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October 28, 2007

Eyes Wide Shut?
by Gary Tanashian

If there was any doubt about the true nature of this market and this financial system, there should be none now. The market reversed higher on rumors that the Fed planned a rate cut and then zoomed even higher on Mister Softie's quarterly results and some happy talk by Countrywide Financial. Bulls are desperate to keep the drunken party going and perhaps they will with the likes of GOOG, RIMM and AAPL - fine companies all - leading the way. But there is one problem for the bulls however; this was all in the script. Reference the note from last weekend written as those slap happy bulls were being led to a short term mini-capitulation by the major financial media and its constant harping on the anniversary of 'The Crash of '87'. As noted on the blog, I covered the majority of my short positions by the close on the 19th for good profits - when this dream machine gives you profit as a bear it is advisable to take them because hope is a powerful aphrodisiac for this market - and then covered the final position for no gain upon seeing the "whites of their eyes" along with a glint of rampaging greed.

As noted, there was little chance that the most recent leg down was going to be the big one and instead, it was just more manic behavior by the alternately greedy and fearful bulls. Now we witness a quick reversal to the opposite pole. Do you think this is healthy behavior? I took new short positions this past week with the assumption that our scenario (support and a bounce to noted resistance) would hold. We are there now but to complicate matters we have a Fed that is being seen as the embodiment of everything we thought we knew about Heli-Ben to begin with. It appears he will err on the side of rampant liquidity creation; a luxury afforded him by the something-for-nothing fiat regime in force throughout his academic career and which he apparently does not question, along with perhaps 90% of the public and official sectors.

Without further delay, on to some charts. First up we have the S&P 500. In last week's note the Dow was shown. Here we take a look at the broad S&P 500. Support at 1490 held with no problem, except in the minds of manic and emotional bulls. But now we watch resistance at 1540, a weekly close above which would get me looking for the exit signs on my short trade (SDS ultra short SPX) on this index. But again, there is nothing here as yet other than a predictable bounce and some still turned-down momentum and trend indicators for the bulls to hold onto. The bulls refuse to loosen their grip on Dr. Bernanke's punch bowl. This is one FOMC meeting that is very important in that it could well decide whether the broad market rejoins other assets in blow off mode. But if that committee ever grows a collective backbone and at least acts like it cares about the US Dollar, watch out below. In other words no rate cut = no continued party (in the short term) for the bulls. In the meantime, along with the bearish momentum indicators on the chart the bulls face a still-bullish (bearish for the markets) VIX, possible double bottoming long term treasury rates and a put/call ratio 2o day moving average that appears to have bottomed and is turning up (.94 exponential and .90 simple).

The next chart I would like to look at is the NDX, of which I am short via QID (ultra short QQQQ). This is a chart that kept me tempered on the short side once I saw that inverted head and shoulders formation beginning to form (those who cared to open their eyes could see what the bulls were up to back in early September). And here is a chart from mid September that clearly shows when the bulls took control as they held the inverted H&S neck line. That is the 'whites of the bulls' eyes' if I have ever seen it - a glint of greed and fury that would not be denied. But the formation has expressed itself to our target and is forming a small, tight reverse symmetrical triangle, which being of modest duration is not cause for any great bearish projections. In fact, I would be happy to get the two noted gaps filled and then go back to a more routine risk management regime (after all, I am primarily short the market to protect gold and silver miner positions for which the macro becomes better every time Bernanke's backbone looks a bit rubbery) as the performance of some of the captains of the NDX like Google, Apple and R.I.M. is very impressive. I also took a new long position in Texas Instruments (TXN) on the day it was torpedoed, as owning this semiconductor (I am aware the SOX is bearish) company is akin to holding a bit of relative value against being short an index of high fliers. It should be noted however that if this does indeed whip itself into a bull frenzy/mania, the high fliers are likely going a lot higher relative to the likes of TXN. But until the bulls show me the whites of their crazy, lunatic eyes, I'll hold short the index here. The whites of their eyes would likely be a break above the top line of the reverse symm-tri.

Next up is oil, another asset rising in bullish fury but which is in reality likely another manifestation of the sacrificial status of US Dollar. I am bullish on oil (and any other precious commodity) for the longer term, but folks, this thing is rising now in a furious and desperate speculative environment. In my book the rise in stocks, oil, the Euro... they are no different than what is happening in China, and what is happening in China is a bubble. A bubble that I have shorted - in very modest doses - of late. I think the US Fed's true nature has been exposed; they simply cannot wait to save the day for asset owners and leveraged risk takers at the continued expense of savers and non-speculators (if you own what you think are sound mutual funds but haven't gone through all their holdings with a fine tooth comb, you but you are a speculator - and a risk taker). People managing other peoples' money tend to go for the gusto; go for the performance. But sometimes performance and sound risk management are mutually exclusive. But back to oil; the goopy stuff continues to frustrate me as a good chunk of my investment stance is predicated on oil topping out and/or declining (like any energy-dependent business, the gold miners do NOT like higher oil [edit: or more accurately, higher oil vs. their product, gold]). Biiwii.com guest writer Bob Hoye's Institutional Advisors have been constructive on uranium vs. oil, and as far as energy goes, my few holdings are indeed in the u₃o₈ sector.

