While You Were Sleeping

I would like to share some ideas with those who are alert. This market is certainly not going to remain comatose much longer. Those who are asleep will be unpleasantly surprised and will have to wonder what hit them. Here are some long-term charts of contrarian indicators, which are signs of stealth preparation for sell-off.

Put/Call ratio bounced off the support zone.

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The same bounce and a hook back up over 16 is in effect in VIX.

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Bulls/Bears % is getting to reversal levels.

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Give Me Liberty, Or Give Me Death!

Mr. Bernanke, what have you done to my market?

I am having a Patrick Henry moment. I am obviously being facetious. I am alive and well, but I just can not trade based on what the man with a gray beard will or will not say at Jackson Hole Symposium. This has become an obsession, a drug, a sickness, and needless to say, a fatal market moment if he (Bernanke) does not deliver.

Aside from promised rain of liquidity "fairly soon, unless economy improves", do you think this market has any more reason to be at this level? FOMC minutes gave a hope and a single Fed member took it away. And you want to trade this?

Market internals are awful, and divergences are getting wider every day. Volume, breadth, momentum, correlations, fundamentals - all are saying this market is ripe for an enormous fall. Who cares? Just wait for FOMC minutes and juice the algo rally until it dies. It did not take long. Hope is not a strategy, it runs out and leaves a void unable to be filled by printing more money. I am still yet to see the magic of QE1, 2, Twist and LTROs. Loan demand is not growing, companies are not investing, consumers are not spending, and fiscal mess is getting worse.

There will be no charts today, just a rant. I am Fed Up! I am not going to take this any more. I am pushing the "sell" button. I demand freedom from central bank's manipulation of business cycle and free markets. I am a trader - I am allowed to be right and wrong. But I am not going to be controlled by those who sell false hope. Do you want to buy a speech by the man with a gray beard? Sold to you!!

Get Ready

While I would like to stay politically neutral on my blog, it is hard not to discuss the upcoming U.S. Presidential Election. Market is trying to digest the latest Paul Ryan development and see what the whole picture may finally look like in November.

I have been following from a little different angle, which I would like to share. Today there is a third huge deal in the health-care insurance space this year. Aetna is buying Coventry for $7.3 billion. (the link to Bloomberg article about the deal is below, and the prior two are mentioned as well) These guys know everything, they are tuned in. If Romney had any chance of winning, they would hold off and wait for a repeal of Obamacare.

On Intrade it looks like Mr. Obama is regaining his chances among the traders. I will stay away from predicting the winner of this very important race, but the chart below and the consolidation in the health-care insurance industry are telling me something rather obvious - the current President will stay for four more years.

http://www.bloomberg.com/news/2012-08-20/aetna-agrees-to-buy-coventry-for-7-3-billion-including-debt.html

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Is there a problem, mate?

It seems that nothing can stop SPX slow grind higher. So I am not sure the observation I am about to present will matter that much. Nonetheless, Australian dollar stopped confirming new highs on SPX. You can clearly see (on the chart below) that since the beginning of June the two were climbing higher together, until the separation occurred this week. I have no idea what exactly is going on in the land of kangaroos, but a repeat of March could be in order, when AUD revolt gave us a hint for SPX sell-off.

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Small Business Slump

U.S. economic data continues to send mixed signals. On the day when July monthly retail sales surprised to the upside (but from downwardly revised June), small business survey showed a slump across the board. NFIB reported that current small business conditions make up the weakest post-recession recovery in the history of the survey. Sentiment, outlook, earnings, and employment - are all in sequential decline.

Privately-owned businesses do not need to engineer growing profits for demanding investors. No lipstick-on-a-pig games there...

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Are Earnings Irrelevant?

S&P 500 price went nowhere in the last 12 years. While there are multiple reasons for over a decade of flat U.S. stock market, none of them could be blamed on the innovative ways of domestic publicly-traded companies' ability to grow their earnings. Since August of 2000 EPS of S&P 500 has doubled. It is obvious that Dot-com bust, GFC, and Eurogeddon caused the equity price stagnation.

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You can see from the above chart how the last two years SPX lagged the earnings growth. So why every time earnings season comes around so many pundits say "earnings are all that matters for stocks to advance"? They tell us to concentrate our attention on the preceding quarter, and better yet, look forward to the estimates of the current one and a whole year to be beat. Like clockwork we should expect the companies to squeeze the profits out of thin air, while we should forget about Eurozone's problems and pay attention to the magic of decoupling.

To confuse investors even further, a real problem with that thesis may be brewing on the horizon. No, let me rephrase that - it is already here. 2012 Q3 earnings will be down YoY, yes, down. This projection is based on the guidance the companies gave us on their Q2 conference calls.
What did the market do after companies told us that? Went up. You may ask: "why"? ECB and Fed are keeping the darn thing up with even more of promised liquidity. They are messing with the business cycle and alter it to their preference. Will it work again? I do not know. But what I do know is that what used to move stocks for generations is quickly becoming irrelevant.

So every time I hear Larry Kudlow say that "profits are the mother's milk of stocks" I cringe and realize that investors may again decide to leave the stock market in droves, dismayed by abundance of utter confusion and perpetual financial market manipulation by central banks.

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All The Wrong Reasons

Here is why I do not share the excitement of Friday's rally. Not to take away from the move - it was an impressive one. My worries are based on the reasons for the rally.

Firstly, the new "modality" - ECB / EFSF contemplated bond-shuffling scheme, while extremely helpful in squeezing short positions on short-dated sovereign bonds and resulting in rallies like on Friday, may perhaps be destined to eventually fail, as it does not address the most important ingredient of Eurogeddon - lack of economic growth. You can shuffle all the bond maturities around, but when there is not enough money coming into the coffers of the sovereigns to pay them off, all you get is a different party holding the default-bound securities. And how exactly is this new scheme supposed to break the link between the sovereigns and the banks which will be providing the credit facilities to EFSF in exchange for aforementioned bonds?
Traders, it is all about the EZ recession, and nothing else matters at the end. Keep your focus on the upcoming econodata from the region. It absolutely stinks...

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Secondly, better-than-expected NFP may not exactly reveal the true U.S. employment situation. Under the surface of payroll data there is a worrisome picture.
The all-inclusive unemployment indicator - U6 is going the wrong way. It now stands at 15%, rising further from the low in March.
Another important employment indicator - Household Survey dropped 195K in July. Labor force shrunk by 150K workers, and participation rate declined again.



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So where to from here for SPX? I say it is stopville for shorts just above 1400 followed by craterville for longs all the way down to the bottom of the channels, and perhaps even lower.

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Full Moon and Financial Market

August 1st is a full moon date. I decided to look at what happened with SPX around full moons this year. Last five marked a turn on the chart.
There may be a major move in the next 24 - 48 hours. FOMC, ECB, NFP... I am sure all of this is just a coincidence.  :)

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