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The Market May Be Speaking. Are You Listening?


Sometimes you can learn a lot just by watching.


"Welcome to the future. San Dimas, California 2688. And I'm telling you it's great here. The air is clean, the water's clean, even the dirt, it's clean. Bowling averages are way up, mini-golf scores are way down. And we have more excellent water slides than any other planet we communicate with!"
-- Rufus, Bill & Ted's Excellent Adventure

Trading is a delicate balance. We must respect the past, operate in the moment and cast an eye towards the future. The market is a forward-looking discounting mechanism and at the end of the day it's not what is, it's what's perceived to be that moves markets.

We recently touched on the fatal flaw of technical analysis -- that a financial vehicle is "better" higher (say, at Gold 1260, after the breakout) and "worse" lower (a few days later with Gold 30 handles lower).

The same can be said for our other primary metrics: fundamentals (news is always best at the top and worst at the bottom), psychology (lopsided sentiment is a contrary indicator), and structural (cumulative imbalances build until they break) are all inherently flawed when viewed in isolation.

That's why I like to assimilate the metrics and rank them on a trading totem pole. At different times, different metrics matter more. Currently, I would offer psychology takes top honors, the structural metric is a close second, technical analysis is next and fundies are bringing up the rear, although they'll step up in the coming weeks.

That's the traditional mix that sets the trading table. The trick to the trade is that the last few years have been anything but traditional. You don't have to be a card-carrying conspiracy theorist to acknowledge "free markets" are a lofty ambition and a shadow of their former self. There are a lot of hands in the current stand, which has morphed our once noble profession a quest for survival.

What's my point? Ah yes, the future. Take a look at the chart below, which is the S&P but it might as well be the DJIA or the NDX. Note the "left shoulder," the "head," and the forming "right shoulder." That's what technicians call a "head and shoulders" formation -- which has negative implications -- or as we like to call it in the 'Ville, "dandruff" (because we're quirky).

Click to enlarge

IF -- and this is a huge IF -- we traverse lower and again test S&P 1040ish, we would be wise to remember this chart. Why? Levels weaken with each subsequent test and IF that level breaks, it could be a cruel, cruel summer. In a way, a case can be made that the ability to hold that zone thus far is an ironic negative. If we didn't, a perfected right shoulder would have never formed.

Should the dandruff trigger, the impled target "works" to S&P 860, which is roughly 20% lower than where we're currently trading. How does one calculate such things? You take the difference between the top of the head and the neckline, and subract that number from the neckline.

Two thoughts of caution: First, never anticipate the anticipator when it comes to this voodoo that we do. I can't tell you how many times I slapped on risk through the last twenty years with the expectation of front-running the technical stampede only to see it never "trigger." Learn from my costly lessons. Second, even if it does trigger, it's far from a fail-safe guarantee. That's why I use the technical metric as a context, rather than a catalyst.

Random Thoughts:

  • Ever hear of Maywood, a small city in Los Angeles? Neither did I, but it caught my attention as they've laid off ALL city employees and dismantled their police force. Angela Spaccia, the interim city manager, said, "We will become 100% a contracted city." As the odds of an outright California default are 24%, I suppose it's not a shocker, although it's surely sad.

  • We often talk about the two pathways for the state of the states: upward taxation and/or austerity measures (neither of which is pro-growth). I figure we'll see a sugar tax, additional tobacco tax, and perhaps even gasoline tax. And so it's said, dude, I figure they'll eventually legalize marijuana so they can tax that too.

  • The longer we stay under BKX 50, S&P 1115, and Gold 1250, the more psychology will sour. The mission in the rain for Hoofy is to keep the tape above S&P 1040 into earnings season and hope corporate America dazzles. The concern, however, isn't this past quarter -- it's the back half of the year and the slower global growth scenario. The smarter folks I speak with don't believe a marked slowdown is priced into current levels.

  • Last Friday I tossed on a smallish S&P downside bet (in real-time on the Buzz & Banter) as we meandered around 1115. There are a few ways to trade that position, including "picking" (trading in between, covering, say, 20%) or rolling down stop-losses. Where you stand is a function of where you sit, dependent on your risk profile and time horizon.

  • Remember the trannies, even though it might be a bad visual. We flagged 'em on Monday as a positive development but they're quickly approaching the "oh no you didt!" level, which coincides with the (broken) downtrend line and the 200-day moving average at 4155.

  • Some Petty, 'cause that's how I roll.

  • Overnight sovereign spreads (said with a "serious" face) widened on the aggregate, with Greece now indicating a better-than-even chance of default. Banco Santander (STD) stood out as well, widening 10%, which jibes with the under-performance of Spain that we've been monitoring in the 'Ville.

  • Retail, which we've been keeping a wary eye on, is getting schmeised today. Target (TGT), Home Depot (HD), and Lowe's (LOW) trade like Punky Brewster.

  • Finally, mucho gracias for the well wishes yesterday as this old man turned 41. If there's one thing I've learned -- although I admittedly don't always remember to follow it -- it's to be mindful of the moments and enjoy the journey. We live in one of the most dynamic, influential, and meaningful junctures in world history. Every step we take helps paint the broader landscape so let's make it count. Let's do it right.

  • Good luck today.


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