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The Phantom of the Market


I won't pretend that all is well in the world or that the worst is behind us.

And in this labyrinth
Where night is blind
The Phantom of the Opera
Is there inside your mind

On the heels of a hellacious six week span, the bovine held their ground yesterday and planted seeds of a much needed "higher low." The ability to create a technical catalyst or, at the very least, hold the June lows is the first step towards putting this process of price discovery behind us. As anyone within spitting distance of the mainstream media can tell you, it hasn't been the best of times for financial assets. Stateside Equities, Europe, Asia, India, Stockholm, metals, crude--it's synchronized swimming at its finest, monolithic movement that has been a mirror image of the U.S dollar. I've long opined that our Federal Reserve must make a choice between a strong dollar or firm asset classes. That script is being screen tested each day as we sift through the other side of globalization.

While I was quite cautious into the May 10 FOMC meeting, I've been buying dips in the metal and energy complex and balancing my portfolio with a spate of autumn puts in the financial sector. For those with an active eye, I've set my short side "stops" above BKX 108 and XBD 205, which is technical resistance for the banks and brokers. The risk to that approach is that charts take a back seat to structural forces when the wheels fall off the wagon. Indeed, if we're to assimilate the four primary metrics of fundamentals, structural, technicals and psychology--in the context of a bubble of hedge funds chasing quarter-end performance--it's quite possible that the path of maximum frustration will flummox those reliant on traditional trading approaches.

I won't pretend that all is well in the world or that the worst is behind us. I'm simply looking to shake shekels from the tree and pocket them before the Phantom returns to his rightful home. Who is this Phantom I speak of and what does he want? For me, it's a simple yet unpleasant answer, the type of discussion that nobody wants to have until we actually see his shadow. He is Deflation; painful, all-consuming, watershed Deflation. While the mainstream media continues to monitor inflationary pressures---and yes, this exists in some corners of the economy--this particular Phantom won't discriminate between victims. The weakness we've seen is the probability of this demon being priced into the collective mindset.

To make intelligent and proactive financial decisions, we must assimilate the entire spectrum of potential outcomes. With all the misinformation, misdirection, confusion and doubletalk prevalent in so many circles, it's no surprise that investors are confused by the world around us. I'm unsure of how, when or if the dreaded Phantom will emerge--or if he already has--but I, for one, prefer to prepare for his potential arrival. How, you ask, can we ready ourselves for the worst while respecting the likelihood that we'll toggle rather than tip? Capital preservation, limited (if any) debt and a mindful consciousness that by the time the answer becomes clear, the ramifications will already be priced into financial assets.

Trading, in its simplest form, is the process of capturing the disconnect between perception and reality. In the process, we must navigate conflicting data and allow for an ample margin of error. I've been sitting in the stagflation camp, which is to say that we're digesting simultaneous inflation (energy, education and healthcare) and deflation (plasma televisions, personal computers and cars). Inherent in that view is the notion that we'll vacillate between the perception of both which, ironically, will allow active traders to capture profits along the path. The risk, naturally, is that the crosscurrents of collective perception will capsize the delicate tact that facilitates the trends most financial players have come to expect.

We often say that the purpose of the journey is the journey itself. That's true in life and alas, it's true for those who have chosen to make a living in the world of flickering ticks. There are no easy answers in the process of real-time assimilation although, as we know, the answers will be obvious with the benefit of hindsight. All we can do--and what we must do--is position ourselves in a fashion that allows for the entire spectrum of financial probabilities. For if we've learned anything about the world around us, it's to expect the best while respecting the worst. Anticipating the latter isn't something anyone wants to recognize but it's a necessary evil that we ignore at our own risk.
Position in metals, energy, financials
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