CheapIV.com

Week Ahead 7-6-2010

admin on 07 6, 2010

I hope everyone had a nice holiday weekend.  I find that I do more running around then I would like, but it is nice to see friends and family.  I spent most of my day yesterday doing  “chores” around the house because the market was closed.  It is nice to cross a few things off the “to-do” list.

I am writing this on Tuesday morning so I have the luxury of seeing that the market has rallied along with Europe and Asia. Europe is rallying mostly on that fact that banks bid some €88 Billion on the ECB’s Fixed Term Operations.  Last week sold off because the ECB auction failed to raise the €55 Billion and only raised €32 Billion.  The ECB must have called an emergency meeting to the participating banks to stop the bleeding.  The use of the ECB’s deposit facility spiked from €232 billion to €246 billion overnight as well.  So the funding is good, but the spiked in loans is concerning.  We know how to roll though, just take the good news and shout it from the roof tops!

I hope that we can continue this rally at least up to a 50% retracement of  our previous move.  We will most likely have some resistance in the 1040-1050 area on the sp500 from the bottoms in late may and early June.  If we can blow through them, then we should see a nice pop to 1072 quickly if the institutions can keep the shorts at bay.  The 1070 marks the 50% retracement and it is also where we dropped from on 6/29.  This would give us a theoretical momentum shift to the positive.  This does not mean get bullish…just a simple cross of a retracement line. The one thing that we do want to see is the market close near the highs for the continued strength.

There is not much to get bullish on, even if the shorts are squeezed above the 50% retracement level.

Unemployment rate at dropped to 9.5%…but we know how this will pan out.

Interest rates are incredibly low and not spiking any buying so how much lower can they go? 1% on a 30 year rate would be nice.  I don’t think our society could handle rates that low.  We would have to have a significant break in correlations of the savings rate and the mortgage rate.  The government would have to be the sole lender because banks could not handle this low rate for an extended period of time.  That is based on the sole fact that the Fed/Treasury will keep rates at zero for any extended period of time.

Housing/foreclosures are still horrible.  Commercial RE is becoming a significant drag on smaller banks and we will see the FDIC go into hyperdrive in the 2nd half of this year.  They are already broke and will have to hit their emergency line of credit from the Fed/Treasury by year end.

EUR/USD is rallying with renewed love of the ECB fixed rate bank love.  This may continue for a few weeks in a new trend as long as the weekly ECB auction are filled.

Gold has seen a nice sell off after hitting new highs.  Rumors are floating that the central banks are again stepping in to sell theoretical paper gold with no actual to show for it.  The CFTC fails to curtail this mainly because they have no bite when going against the Fed.  The paper monsters will continue to be able to manipulate the markets until buyers demand the actual and the truth is revealed.  Silver theoretical shorts (paper monster) has even more control and can manipulate the market at will.  This is why Gold made new highs, but Silver did not.

Volatility spiked as we said a few weeks ago to buy the dips in the VIX.  As more negative news comes out, we will see continued spikes.  Let’s hope for our long term portfolios that we can settle into a consolidation period where vols come back down to lows.  Unfortunately, this will not be the case.  There are to many overwhelming issues for our economy to handle and our current government is hell bent on adding more debt to our already out of control deficit.

States are broke.  States are looking for handouts from the federal government and they are most likely not going to get it.  Some have stopped paying their bills like Illinois and some are considering bankruptcy as an option.  This just hits home how hard pressed we are and there is no sign of things letting up.  Please don’t believe the talking heads on CNBC, do your own research in your own neighborhoods.  Are housing selling? Are they buying from a family or buying from a bank foreclosure?  This mess will takes years to clean up, don’t be fooled by short term stats.

A reader asked for an update on the hedger section to the current market, so I will update that with another example.  I will also add in my results of the long weekend trade in the How I traded it Section.

Have a Great Week !

Ryan