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Random Thoughts: Dangerous Curves Ahead!


Adjust your style to the market.

It's Turnaround Tuesday in the City of Critters as NYC prepares for a Giant parade.

I learned a few things watching the game on Sunday, not the least of which is to never order pulled pork airmail from Tennessee. The others? In lieu of the Oakland Raiders returning to glory, the second and third best Super Bowl scenarios are for a New York team to win and either the Denver Broncos or New England Patriots lose.

Let's just say I went two out of three, and paid for the third in spades.

From what I could tell, more than a few folks took off the day after the big game. Following Friday's big rally-one that caught me flat-footed before I covered up into the weekend-the tenor of the tape continues to act digestive as fund managers play ketchup with the averages.

I'll tell ya, I've traded multiple booms and busts throughout my 20+ year career and it sure feels like the mainstay averages are up more than 5% DJIA, 7% in S&P and 11.5% NASDAQ, respectively. If all market moves are defined by three phases-denial, migration and panic-we're seemingly in the last licks, at least for this move.

I've respected the potential that the tape trades to S&P 1360 since December 2011, when that was an outlier perspective. Now, as we edge into that zone, we've witnessed a 180-degree turn in the collective sentiment; the bears haven't only been clipped, they've been mocked in the process. There's no debating 2012 has thus far belonged to the bulls, but we would be wise to remember that 90% of the trading year still awaits us.

As a matter of perspective, the following fare was shared in my Ten Themes for 2012:

Financial asset performance will be dependent on policymakers. "Free" markets-those without government stimuli-will aggressively deflate. "Modified" markets-those with bearded socialism and/or nationalized assets-will act better, but arrive with profound costs and unintended consequences.

Through a pure technical lens, the "reverse head & shoulders" pattern in the S&P that we've monitored in Minyanville for the past month has triggered, which "works" to S&P 1360. From there, the European debt auctions will set the tone for global assets in the context of a secular bear market that has a few years to go before generational opportunities emerge in the back half of this decade.

While I've recently "tapped" the tape a few times to get a sense for the demand, it wasn't until last Thursday that I carried short exposure overnight-and paid the price. Still, profits reside in the ride ahead and the steady drumbeat of bullish prognostications, coupled with the palpable performance anxiety and extended tape (S&P +25% since October, +16% since November and +12% since December) has my ursine antennae reverberating as we meander through the minefield that is our newfound reality.

As of this post, I have not positioned in kind, although one could offer that a flat book (other than a placeholder in Research in Motion (RIMM) is tacitly bearish in and of itself. However, given my trading pad is by definition two-sided, I plan to watch the price action accordingly, keeping in the back of my mind that we've still got 25 handles in the S&P cash before the 1360 price target is achieved. And yes, given how "loud" this has now gotten in trading and media circles, I'm conscious that we'll likely not get there or blow right through it.

One stair-step at a time as we together find our way.

Random Thoughts:
  • Bank of America (BAC), Morgan Stanley (MS), Citigroup (C), Barclays (BCS) and other Wall Street titans have all cut overall compensation and many, in the process, capped the cash component to $150,000. That is going to put a pinch on everything from NYC real estate to luxury goods to the Hampton rental market.
  • I know few will shed a tear for those in this industry but know this: Many of these families were counting on cash bonuses to pay for their private school tuition and other debts that have accumulated throughout the crisis. Indeed, it feels as if The Age of Austerity will finally hit the financial community where it hurts most.
  • For those looking to bang with Boo the Bear, you might want to consider playing with "positive gamma" (or long options) as the VXO clings to a not-so-sweet 16 and the skew is to the upside. If you don't understand what I'm talking about, don't worry-that's why we're here!
  • In terms of timing, the best entry for the bears may well be when the Greek debt accord is finalized-when we would/could/should see a euphoric blow-off rally. Don't hold me to that-the market is dynamic and ever-changing-but if we get that without an upside pause first, I, for one, will look to unleash some hounds.
  • Finally, while I rarely (if ever) do this sorta stuff, the Wall Street Journal has extended its lead on The Other Side of Wall Street to 44 votes with nine days left! Help us out (if you like) and let's win one for the critters!

Twitter: @todd_harrison

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