blisters on me fingers."
Each generation imagines itself to be more intelligent than the one that went before it, and wiser than the one that comes after it.
Seldom does the market thread the needle and hook the shorts as it did on Monday's open and then let them off the hook so quickly, unless there is serious liquidation backstopping the bears. And as a serious change in character: the back of the sell-the-rally mentality has not been broken. It has not even been bruised.
As I sat at my desk Sunday evening, eyeing the S&P futures up as much as 19.50 points on Globex (after a sloppy run off on Friday's close), I prepared to have my face ripped off on my shorts, pared down as they were. I thought to myself, "This is where the jam job begins on the heels of last week's massive Fed intervention." Yet the bulls snatched defeat from the jaws of the bear.
Click here to enlarge.
Markets around the world attempted to respond to Fed injections but the reality is that many of the best and brightest funds are in trouble and down on the year. Consequently, every rally attempt is viewed as an opportunity to sell.
With risk managers assuming a refreshingly novel role of actually managing risk, every rally must be sold: it's a case of machine bites man, man bites machine. No one wants to be a hero with financial tomahawks zipping through the air lest they lose their scalps or worse, their jobs.
If Wall Street doesn't like uncertainty, it abhors chaos. Although the wagons may have been temporarily circled, it seems no one can positively, absolutely connect the dots according to the brave new world of Stat Quant. It seems no one can truly explain the DNA of some derivatives' incestuous ancestry and the havoc their mutated offspring may provoke. No one wants to be a hero here: where once financial pioneers staked claims, now investment bankers see the plains littered with the bodies of pioneers. No one wants to get trampled by the march of the machines, the regime of the Black Boxes goose-stepping through Tape Town.
No one wants to hazard a guess: the silence of the wolves is deafening. The foxes who guarded the hen house may have devoured the Golden Goose and are puking up Goldman (GS) Eggs.
If the smartest guys in the room lose $1.4 bln in six trading days, what does that say about Joe Hedge Fund? If the most powerful platforms, the best brains, and the most moolah gets crushed, what does that say about the propensity to panic on the Street?
Algorithms? Here's an algorithm for ya. Heightened returns = heightened risk.
Or a law of physics: heightened risk squared by leverage, divided by hubris, multiplied by the diameter of other people's money is the circumference of what could become a real conundrum for the real economy.
Despite Monday's retreat, the S&P still seemed to stabilize and back and fill following Friday's test of the low. Another day of choppy trade and 'time on the side' without violating the low for the move at 1427.40 could see another rally attempt by Wednesday, August 15.
Click here to enlarge.
On Monday the S&P found resistance at the underbelly of a Live Angle and broke a short-term rising trendline on the close (A). However, recapturing this trendline and 1462 could see a spike toward 1480 (B).
Interestingly, August 15 is the date when funds must fess up, notices for complete redemptions. If funds have been liquidating in anticipation of redemption notices, it may play out as a case of buy on the news---albeit, a rally may be short-lived, although sharp, in my view.
If stocks resist selling pressure into Wednesday, on this cut off date, counter-intuitively, the market may rise: if it's not going down on Wednesday, it may go up.
On Friday, the S&P came within two points of its low for the week. While the bulls suggest this is a successful test, the bears slant is that this simply builds up sell stops at this level. Moreover, the S&P made an outside up bar on the weekly chart last week again, underscoring the importance of last week's low. A break of last week's low could start another wave of selling that would snap a three point rising trendline on the weekly chart from June '06, issuing a Rule of 4 Sell Signal. Such a break would more than likely in turn test 50% of the range of the June '06 low to the July '07 top or 1387 S&P. A break of this mid-point should coincide with rapid downside acceleration.
1387 S&P happens to coincide with the close of the low bar day on March 14, "proving" the geometry and importance of this level.
There is a temptation to accept the notion that because the market has "stabilized" for a day or so and that the Fed has intervened that calm has reclaimed the day from panic. However, it is important to remember that the greatest volatility is usually at the end of these kind of moves.
I suspect we ain't seen nothin' yet.
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