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Todd Harrison: Argentina Rocks US Stocks


Currency markets are roiled as the peso takes a hit.

Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

The "reason for the rhyme" crowd is piling into the Argentine peso as the downside catalyst for today's stock market plunge. Lest you missed it, it is changing hands15% lower (against the US dollar) than it was at this time yesterday.

Why? The Argentine central bank scaled back its intervention earlier today because its international currency reserves had fallen to a seven-year low. Inflation in Argentina is currently running at 28%, year-over-year.

Does -- and will -- this matter to the forward path of financial markets? The bulls, for their part, believe Argentina is akin to Cyprus (and won't have lasting implications for stateside markets). The bears, or what's left of them, are thinking more along the lines of Greece.

We know this: There are only so many release valves in the global market machination, and currencies are one of them. The engine has been operating at full capacity for five years (if not longer), and something -- other than social mood -- was bound to spring a leak. It remains to be seen if this latest dynamic will be contained, or if it will knock over the next domino in our interconnected world.

As recently discussed, there aren't many people positioned for a downside trade, so risk management is essential as we edge ahead. Someone once said, "Good traders know how to make money, and great traders know how to take a loss" and I'm reminded of that as I watch today's action.

There are a lot of moving parts, so let's segue into some Random Thoughts:
  • It's looking more and more like Justin Bieber is the latest short-sale of an American icon, even if he's technically Canadian. I'm not the type to kick someone when they're down; I'm just looking at his fall from grace through a socionomic lens.
  • The CBOEO EX Implied Volatility (INDEXCBOE:VXO) is up 15% and once again a teenager, although we're far from levels typically associated with fear.
  • The chatter continues following Mohamed El-Erian's departure from PIMCO, with some pointing to his performance, or the stress surrounding his performance, as a key catalyst for his decision. Only Mo knows, although I will say that sometimes the best people don't always make the best fund managers. I have little doubt that he'll do just fine in his next professional step and wish him well in his endeavors.
  • There was a moment last night, after eBay (NASDAQ:EBAY) reported, when I had to put a cork on my fork. After spying the chart below earlier this week, I had some Feb 60 calls teed up at $.35, lest the pennant formation flagged higher. I didn't pull the trigger because, 1) the expiration was too tight and the strike was too high, and 2) I didn't have an edge other than the potential pattern. On cue, the stock traded to $60 following yesterday's news that Mr. Icahn is involved -- but the stock came in (read: for sale) when eBay resisted a PayPal spin-off. Why do I bring this up now? If the stock can hold above the pennant, vols will get sucked from the name (post earnings) and an opportunity may emerge for those interested in the name.

  • When 2014 kicked off, we asked, "Will China emerge as the downside catalyst, either through geopolitical discord, economic upheaval, or a seismic structural shift?" I've included a 10-year chart of the Shanghai Composite below to illustrate, 1) the post-bubble malaise that is now entering its seventh year, and 2) the importance of the technical levels that are approaching to the downside. If there was ever a time to reverse "the year of the dog," this would be it.
  • S&P 1800-1850 (INDEXSP:.INX) is the zone of importance for the broader market; the bulls will claim victory if, 1) the channel holds (they'll view it as basing, and a digestion of the 2013 gains), or 2) it's broken to the upside. The only scenario that will raise their antennae will be if the tape fails below S&P 1800 and the "buy the dip" mentality isn't rewarded.
  • Gambler's Fallacy? Perhaps, but after five years and a 177% gain in the S&P, they've earned the benefit of the doubt which, paradoxically, is the same mindset that sets the stage for an "off-sides."


Twitter: @todd_harrison

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