Saturday 31 December 2011

Taking A Peek At 2012.

Everyone worth his/her salt is making projection about the 2012. There is almost unanimity in the blogosphere that Euro is going to crash and we will see a repeat of 2008/9. So everyone is bearish biased in varying degree. Doomsday drummers like ZH, Mish, Prechter  et all are having a field day predicting the coming demise of Eurozone and return of the civilization to the stone age. We are encouraged to buy guns, bullets and canned foods. In the mean time, readership surges, ad-revenue and subscriptions come pouring in. They or their sister companies sell bonds by the bucket and deposit the much maligned fiat currency in the same TBTF banks on which they heap scorn every day. Not a bad business model, eh?

Yes, the OECD nations have piled up Trillions upon Trillions of dollars of debt and they will find it more and more difficult to service those debts and sustain them. But it is not going to be one straight line down from here. Trading in the stock market is different from fundamental macro economic analysis. Just look at Japan. It has over 200% of debt to GDP ratio and yet the yen is stronger than ever. How do you explain that? If Greek drachma was in existence, I am sure it would have been severely weaker today as a result of the debt problem of Greece.  Then how come JPY is stronger despite Japan having the highest debt in the advanced world? Just shows that there is no straight answer and things are much more complicated than ZH can explain.

How do you explain then that the commercials are net long EURO is a massive way since Sept 2011? These are the big guns that move the market. They are building up the position slowly and will possibly continue to build up long positions. People like ZH, Mish and Prechter just help them, either willingly or unwillingly, to divert attention from the slow and steady built up of their long position, so that the retail continue to sell.

The following is a weekly chart of EURO.
If you compare these two charts, you will note that while EURO was going up from Jan 2011 till end of April 2011, the commercials were building up short positions.The commercials went long from September and Euro has reached its lowest of 2011. Basically the same point where it started the year. So what has changed if I may ask? Why are these people screaming end of EURO?

Also note that there is no immediate relation between price movement of EURO and long or short position of the commercials. But ultimately, price follows the action of the commercials and that is a long term play.
I am not implying that EURO will start going up from tomorrow as a trend change. All I am saying is that the end of the world does not appear to be in the calendar of 2012.

Look at what the commercials are doing with the SPX index futures. This is different from ES.
Compare this with the weekly chart of SPX.

Commercials were net short of SPX from January 2011 till 1st week of August 2011 while SPX went up. They were net long between Mid-August 2011 till Mid-October 2011 when the markets went down. So the commercials are way ahead of the curve. Now they are short again from end of October. So we can be sure that a down turn is coming. May not be tomorrow. But when that down turn comes, just know that it has been planned months and months in advance. That the coming downturn has got nothing to do with whatever nonsense ZH, Mish or Prechter is saying.

This is what I call being unbiased. Trading  is serious business and modern economics is far more complex. So let us separate BS from trading. Hope this last post of 2011 will help explain my methods and approach to the market. Thank you for following me in Twitter (@BBFinanceblog). Please retweet to your family and friends and visit to profit from the world of finance.

Once again, wish you a very happy New Year.


  1. great job, I got hooked on those blogs and really got nothing from the other then being afraid the end of the world was coming. Since being here I have been able to put information to use and trade appropriate and profit, rather then going to bed every night being worried I don't own a gun or a brick of gold.

  2. We all like to be scared. That is why horror films do so well. If EURO is at the same level now as it was in the beginning of 2011, what effect the European debt problem had on it? Why all the noise about the collapse of EURO? For whose benefit? We need a conspiracy theory for the conspiracy theorists themselves.

  3. Happy New Years! Great post as always. The only thing I would say about the commercials and big players is that they are more mean reversion and they understand nothing goes up and down in a straight line. Euro is ridiculously "oversold" and the commercials are just reacting to the large amount of retail guys on the short side. Of course I'm just speculating. Best of luck in 2012!

  4. Commercials are 90% of the total trade. So I do not think they react to the retail. Rather they set up the market. All the volatility is their creation so that they can create profits out of thin air. Most of the time, MSM ( main stream media) says things which are just propaganda for the commercials.
    Best of luck to you and all my readers for the year 2012. Thank you for reading my blog.

  5. Hi, I like the analyses on your blog, and thank you for sharing it with everyone. May I ask what does commercial mean? Are they the financial institutions like JPM and Goldman?

  6. def. you are providing a very easy to understand blog, but sometime some of the term confuses me. i don't understand when u say commercials, what does it mean? who are these commercials? Second, you have shown charts to show that commercials are going long or short? how do you know that commercials are going short or long?

  7. I think the problem is Europe has done little to actually fix the problems. Greece has another payment now due in January. They'll have one every quarter until a final solution is imposed. That means that at the beginning of every quarter, panic will be in the air. Then, some action from the European powers is required to reassure the market. Europe simple postpones the problem every quarter, virtually guaranteeing we will have a replay of the drama. max pain

  8. Octrends, Anonymous, 90% of all trading is done by 50 large banks, which is also known as TBTF (too big to fail) banks. They include JPM, GS, DB etc. They are known as commercials. We do not know in advance what they are doing but every Friday, Govt. releases COT data and you can find out what they have done so far. Their actions are long term and always ahead of the market.
    Dan,Europe cannot solve its problem without massive money printing. But they have already found a roundabout solution by introducing LTRO. ECB is giving unlimited loans to the European banks at 1% so that these banks can now invest in their countries bonds at 5-7%. So what you read about European problem etc are just noise and have nothing to do with the movement of stock prices. Price movement makes the news. News does not move the price. I know it is difficult to understand and accept but that's how it is.

  9. "All I am saying is that the end of the world does not appear to be in the calendar of 2012"
    Above statement summarizes your blog's uniqueness i.e you do see spx catching up with fundamentals but not in the next week or so.. Till then play the rallies, make money and stop worrying about market manipulation.

  10. Thanks for sharing in Facebook.
    Arun, yes that is the objective. Even if DOW reaches 5000, it is not going to sit there for ever.