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Monday Morning Quarterback: The Asterisk Rally


The bulls battle an expiration hangover.


Do you remember the scene in Good Will Hunting when Dr. Sean Maguire said to that damaged and defensive lad, "Look at me son, it's not your fault, it's not your fault -- it's not your fault!?"

That same psychology applies to today's trading environment; bulls and bears alike have struggled, with only the fleetest of feet able to successfully navigate the ever-changing market machination.

Let's leave 2009 alone for a moment; that, in and of itself, was a trying test. From the brink of a total system meltdown to the sharpest bear market rally in history, say what you will about the what, why and how -- the fact you're still here says a lot about who you are.

I read an interesting article in the New York Times yesterday by Paul J. Lim. Amongst the topics discussed were, "Who knew Europe's woes would shake the market?" and widespread assumptions the financial crisis passed, along with a shifting focus to "the creditworthiness of the governments themselves."

Other items touched on how "consumers aren't likely to go back immediately to their free-spending ways," and "If you don't expect something to happen and haven't prepared for it…that's when panic often sets in."

These threads of thought aren't shockers to Minyans but they warrant a mention as they seep into the mainstream mindset. We've been monitoring The Age of Austerity for years and diligently discussed how social mood and risk appetites shape the tape. As I wrote in July of 2006:

"Those of us who grew up on Wall Street wore CAPITALISM across our chest like a badge of honor. Meritocracy differentiated our existence and afforded us status in a white shoe world. The frenzy bridged those Benjamins to the digital age and migrated wealth to Silicon Valley and beyond. Once that ship sailed, fiscal and monetary agendas were implemented to prolong the modern day Jazz Age with hopes of avoiding the other side of that joyous ride. And in what many believe was the last hurrah at the Bubble Spa, home equity became the enabler of paper trades and happy trails. Yes, for some, life, or the perception thereof, has been very good indeed.

"Meanwhile, on the other side of the tracks, a different breed of reality emerged. Wage growth is stagnant, energy costs are rising, education expenses are escalating and our once proud manufacturing sector has been outsourced abroad. The affects of isolationism continue to sequester our relative global standing. When the going gets tough, as the counter-parties of our government obligations have recently shown us, the tough tend to take care of themselves. That manifestation wears many faces, be it nationalization of natural resources or a debasement from the dollar as the world currency reserve. We can pretend it doesn't exist but denial has never been a viable investment strategy."

Someone once told me that the only difference between genius and madness is acceptance; I suppose the same can be said for perception and reality.

Engine Room, More Scream!

At the beginning of last week, we paid homage to the bull case. While I traded around the short side -- reducing risk when we popped through S&P 1080 and tethering it back out into S&P 1100 -- I made sure to mention the rose-colored glasses currently fashionable in Matador City.

The bovine dynamic remains very much in play; the first phase of the decline (regulation risk), coupled with the second phase (sovereign scrutiny surrounding Greece) tanked the tape to the bottom end of the uptrend channel that's been in place since the March low.

Click to enlarge

Given technical analysis is a better context than catalyst, Hoofy needed tangible ammunition to blast the bears. His bullets included better than expected earnings (check), the specter of M&A (check -- Simon Property Group (SPG) last week, Schlumberger (SLB) and Smith International (SII) today) and concrete building blocks in the wall of worry (check -- although I continue to believe volatility levels, on the aggregate, are perhaps the single biggest disconnect in our midst).

A three dimensional asterisk should be placed on this rally, which isn't to say it'll prove true.

  • Volume has been anemic; high volume declines followed by low volume rallies are textbook recipes for failure.

  • Unforeseen expiration influences were in play and it typically takes a few hours (this morning) for that hangover to subside (read: dealers to "get square").

  • Finally, as per our steady thread, layered resistance resides in the S&P, with a cluster of pivot points in play between S&P 1100-1150.

I enter this fresh five-session set with a negative bias, albeit smaller than it might otherwise be due to looming unknowns, most notably the Government of Greece $6.8 billion 10-year bond auction currently floating around. Should this inventory place (and there is Keyser Soze level motivation for this to happen), we could see a sigh of relief, much like we saw when Dubai World seemingly found sponsorship.

I will leave you with one caveat, however. Greece -- and Dubai, for that matter -- aren't the problems, per se, they're symptoms of an entirely more sinister dynamic. I'm not smart enough to know when the cumulative imbalances will again "matter," but I'm seasoned enough to respect that they do.

Vibes on the Overseas Dynamic, Courtesy of Minyan Mike O'Rourke, the talented strategist from BTIG:

"The Greek Finance Ministry's report notes that the Central Government's short term debt at the start of 2010 was €30.4 Billion (note: total debt outstanding stands at €298.5 Billion, with an average maturity of 7.94 years). As we know, Greece sold €8 Billion of 5 year notes at the end of January. If the proposed offering of €5 Billion 10 years takes off, it should provide some breathing room. The weakening of the Euro reduces the U.S. Dollar amount of the obligations lower, and therefore could provide some currency flexibility attracting some U.S. investment dollars that otherwise would not be there.

"If there is any constituency that has a vested interest in the success of the Greek offering, it's Wall Street. Last week, there were media reports that during closed testimony, French Finance Minister Christine Lagarde identified 6 "Anglo-Saxon" institutions as speculating in Greek debt. There have also been allegations that Wall Street firms designed derivative strategies to aid Greece in hiding its true financial state. It is bad enough that Wall Street already garners the overwhelming majority of the blame for the irresponsible behavior of the past decade; they surely do not want to be tagged with the take down of a nation. There is also the simple fact that a breakup of the Euro will not be good for business. U.S. Banks have over $1 Trillion of reserves sitting at the Fed. It would be a case of "enlightened self-interest" to make sure Greece can sell debt without a hitch."

Random Thoughts:

  • Remember when mere use of the discount window used to carry a social stigma for financial institutions?

  • If you haven't checked out our latest Pop Biz segment on Mattel's (MAT) business going to the dogs, it's most certainly worth a look!

  • Are you interested in a wickedly snazzy, fully compliant community tool (for internal or external communication) bundled with (or without) Minyanville content? (if so, please click here!).

  • If producer prices increased more than expected and consumer prices decreased more than expected, won't that negatively impact the margins of corporate America?

  • Meanwhile, in the "disconnect between perception and reality department, the VXO is a teenager!

  • Amazon (AMZN) is the stock in the master beta realm to have a pink hue in an otherwise green pre-market tone. Something to keep an eye on as we can often learn a lot just by watching.

  • Good luck Minyans; let's hit this five-session stretch with moxie and mojo.


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