The Markets Are Worn Out, Yet There May Be a Surprise Under The Hood
There is a high correlation with the 'risk on' trade and the Euro (FXE etf). To get a holiday bounce that will see the SP500 year end in the green Mr Market must force a Euro short squeeze. The 2011 year has been one of elevated volatility and traders have been swung up and down to see their positions evaporate, maybe Xmas week will be their last chance to catch a good winner.
For the markets to finish the year in the green the SP500 must close above 1250 (we are at 1219). To do so Mr Market must force the all time massive short position on the Euro to bank profits or a short squeeze.
Chart via ZeroHedge.com (COT as at 12/16/2011)
This last week saw the short positions on the EURUSD (FZE Etf) reach the same dizzy lows as May 2010 when the FXE pipped 120, but currently we are at 130. So why is the FXE at 130 and not at 120? This is because French and German banks are pulling assets home to support their busted balance sheets (stress test demands etc). This means they are selling foreign currency assets (ie USD, JPY, AUD, CNY, BRE) and buying EUR. How much more to go, who knows! The fact is that the Euro short positions is very crowded and any positive news could trigger a violent short squeeze (bullish for risk on) that could see the FXE jump to 135. Therefore watch out for central bank officials to pump up the Santa joy next week. If no short squeeze then a FXE at 120 is a real possibility. In the last two weeks there has had plenty of bad news for stocks and the SP500 has yet to plunged south, this resilience is bullish as maybe Mr Market knows the Santa pump up will be arrive right on time.
We read this chart as bullish, if 128 on the FXE holds. Sure the bearish sentiment may delay the FXE low for a week, but cycles and Gann Angle support suggest that a bounce (short squeeze) is on the table. The correlated risk on trade may just push the SP500 into positive green.
An important statistic is when the first 5 days of January was up and January as a month was up then the whole year ends up 95% of the time within this stage of the presidential cycle. This statistic needs a Euro short squeeze to prove true for 2011.