Slope of Hope Blog Posts
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Hi all, Gary from Biiwii still short the market (actually bullishly biased when gold stocks are factored) and not blinking – yet.
One of my short positions is on China using the FXP inverse ETF. On the surface it looks like the bulls have won again, but is it really so? On a G-20 pump no less? I am not so sure.
Take a look at the daily chart of FXI and tell me what you see, a bullish breakout or a gap up at the end of a short term trend, fueled by global macro-economic pumpers in positions of authority? I see a market with a terrible risk vs. reward ratio, and it goes beyond China. We are seeing gap ups all around, including in my gold miners.
This is not to say it will not be different this time. I have a tolerance level on the broad markets as per the 60 minute chart of the S&P 500 I showed last week. We are basically there. Most of the items I am short against are not at new highs. These include the SPX itself, real estate, euro and financials. I chose to look at the FXI today however because it is at new highs and it has left a nice progression of ill-fated gap-ups throughout this rally built on waning momentum.
Let's see how it turns out.
I don't have time for a lengthy post, but I wanted to write up something quickly.
Emotions are definitely running hot right now. Bulls are absolutely exultant; bears are dejected beyond measure. I was quite content to watch the market action today. I added to a number of existing short positions, and I tightened up stops on my longs. In my opinion, today's rally presented a good "selling-into" opportunity.
During trying times like this, I emphasize – again – the importance of thinking for yourself. I have been doing this a very, very long time, and I've got capital and risk management that some folks may not be employing. Blindly aping me or anyone else is a recipe for disaster. So while I'm happy to talk about what I think of the markets, during times like these, it's more important than ever to steer your own boat.
I do note that a critical chart I watch – crude oil – is hovering right around its major 50% retracement level. In spite of the dollar's amazing weakness, crude remains well off its highs, and I think if the dollar strengthens, energy is going to move down and move down big.
Reading tonight's short-term update from EWI, it's evident that they are shying away (quickly) from the notion that primary 3 is underway. Their contention seems to be that if there's even a little more strength tomorrow, P3 comes right off the table. I'm sure we'll all be watching with great interest.
"Bond traders always have been considered the smartest guys in the room," says Beth Malloy, bond market analyst at Briefing.com in Chicago. "But they keep a low profile."
Risk appetite is critical for ongoing gains in equities. A curtail of risk among the market makers would result in several outcomes: a reversal in the greenback, a broad-based equity plunge, a drop in silver and lesser-grade bonds, lower oil prices, etc. There are several gauges of how frisky the market is feeling, including the gold / silver ratio, the QQQQ / SPY ratio, and the Barron's Confidence Index, among others. Today I'll focus on Barron's because it's derived from bonds, and gives a peak into how the largest and best capitalized traders are feeling about the current risk environment.
The Barron's Confidence Index is derived from a simple method: compare the relative performance of high-grade bonds versus riskier medium-grade bonds. When medium-grade bonds outperform on a relative basis the index rises, reflecting higher risk taking. This sets the macroeconomic picture for other asset classes as well.
Barron's Confidence Index performs best as a 10-year weekly chart, with a 50-week moving average used as a trigger. A firm break above the 50-week indicates risk is returning, and occurred at critical market bottoms in 2003 and 2009. Conversely, a firm drop below the 50-week MA indicates bear market conditions are likely, and last occurred in July, 2007.
A few notes: the timing signals are not pinpoint, they are often several months early or late. Also, a well-pronounced false signal was generated in 2004 as the market chopped sideways into early 2006. This era, which I call, "The Great Theta-Burn Era", resulted in whipsaws in most directional indicators. Despite these issues, trading counter to the readings of the BCI will typically lose money unless your time frame is adjusted to short-term.
Thanks to a thoughtful client who sent me a new copy, I've been re-reading the New Market Wizards, which is great fun.
I saw a quote in there that I absolutely love; I strongly suggest you take it to heart:
If it will give you comfort, don't do it.
I am paraphrasing a little, but that's the crux of it. I think this is a marvelous thing for traders to remember.