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A Seismic Shift for Financial Markets Looms Large


The conditional elements of readjustment slowly takes shape.


At the beginning of September, as the tape tickled S&P 1050 and the mainstream media had their depression panties in a bunch, we offered the following thoughts:

"While it will take years to fully flush the system and cement a legitimate foundation for future growth, I've become open to the notion of a counter-trend rally given the mainstream merchants of gloom and doom. This particular lift, should it occur, will again litter the landscape with false hope and empty promises before the cumulative comeuppance returns to roost.

How far can it go and how long will it last? Dude, if I knew that, I would already own the Raiders and move their training camp to Denver just to piss off the Bronco faithful. Since I don't have a crystal ball, I can only offer my best estimations through a stair-step technical lens. The first zone is S&P 1080-1100, followed by S&P 1130-1150, and then perhaps S&P 1200."

That's not a victory lap, that's not how we roll and even if we did, I missed much of the move as I was on the left coast for (mostly) business. I've circled back, however, for two reasons: First, it continues to provide a risk context for our current journey and second, it demonstrates the distinction between the destination we'll arrive at and the path we take to get there.

On Tuesday, we conversed with Hoofy and Boo as they stated their respective cases. There were strong observations from them both as you might at expect. We've learned through the years there's always a bull case and a bear case and the residual grist is what you read about the next day in the newspaper. To truly get it, however, you need to see both sides.

I will again say I respect the upside; buff corporate credit (the potential for further squeeze or, conversely, asset allocation), improving psychology overseas (perception is reality), and percolating performance anxiety (proxies include Google (GOOG), Apple (AAPL), Baidu (BIDU), and Amazon (AMZN)) suggest unfinished business on the upside. Toss in the motivated government agenda and a pocket full of stimuli and you can see why some bulls are psyched.

I've been trading for twenty years and writing for more than a decade. Over that stretch I've had some snazzy calls and others I would just as soon forget. The common thread was ingrained honesty; I put it out there, for better or for worse, with hopes that sharing the process itself lends utility at some level. And while I rely on an assimilation of our four primary metrics when trading, there were times when intuition and hairs on the back of my neck proved prescient, much like the hours before The Flash Crash.

With that in mind -- and full disclaimer that my workload has never been heavier as I juggle multiple projects into year-end (so maybe it's just me) -- I would be remiss if I didn't share that my antenna is vibrating.

It started last weekend with a disturbing dream about massive bears and it weighed on me all week. While some of you view this as nonsensical voodoo, I'll expressly state that I not only believe in intuition, I've come to rely on it. Old school Minyans understand what I'm talking about.

I don't profess to know whether it'll again prove true. As I've said, there have been times it was freaky in its accuracy (I didn't sleep a wink the night before 9/11) and others it proved to be a false alarm.

As I sat awake at 2:30 AM this morning -- I didn't go out, I just couldn't fall asleep -- and "Crash" howled at the moon, I decided to share these feelings with ye faithful. (My therapist told me communication is the key to a healthy relationships, or at least that's what I heard before she ran out to see her therapist.)

Take it for what it's worth, which might not be much. I do, however, feel better for getting it off my chest. With the bears scared, growing uniformity of a rally into quarter-end, and wars of words erupting between the US and Iran and China and Japan; something funky is in the air. I don't know how social mood is around you but I can tell you it's been particularly prickly on my particular path (not just NYC, but the West Coast, Florida, and other cities I've recently traveled through).

It reminds me a bit of the 'view I did at the end of 2006, when I offered that my biggest concern was that the DJIA was at all-time highs but nobody really felt it was at all-time highs. The same can conceivably be said today as the S&P is up 70% since the March 2009 lows but nobody feels particularly flush. In fact, I would argue that both patience and positive thoughts on the aggregate are going the wrong way.

Social mood and risk appetites shape financial markets and while I view The Great Depression as a framework for optimism, we would be wise to remember that it was an era rather than an event. It took years, not months, before ultimately manifesting through geopolitical conflict.

I was the most bearish guy in the room for a few years leading up to the financial crisis but take me at my word, I look forward to being the biggest bull in the room. The reality is that by the time I am, the pushback will be palpable (much like it was in the Spring of 2009 when we layered into exposure for a trade in February, about a month -- and 15% -- early). I will simply say this: when we chew through the other side of the storm -- and we most certainly will -- those who proactively prepared will be the torchbearers for future generations.

Our goal in the 'Ville is to make sure you're among them.

Good luck today.


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