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Monday Morning Quarterback: The Punch Bowl, Part Deux!


A side step look at where we've been, where we are and where we are going.

The 2009 Financial Reality Show has been nothing short of surreal.

We sidestepped cataclysmic dysfunction in the first quarter.

A furious chase followed, taking the S&P back towards the flat-line at the halfway mark.

The third quarter began with a dip and morphed to a rip, a measured move almost suspended in disbelief.

The fourth quarter script is still being written but it promises to be chock full of action and sprinkled with surprises.

There's most certainly a lot going on; liquidity galore against cumulative imbalances, a familiar tale yet ripe with twists.

It's reminiscent of 2003 in many regards, the market carrying the weight of an unsure world as corporate credit improves and tension mounts.

You know how that movie progressed; after the eye-popping rally, the S&P spent the following few years meandering before the blow-off ascent began in the summer of 2006 and exhausted itself in October 2007. From there, all hell broke loose.

As it stands, following one of the most gripping rallies in history, the S&P finds itself precisely where it was at various junctures in 2004, 2002, 2001 and 1998, the dilution of the dollar notwithstanding. Global appetites for risk and tolerance of policy isn't static, however-it becomes a question of magnitude and a matter of degree.

One could argue we've witnessed a massive shell game, with wealth transferring from one perception-and pocket-to another but alas, that's a discussion for another time. We often say every journey is a series of steps and each stride must be stable.

With that, it's time to tie our shoes.

The Metric System

An assimilation of our four primary metrics, while perhaps cursory, helps paint the landscape as we edge towards year-end. To top-line, and in order of perceived importance, we find:

  • Psychology: Global perception is that the G-20 is leaving the punch bowl on the table and perception is reality in the market, until it isn't. Faith in the system and avoiding a crisis in confidence is the single most important task at hand for policymakers around the world. Market participants remain reactive, with the buyers higher and the sellers lower, as socioeconomic angst looms large on the horizon.

  • Structural: Massive amounts of corporate credit have been "rolled out," much like we saw in 2003. As credit was the culprit last year, we continue to respect the mere functionality of capitalism, if we can still call it that. "Asset class deflation vs. dollar devaluation" remains in play, which has effectively outsourced policy to foreign holders of dollar denominated assets.

  • Technical: We spoke about layered resistance in the S&P last week and that will be challenged today. S&P 1075ish is a back-test of the March trend-line and S&P 1120 is the downtrend from the October 2007 high and a 50% retracement of the entire decline. Keep in mind technical analysis is a better context than catalyst, as evidenced by NASDAQ 2000, which was a similar set-up for tech before it broke through and subsequently tested twice.

  • Fundamentals: Largely in the rear-view, both in terms of the actual catalysts and with regard to what we've learned. Earnings beat estimates for the most part, although many will point to cost cutting, channel stuffing and currency gains when lifting the proverbial kimono. As the market is a forward-looking discounting mechanism, we'll need to see legitimate fundamental improvement to push past S&P 1120.

See Both Sides

On the retracement higher to S&P 1070ish on Friday, I nibbled on some S&P puts with an eye towards defined risk (as measured by the back-test of the March uptrend). I'm keeping a tight leash on that exposure as I continue to hit it and quit it into year-end.
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Position in S&P

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

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