Tuesday 26 July 2011

Afraid Of The Debtmageddon?

I borrowed the word from Lee Adler.

Right now it is easy to be afraid and difficult to be objective.  So let’s review the market actions in that light.

SPX came down about 5 points today. Big deal! If there is going to be Debtmageddon , there should be mad selling. What the smart money is doing? Why are they not selling out yet? Once again, let us look at things with objectivity.

Below is the SPX daily chart.

We are above than where we were one month back.

Shouldn’t there be a sell-off of Bonds, pushing the yields higher?  After all, the AAA ratings are about to go. Look at TNX, the 10 year bond yield indicator.

Nope. The yield is still below 3% whereas the 10 year average is 4 %.

I am not a big fan of TA. I think when you torture the data for long; you can make it confess anything. So for each bull case in TA, there is a bear case, all from the same chart. However, let us look at the following hourly chart.

It looks like we have kind of a bottom or base.

For me more important is the money flow and I will borrow a chart from Lea Adler of The Wall Street Examiner. This is one indicator I follow amongst many other.

As you can see,  cumulative net money flow is still positive and well above the SPX.  Lee’s chart is “based upon the theory that as cash moves between money market funds and the banking system, there's a relationship between that movement and the movement of stock prices. As you can see, it has correlated well with stock prices over the past couple of years.

In his latest email newsletter Lee writes as follows:
“It seemed that virtually every market observer expected that event to have a bearish impact. My expectation was that it would not be felt until mid July due to technical factors having to do with the Treasury supply settlement schedule. But over the past month, the indicator shown above began to surge, boosting support for the market just as the Fed was ready to step away.

Hysterical media pundits have been loudly proclaiming that the sky is falling as a result of the approaching US Debtmageddon. The markets, however, are revealing them as the know nothing clowns that they are. In fact, the opposite of their dire predictions has been occurring, with both stocks and bonds remaining resilient. The Treasury market is even rallying today after the uber depressing N'Obama Boner show last night. You gotta laugh.

The chart above makes clear the reason for this market resiliency. Money has been flooding into the US banking system over the past month. The source is apparently capital flight out of the Eurozone. While I don't track the data at the source of those flows, we know from anecdotal reports that there's been capital flight out of parts of Europe. Other US banking system indicators suggest that this is the source of the surge of cash into US bank accounts. The cash account balances of  US based foreign banks have been surging in recent weeks. So have their trading accounts. Deposits in domestically chartered banks have also surged, but their trading accounts have not. It would appear that that the resiliency in the US equity market has been driven by foreign private buying. The Fed's data shows that foreign central banks have not been a factor. This is coming from the private sector”

For some reason private capital all over the world considers US to be safer than Europe and I suppose they know more than I do. But this is one reason I have not gone short yet.
But I am not blindly long and I may switch sides all of a sudden inter-day and shout “let’s get out”. Follow me on Twitter to get my latest calls.

Once again, make no mistake; these are all part of forming the top. But we do not want to short when the market is still going up. That is not smart. I talked about 27th July before and we are almost there. For me the most crucial dates  are between 27th of July to 5th of  August. And I willl be watching the market activities closely to see if my calls are still valid. You see, I do not mind bring wrong, but I do not want to be wrong for a long time.

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