Friday, May 4, 2012

What A Day!

Before we discuss the market action and what is next, let me quote from some of my earlier posts. It seems that many readers do not really apprehend what is being said on a regular basis.

On 23rd April, I wrote: “What I find interesting is that we can consider it as test of previous lows which it did not break.  Now it should have a test of the previous highs, at least which is the theory. Only when that test fails and it reverses, we can short with confidence.”

On 24th April the heading of my post was “Last Bounce Coming?”

On 30th April I said: “It may not be a bad idea to start laying the defensive bets now onward….When the correction comes, it will be fast and furious and will not give us much time to take advantage. But at the same time, it is risky to front run, as I keep saying. So we will have to pick up sectors where there are definite weaknesses.

On May 1, I wrote: “Question is, have we seen the test of top today?  I am getting a funny feeling that we have. … Despite new high in DOW, NYMO did not go up much and is in that zone from where it can go up 25 handles but can come down 135 handles.”

On the same day we added defensive positions in our model portfolio which is absolutely free for the readers.

The purpose of quoting my own post is not to gloat but to demonstrate that the road map has been before us all along if we cared to read it with little love and attention.  Our defensive positions taken on May 1st  are doing fine and we plan to add some more on a bounce.

S&P futures were down some more after the cash market closed. But the biggest loser of the day was crude, down over 4%. Again, it was only yesterday that I wrote that Crude goes on sale in summer and I would like to short it.  We will see a bounce by Wednesday next week and maybe we will get a chance to add some short position on crude. I expect crude to reach around $ 101 by then.

Dr. Copper is another short candidate and we will assess the situation next week.

Now before we get carried away with the sell-off and start talking about the coming end of the world / Europe etc, let us pinch ourselves hard and remember that this is part of the plan. Stocks did not fall because NFP numbers were bad. It fell because the numbers were not bad enough for Bernanke to act on his own. If you remember me saying it again and again, Chairman is ready to catch us but we have to fall first. Buying stocks on a dip will not get us free money. The sell-off has got nothing to do with Spanish yields spike or Portugal going the way of Greece. It has got everything to do with more free money.

We have seen this tape played last summer but most of us do not remember it.  Only difference this year is how Bernanke will implement the lessons he learned last year. Because this is an election year, the powers that be are very concerned about the rising gas prices. And as we all know, the unintended consequences of last QEs have been rising commodity prices. So this year, they will try to keep oil prices under check while letting stocks rise. It should not be that difficult given the fact that $30-$40 of the crude price is speculative premium built by TBTF banks that run huge commodity trading desks. These guys will be under strict instruction to stay away from channeling the free money to crude trading.  That is another reason I think shorting crude would be a safe trade in summer.

Coming back to markets next week, I expect we will see a lower low on Monday but will see some bounce by mid-week. Such a bounce will still be a sell. I hope you have already got out of your long positions and are either in cash or little bit short. You have not missed much yet because more action will come in June. Stay tuned, stay nimble and trade safe.

Have a great weekend folks. Thanks for reading