Friday 4 May 2012

What A Day!

Before we discuss the market action and what is next, let me quote from some of my earlier posts. It seems that many readers do not really apprehend what is being said on a regular basis.

On 23rd April, I wrote: “What I find interesting is that we can consider it as test of previous lows which it did not break.  Now it should have a test of the previous highs, at least which is the theory. Only when that test fails and it reverses, we can short with confidence.”

On 24th April the heading of my post was “Last Bounce Coming?”

On 30th April I said: “It may not be a bad idea to start laying the defensive bets now onward….When the correction comes, it will be fast and furious and will not give us much time to take advantage. But at the same time, it is risky to front run, as I keep saying. So we will have to pick up sectors where there are definite weaknesses.

On May 1, I wrote: “Question is, have we seen the test of top today?  I am getting a funny feeling that we have. … Despite new high in DOW, NYMO did not go up much and is in that zone from where it can go up 25 handles but can come down 135 handles.”

On the same day we added defensive positions in our model portfolio which is absolutely free for the readers.

The purpose of quoting my own post is not to gloat but to demonstrate that the road map has been before us all along if we cared to read it with little love and attention.  Our defensive positions taken on May 1st  are doing fine and we plan to add some more on a bounce.

S&P futures were down some more after the cash market closed. But the biggest loser of the day was crude, down over 4%. Again, it was only yesterday that I wrote that Crude goes on sale in summer and I would like to short it.  We will see a bounce by Wednesday next week and maybe we will get a chance to add some short position on crude. I expect crude to reach around $ 101 by then.

Dr. Copper is another short candidate and we will assess the situation next week.

Now before we get carried away with the sell-off and start talking about the coming end of the world / Europe etc, let us pinch ourselves hard and remember that this is part of the plan. Stocks did not fall because NFP numbers were bad. It fell because the numbers were not bad enough for Bernanke to act on his own. If you remember me saying it again and again, Chairman is ready to catch us but we have to fall first. Buying stocks on a dip will not get us free money. The sell-off has got nothing to do with Spanish yields spike or Portugal going the way of Greece. It has got everything to do with more free money.

We have seen this tape played last summer but most of us do not remember it.  Only difference this year is how Bernanke will implement the lessons he learned last year. Because this is an election year, the powers that be are very concerned about the rising gas prices. And as we all know, the unintended consequences of last QEs have been rising commodity prices. So this year, they will try to keep oil prices under check while letting stocks rise. It should not be that difficult given the fact that $30-$40 of the crude price is speculative premium built by TBTF banks that run huge commodity trading desks. These guys will be under strict instruction to stay away from channeling the free money to crude trading.  That is another reason I think shorting crude would be a safe trade in summer.

Coming back to markets next week, I expect we will see a lower low on Monday but will see some bounce by mid-week. Such a bounce will still be a sell. I hope you have already got out of your long positions and are either in cash or little bit short. You have not missed much yet because more action will come in June. Stay tuned, stay nimble and trade safe.

Have a great weekend folks. Thanks for reading


  1. You have too much faith in Bernanke. Can governments/CB's influence/manipulate markets in the short run? Yes... Can they contol markets in the long run? No.. Bernanke has been at it for 3-4 years now. Am I suggesting this is the start of a bear market? No, because I don't know. This could be the start of a correction in an uptrending market. However, after 3 years of going up if the market wants to go down, it will, and nobody, not even the idiot at the FED will stop it.

    1. When did I said that I have any faith in Bernanke? I know it will all end badly but I have my own take on time. Till that time, those who are dreaming of the repeat of 2008/9 , will have to dream a bit longer.

    2. It was implied in the second and third to last paragraphs. The market is full of people who believe Bernanke will save the day if markets get in trouble. And why not, he did it in 2010 with QE2, and 2011 with his dollar swaps to Europe. The savior mentality among investors is getting ridiculous and we all know what happens when the "boat is crowded to one side"... Maybe he pulls a rabbit out of his hat and saves it for a 3rd time. I don't know. Here is the core to my thesis. With respect to time, we are 3 years into a cyclical bull market inside of a 15-20 year secular bear market.. The FED has been at it's games for 3-4 years. These counter trend moves usually last 3-5 years, (you might have a more exact number of years than me) so going forward I suspect most of the money will be made to the down side.

  2. What I have implied is for short term and I have been writing about these time frames very often. You are partially correct. Yes, Ben will save the market till election. We will see after that. Do you want to short the market when it is going up? You make make money on the downside in 2013/2014.

    1. I like and agree with your cash call... Yes, shorting the market is pre-mature right now. Having said that, if Bernanke comes out with another asset purchase program, I am not going to bite. I think risk is too high up here no-matter what those morons do to help the bulls. I just think we are too far into this cyclical bull market business cycle. I am not nimble and don't want to get trapped. I've learned to manage risk the hard way, Bernanke/the market can keep his additional 100 S&P points if the market trades to 1550 on another stick save. BTW, I just started reading your blog and enjoy your thoughts.... Keep up the good work...