Monday, October 24, 2011

May I Change My View??

Only if you allow me :)

I know I may lose half of my followers (LOL, everyone is so bearish now), but it is time for me to become less bearish and move into the neutral column on my 2012 macro view. This is not to interfere with my short-term view that we are at the top of this bullish move from Oct 4 low, and we fail here in SPX 1250 - 60 area. Still think that we hit lows for 2011, but we pull back below 1200 (still patiently waiting) just to mess with longs and get their stops. Too far too fast... I will buy the sub-1200 levels for another push to 1300 before year end. USE EUROPEAN DEBACLE ON WEDNESDAY TO BUY THE PULLBACK, sorry for caps, just want to make sure everyone is clear.

So my idea on what to do in the intermediate term is not clear any more. I am torn apart by dueling macro scenarios and therefore moving into a neutral bias. Here is my breakdown of reasons for shift:


1. Q3 earnings are very solid. Q4 guidance is even better. 2012 guidance is plain out exuberant. You just can not deny this fact.
2. Retail sales are much better. S&P Retail index is 2 points from all-time high (historical high). Many components are at all-time highs already this morning. The rumors about American consumer's death have been greatly exaggerated.
3. GDP has been improving. Estimates are rising, and for now it looks like there will be no recession in US in 2012. These numbers are always a moving target, so still a slight suspect, but definitely better than I previously expected. Remember, there is a huge difference between slow growth and no growth or recession, no matter what the pundits say.
4. Cyclical sectors are showing amazing strength and are rebounding way faster than all others. SOX and DJT are leading this advance, and their components are all commenting on much better than expected business across the board. I have to respect this fact! Even lagging XHB has skyrocketed from Oct 4 low. Now I remember that I said  in one of my posts that I had 4 new homes breaking ground in my neighborhood. Little facts like these are a part of macro view.
5. Speaking of laggards, XLF, the biggest laggard of them all, is looking to breakout as well. I am no big fan of banks, but if we get some love in this sector, lookout bears. Banks are a backbone of business, enough said...
6. SPX, DOW, NDX technicals are way too bullish to be a bear here. Only a fool would fight this in full force now. I respect those who try to pick the top of this short-term move, yours truly did at 1230 and got out quick to no avail, but there is just no reason to continue this guessing game until stochastic went below the embedded overbought condition. Wait for a quality setup!


1. Europe is still in a sausage-making process of bailout. I am a skeptic on their resolve, willingness, and capability to solve ongoing debt problems.
2. European economy is heading into recession. All economic numbers are pointing to start of recession imminently or it is already in progress.
3. With their economy being so important for our exporters, US is in danger of catching the cold as well. This contagion effect is real and is a major threat to bullish case (above).
4. China is flashing warning signs. Not only is it depending on Europe but its domestic real estate bubble is getting ready to burst. Chinese bailout is coming too. This will be an ugly event and will take up a lot of their reserves, otherwise available to domestic developments and investments around the world. Copper and lumber are weak due to this fact.
5. Our (US) debt problem is no better shape than it was in August. We kicked the can and will have to show a little more resolution in November. Lets see if debt committee comes up with something magic to throw at the markets. A lot of skepticism on this front remains.
6. Debt market is not coming along for this ride from Oct 4. I mean not fully at least. Even though 10 yr T-note yield is higher, it is nowhere near its comparable level last time SPX was in this 1250 range. German Bund, CDS (especially in Europe), LIBOR, and US high-yield corporate debt, are all pointing to some credit event still yet to come. I am not going to brush it aside like many who say it is just hedging and scared money hiding. These guys have been right way too many times, especially in 2008.
7. Political uncertainty in 2012 will be probably the biggest reason for slow growth in US. Businesses will wait to see who is in charge for the next 4 years, before they make huge capital investments. What a drag on economy!!
8. Real estate market is not rebounding at all. Our biggest asset - home, is still deflating and putting an enormous weight on available spending (despite retail sales numbers). This has to be resolved for US to move forward on better footing.  

So you can see how it is easy to get confused and indecisive with above dueling scenarios. I am going to take a neutral approach and will continuously weigh all related points for future updates here. For now I am going to trade a range, an expanded range perhaps: from 1150 - 60 to 1275 - 1300. I do not see a decisive breakdown/breakout occurring any time soon.

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