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Trade the Markets 7-20-2009

admin on 07 20, 2009

Last week we focused on Meredith Whitney’s comments having generated a lot of uncertainty.  We weren’t sure ourselves exactly where they would lead the market to in the end.  We thought that there could be some “markup” followed by selling into that but we didn’t expect it to take a week.  We were looking for a few days or so of it but the market had other ideas.  The one thing that we were fairly sure of was VOLATILITY. And that’s exactly what we saw.  Most of the major averages closed up about 7% for the week.  It was very impressive in a manipulative sort of way.  We’ve been consistently noting that while there hasn’t been a clear trend during the summer in terms of direction, there’s actually been quite a bit of lively movement and thus tradable volatility. What we think happened was that the week before last brought sellers into the market as a result of the 2^nd head and shoulders neckline having been penetrated.  This brought fresh fuel for a short squeeze.  Then Whitney, a big name at the moment, comes out with the Goldman talk etc. and the manipulation that we typically see around necklines then takes on a new ‘roided up complexion and Viola!  We have a summer week of significant proportion that actually did deliver on the fireworks that we alluded to at the conclusion of last week’s comments.

This week we’re apparently supposed to bask in the afterglow of last week’s melt up that started from exactly where it had to technically.  Given the trend of earnings so far we’d expect the “positive surprise” bias to remain as such but we do have to note that we don’t believe all of this hype with respect to earnings in the least.  We’ve seen this act hundreds if not thousands of times and we’re not buying that all of a sudden the financials are really, legitimately “killing it” despite what is being reported. Some of them were the recipients of reality-cloaking “one times” and others appear to have reversed engineered the holy grail of trading systems and are applying it with high leverage to boot.  None however are making money the old, old, old-fashioned way by acting like simple, greedy bankers and lending. Which speaks to the economy and the markets.  If they’re not making it in a way that indicates that the economy is healing properly then what is so great about this news in a big picture sense?  Exactly.  However, if they need to make their profits from the markets shouldn’t we expect the volatility to remain since that’s the fuel for trading profits?  Well that plus inside information and the nearly $400 million worth of lobbying that Wall St. funded last year with essentially OUR tax dollars.  Yet some people still believe that comments like these exaggerate Wall St. law-writing influence!  Our recollection is that the last 2 weeks of August are typically the preferred choice for Wall St. vacationers.  To us that means about another month of summertime volatility if at all possible and with several earnings reports remaining, the potential for a healthy retracement of the bounce we’ve just seen, and with Cap & Tax and Healthscam still on the docket, we don’t think that there is a shortage of propellant. We’ll finish here by adding that last week’s rise may have been partially fueled by reports coming out of DC that suggest that Cap & Tax and Healthscam may not be on the smooth-as-glass trajectory that they once were.  Knowing that both of these items are effectively taxing programs that will affect all consumers once the “pass throughs” are “passed on”, we believe that the markets were legitimately hopeful to a degree and that may have aided last week’s cause.

We continue to add to the number of major issues/problems that are mounting these days that the mainstream media refuse to cover as usual. The California and European banking issues that we’ve touched on in the past are only moving closer to the flash point.  At some point we’ll look to publish a comprehensive list of all of the headwinds that are out there but we are fully aware that these will matter little to the Wall St. crowd until they are forced to confront them.  Therefore we’re staying in the blowin’ in the wind camp.  The prevailing winds have shifted from side to side a lot over the past few months and we expect no change in the short run.

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The Technical Picture:

This chart is labeled and has accompanying commentary within it.  Our intuition tells us that this was the boys doing what they do best:  Using the convenient news to rake pattern traders and those expecting a correction over the coals.  The volume levels suggest less than impressive buying or adding by institutions but this is a wildcard at the moment considering that we’re near the Heart of the Summer trading at the moment.  Assuming as we did in our comments above that trading profits are paramount, nothing can be ruled out volatility-wise despite our macro-picture based cynicism.  Another stage of what would be an epic short squeeze could trigger if the head is blown through and a retracement could easily occur given the slope of last week’s yeoman’s work by the boys.  We’re trading it that way until we have greater technical conviction.