The airlines have not yet gotten the memo and remain a bearish divergence for oil as long as the short term uptrend remains intact. I am long JBLU and LUV until such time as the XAL breaks down. Painful as it has been, the grind continues and I remain bullish until the chart tells me not to be. As noted on the blog, this Airline trade has been a grind. But that is the life of a bottom feeder, which in trading practice I tend to be (as opposed to a momentum or new highs breakout trader). Patience and ultimately having to possibly admit I was wrong are part of the equation.

Next we have a chart for gold, a traditionally counter-cyclical asset that is either aboard the speculative blow-off trade or is simply biding time as it prepares to decouple from all the other nonsense on fiat planet (think Euro). But if the Dollar ever catches a bid - and catches the multitudes of Dollar bears on the wrong side of the trade, gold will receive one of those hard whacks that its ongoing bull market is noted for. I had projected $900 off of an ascending triangle break but a symmetrical triangle works as well or better and targets the same level. This is among the reasons I hold my core gold stocks no matter what.

The gold bug camp appears have a lot of people who consider it healthier for silver to lead the bull market in precious metals. But gold is the 'monetary' metal and its real bull market is and has been marked by its enduring value in the face of the wholesale compromise of global fiat currencies. Again, I would like to emphasize the value that Bob Hoye and fellow Biiwii.com guest writer Steve Saville (there are others I am sure, but they are a minority) have provided to those willing to open their eyes - as they in my opinion correctly analyze the dynamics of gold as counter cyclical and counter confidence and the importance of the gold/silver ratio in divining whether we have a real gold bull or merely a rising component in the commodity complex. As long as broad market participants choose to believe all will turn out well, Google can make them rich and silver is going to $100 any time soon, then gold will not distinguish itself. I am not bearish on silver by any means. But in a contraction environment, which I believe will persist, I am less bullish silver than gold. Our often-watched gold/silver ratio remains in an uptrend. But that fact and others, like the bullish stance of the Yen are merely inconvenient and boring details as the bulls prepare for a hoped for next leg up in their fantasy where an all powerful Fed actually can micro manage assets of all kinds to the inflationary heavens and a certain despised debt note to the gates of hell.

But what if the GSR continues upward, the Yen continues upward, long term treasuries do not make a lower low and the manic whites of the bulls' eyes once again turn yellow? This is not a doom and gloom forecast, but it is best keep your feet on the ground, understand the risks and proceed with your eyes wide open. Money is scared right now and it is stampeding into the hottest plays it can find. But it is not sound money, it is just too much funny munny, created out of thin air and seeking to transform itself into something real and productive. Funny munny fuels private equity. Funny munny promotes stock buy backs, funny munny creates Euro and China bubbles. Some of the munny will manage to become money, first and foremost by denominating itself in gold. But also silver, oil and productive resources of all kinds. This munny will also hide in good, solid debt free technologies that enable the interconnected world we are heading toward. So you won't find me writing a total Armageddon piece. Look at it this way, in an age where the world's reserve currency has come under the gun and its major competitors are not much better intrinsically, this is a game of musical chairs and the time is now to have your eyes on the chair you plan to sit in. When the music stops you do not want to be stuck with the wrong 'assets' or obligations.

Secular changes are at hand in how we define 'value'. The above is TA piece that became a bit long winded (it's not the first time). I am interested in effective short term trading/investing and in fact enjoy few things more. But I always operate against a backdrop where I keep a sober eye on the macro framework. In a soon to come weekly letter, this framework will be kept in focus along with shorter term trends and trading ideas. If you are interested in joining me, watch the website, TA blog and Commentary blog for details.

PS: As if his ears were burning at the sound of the bubble talk above, yet another Biiwii.com guest writer, Clif Droke checks in this morning with his views on matter. Mr. Droke, while maintaining a differing perspective from my own as to the implications of liquidity creation, has been one of the most consistently correct analysts I have seen in recent years as far as calling the direction of what he would call a market and I might call a casino.

Gary Tanashian
http://www.biiwii.com/

Disclaimer: biiwii.com does not recommend that any trading or investment positions be taken based on views expressed on this site. If you speculate or invest it is suggested that you consult a financial advisor qualified in your area of interest.

Copyright © 2005-2008 Gary Tanashian

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