What Do You Think?

The market knows exactly when to screw the most longs and when to kill and bury the most shorts. It will possibly do the exact opposite what most people agree on. Do you remember the debt ceiling drama of last year? I do because I was burnet. Everyone expected and knew that the Republicans and Democrats will ultimately agree at the last moment and the debt ceiling will be raised. We all expected the share market to continue the rally of the previous week. The market was up till then. And then, Boom.  The market tanked big time after the debt ceiling was raised. Looking back I now realize that the boat was loaded too much on one side and that’s why it sank.

So what it will be this coming week? Will Greek bailout sail out of the gate? What is your take? Since it is a long weekend, why not send some well thought out comments. Looking forward to it. 

Myopia Reigns

A "Greek Deal" will be cheered by stock markets as taking the Greek issue off the table. But, does it? Will Greece honor the severe austerity embodied in any Greek deal? Not likely.

Politicians love situations like this. A patchwork solution that makes the long run problems far, far worse than simply ignoring the problem and letting nature takes it's course.

Greece needs a "workout," not a debt expansion and extension and austerity.

The Eurozone needs policies that promote economic growth and economic opportunity. European politicians are supporting policies that do the opposite. Default is not a bad thing. "Extend and pretend" is not a policy. It is a cop-out.

What is needed are two things: 1) a recognition that the high levels of debt in the Eurozone are not only unsustainable, they are unpayable; 2) the absurd "protection" and "entitlement" programs that characterize the European welfare model are inconsistent with economic growth and economic opportunity.

But, in the short run, the Tim Geithner mentality will reign, no doubt. A Greek deal is reminiscent of the famous "Emporer Has No Clothes" story. For a while, it works, but it has no chance of working in the long run.

None of this will matter for long as the Greeks will not live up to the austerity programs forced upon them by their politicians. The bailout will simply buy time for the present disastrous economic policies to continue unabated until discussion begins about the next bailout that Greece will need.

Long Greek Weekend.

When on January 10^th, the great oracle of Elliot Wave theory proclaimed that wave 3 has started and everyone should leverage up and short the market with a stop loss of 1360, I should have realized that SPX 1360 would be taken out. Now that it has been taken out, can we come down to earth please? I think even the last bear has been killed by now. I want to join the fun but I am too old to give up on rationality and chase momentum. 

Let me quote from Phil Davis:

This is what it was like in 1999, when the experienced market players would be well-hedged and missing the rally while some kid who works for him quits because he bet his student loan money on Yahoo and now drives a Porsche.   

Sure 9 months later the Porsche was repossessed and the kid was flipping burgers but WE WANT TO BE THAT KID – IT'S FUN TO BE THAT KID – until it isn't again.

Last night I made a 2^nd post showing / mentioning few divergences. The list goes on. Today the FX proxy AUD developed a huge divergence and I have not seen anything like this in last few years.

The next two charts are from Eric Swarts of Market Anthropology who does a great job of analysing the market in the most rational manner. The first one is the divergence between DOW Transport and SPX.

The next is TNX and SPX.

This divergence is going on for a while and I think they will meet by end of May 2012.      

   

Today Credit was down, gold  was down, Carry trade FX was down, DJ-Transport was down, RUSSELL 2000 was down, Nasdaq was down. But SPX was up and DOW as well. You tell me should I go long now? May be I will flip long if I see that SPX has decisively broken past 1370 and stayed there after end of February.  Till then I am still a non-believer.

While we shall be enjoying our long weekend, Monday will decide the fate of Greece one way or other. Either they default and get liberated or they get bailed out and live in semi-slavery of Germany for many generations. And this time, Germany does not have to fire a single bullet! Isn’t that sweet!

I would close the post with the chart I showed few days back and it is still relevant, if not more. ( Hat tip to Streettalklive.com)

Thank you for sharing my thoughts and for reading http://bbfinance.blogspot.com/ Have a wonderful long weekend folks.

Divergences Everywhere.

