Sitting on the Widow's Peak
Edging towards the 2009 inflection point.
A smart man once said that when trading financial assets, you can game the direction or nail the timing but you'll rarely capture both.
We asked last week whether investors would again be wise to sell in May and go away. Central to that discussion was the observation that should the market mount S&P 875-the level at the time-we must respect the potential for further gains in the near-term to suck in those standing on the sidelines.
That script has indeed played out, which is all the more impressive given the steady stream of negative news. From the stress test postponement to the swine flu contagion to the Chrysler bankruptcy, there were plenty of excuses to take profits following the spirited sprint off the March lows, proving yet again that the reaction to news is more important than the news itself.
I offered in a recent interview that when the dust settled at the end of the year, 2009 could look like a "W" and we're currently dancing around the widow's peak. The natural question is therefore begged: where are we on the rollercoaster and how far away might that apex be?
Continued strength remains within the probability spectrum, particularly if the greenback meaningfully declines. That's why we've steadfastly monitored the other side of our Wishbone World, a scenario where we jump the shark towards hyperinflation and anything denominated in dollars rallies on a relative-albeit not absolute-basis.
Through a technical lens, there are a few observations of note. The market has room to run in the context of the lower highs that define a bear market. The first test will arrive around S&P 950, which is dual resistance in the form the 200-day moving average and the one-year downtrend. The dollar, for it's part, would "break" below DXY 83, potentially paving the way for higher asset classes.
The Other Side of the Trade
We must remember that a cornered animal has little to lose. The Federal Reserve and Treasury Department have thrown a lot at this market and seem intent on inventing mechanisms, printing currency and further diluting the definition of free-market capitalism. I learned the hard way in 2003 to respect those agendas and it's a lesson I carry with me to this day.
The flies in the sustained recovery ointment are two-fold, which is why I'm of the view that this is a bear market bounce. First, rampant inflation requires legitimate demand for goods and services coupled with the healthy velocity of money, neither of which can be artificially manufactured by the litany of government acronyms or tough talk from the Beltway.
Second is the unavoidable reality that the cure for an imploding debt bubble isn't the inducement of more debt but rather the destruction of it. That is the single greatest flaw in the "all clear" thesis-we're swimming backwards against a growing tide of credit dependency and the cumulative imbalances that have built since the turn of the century.
We were never allowed to take our medicine following the bursting of the tech bubble and the gains thereafter were a function of credit induced growth rather than legitimate economic demand. They were masked by the falling dollar and skewed by the spending habits of a slimming margin of society, which was lost on most Americans but not on foreign holders of dollar denominated assets.
The Grand Experiment has since been exposed through time and price, which is on the margin constructive. While admitting you have a problem is the first step towards solving it, it cannot be fixed with the same "remedy" that caused the problem in the first place. I'm an optimist by nature but a realist when it comes to financial markets and my motivation in sharing these thoughts-and the genesis of the creation of Minyanville-is to simply to affect positive change through financial understanding.
With that in mind, a word to the wise: When in doubt, wait it out. If opportunity cost is our greatest loss, we should consider ourselves fortunate. There will be easier trades and better days in the years ahead. Our goal is to achieve the financial staying power necessary to prosper when they arrive.
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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