While SPX is making new highs I am seeing divergences everywhere.
1. Price Volume Divergence:

 2. Momentum divergence. Prices up but RSI down.

3. SPX making new high but VIX not making lower low.

4. SPX making new high, but NYSE new highs are falling.

5. SPX making new high, DJ-Transport is diverging.

6. SPX making new high, copper moving down.

I can go on and on but somehow I think a correction is needed to rebalance the too stretched rubber band.

I know liquidity is strong and all Central Bankers are pumping in money, but even then!

Lets see tomorrow. 

Punch Bowl Filled Again!

Yessss! They filled up the punch bowl again today. I hope you did what I wrote yesterday. That is, did not do anything. Neither long nor short. I was expecting that SPX will go up today but I did not expect a new high. But hey, we tested 1358-1360 level and that was the ultimate goal. The following is a chart from Uempel .

So let us see how far it goes. It shows resistance at 1360 level.

AUD, the FX proxy for risk assets seems to have made triple top.

/ES or S&P 500 futures showing a double top in the one hour chart.

Although SPX cash index made a high today, Emini made a high yesterday and it did not take out the high yet. 

With all my indicators flashing red, I am not chasing this bus. Even if I am wrong, I might miss another ten or twenty upward points, but the risk to the downside is not worth it.

The CBs have flooded the world with fresh liquidity and everything is being done just to create enough fire-wall around Greece. Today’s rumour was the ECB bond swap news story and the momo chasing lemmings took the bait hook line and sinker.

Time is running out for a Greek deal and more and more it seems that by February 23, Greece will declare insolvency. The negotiations with the private bond holders are not going anywhere. 

http://blogs.ft.com/brusselsblog/2012/02/more-on-leaked-greek-debt-deal-documents/#axzz1maD2Ufsg

Please read the complete article and you will understand why it is such a hopeless situation. All the liquidity is actually needed to save the European Banks from the collapse after the Greek default. Even if the deal is finalized on Monday the 20^th February, it will still include a list of 24 prior actions to be completed by the end of the month, before the aid is disbursed. There is not enough time to put all the ducks in a row.

Coming back to the US markets, I expect that the punch bowl will be taken back tomorrow and the Junkies will be put on a Detox & Cleansing diet from tomorrow till the end of the month.  But no front running please. Wait for the confirmation of the trend change. Better still, if you are trapped in short position, you may get an opportunity to get out. There is too much liquidity in the system and unless the default is triggered, good correction will not be forthcoming.

   

Thank you for sharing my thoughts and reading http://bbfinance.blogspot.com/

Hopelessness for the Young in Europe

The New York Times has an excellent article today detailing the plight of youth in England. But, English youth are better off then the rest of European youth. Staggeringly high levels of youth unemployment, reaching 50 percent in some Eurozone countries, are creating a generation of drifting, aimless young Britons and Europeans with no economic future.

This is the natural outcome of government policies that guarantee the good life. The good life has to be paid for. The youth are victims of all of this. By making it virtually impossible to fire anyone, Europe has guaranteed mainly that no one wants to hire any young people. Why? If they don't work out, you can't fire them. So, why hire them in the first place?

Those who thought that the European model was the way to go or that every country in the world can "afford" health care for all of its citizens (and other "affordable" things that government can do), should take a good hard look at Europe today. It is a catastrophe and it is simply a question of numbers.

Economic recovery won't even do the trick given the arithmetic of the welfare state. But, economic recovery is not in the cards with government policies like this.

Take a hard look. This is America's future playing out before our eyes. It is easy to promise, and, for a while, it works. But, eventually massive debt and kicking the can down the road leads to economic chaos and disaster. Europe is paying the price for policies that keep the free market from working. The US is next up on this stage.

Romney on China

President Obama is likely to be re-elected by default. Mitt Romney, the most likely Republican nominee has penned an article on China in today's Wall Street Journal that is an embarrassment to good sense. Far from appreciating the significance of a China that has turned hard in the direction of free markets and away from the communist model, Romney has once again given voice to the know-nothing crowd.

Blaming China for American economic weakness guarantees that Romney really doesn't understand why the American economy is faltering. America's problems have nothing whatever to do with China and pretending that it does eliminates the possibility of promoting the necessary reforms to get the US economy back on track.

It becomes increasingly more difficult to see any real difference between Romney and Obama. That favors the re-election of the President.