Saturday 11 August 2012

Illusion In The Wonderland.

1st , let me apologies for my absence for the last few days. I was hoping that I will get some respite after 8th August but now it seems my pressure situation will continue till mid-Sept. But that’s life, so no point cribbing.

Coming back to market, I would like to start with some interesting COT data. We would do well to remember that COT report does not result in immediate action. It just shows what smart money is doing well in advance behind the scene while the retail is distracted. The 1st  chart is the S&P Emini contracts. 

The smart money has gone short from last week while retail is long.

The 2nd chart is more dramatic and it is a chart of Nasdaq.

The short interest in Nasdaq by the smart money is huge and is a real concern. It seems that at any point of time, retail will be left holding the bag full of crap.

The whole of last week the markets have struggled to move higher and have made multiple tops. It may still make one more break out on Monday or Tuesday, which is also the top as per my cycle analysis. Again, this is not an exact science, but it has proven to be fairly accurate in the past with few days variation. Looking for top is of course a fool’s errand and front running is a bad idea. The reason is not to time the market exactly, but to reduce risk by reducing any long exposure. I am short but in a very limited way and would not increase the short position unless I get the confirmation of the breakdown.

I do not buy the bull logic because I think fundamentally, the world is in a recession and Europe is just taking a rest with everyone in vacation. Nothing has been solved for the stock market to go up. I think the only way it can go up any further is through central bank liquidity, be it Mario or Bernanke. One chart from Mr. Dominic Cimino of PPC tells an interesting story.

The green line is the ratio of XRT to XLP. XRT is the retail sector ETF where as XLP is the consumer staples ETF. When the ratio is rising, it means retail sector is doing well. Retail sector does well when consumers are spending money. And we all know that 70% of American economy runs on consumer spending. When the ratio is going down, it means consumer staples are doing better and retail is going south. Which also means the economy is not really doing well. So when the green line is moving up, SPX should move up and when the green line is moving down, SPX should move down. Simple but powerful concept and it had indicated both the downmove of 2008 and upmove of 2009. Now we see a divergence with green line moving down while SPX moving up. This definitely calls for caution and I do not think there is much to be bullish about unless of course, and again, Ben shows us the colour of the money.

There are many technical divergences which is calling for a top but all these divergences take time to work out. In a way, that’s how the smart money plays with the muppets. While they are busy selling at the top, they create an illusion of new prosperity. And with the markets being manipulated like never before, volume at extreme low level, their job is not that difficult. I think higher the market goes from here, harder it will fall.
Also let us not forget that if the markets continue at this level, there will be no free money coming from Ben. That is not exactly helpful to the Banksters. So be prepared for some action in the coming weeks. In all possibilities, volatility will spike from next week and a crescendo will be reached by end of the Month. It has taken longer than I anticipated but by not front running we have avoided all the whipsaw and mental agony. As I always say, in this present environment, return of capital is more important than return on capital. So be safe out there.

Hope you are having fun in this beautiful weekend. Stay sharp and filter the noise. Thanks for reading . Please forward / re-tweet / post it on your wall and join me in twitter. (Twitter @ BBFinanceblog) 


  1. The action of previous weeks continues: bonds closed very soft, vol got sold hard (many big name's vol, like aapl, goog is on historical lows), aussie is not showing any weakness, ES crawling towards second monthly pivot at 1420.

    Vol descending is pretty fascinating actually, last 10 weeks were red in VIX (except one time), although futures curve remains steep -

    I think they realized that EU bs is not scare anymore, and now they have to come up with a new horror story. US bonds ponzi schema looks like a right one :)

  2. Hello,Yes Ok.
    You reading hatarpont

    1. I am not sure what you mean. I did not have time to read your blog. Sorry.

  3. I read your blog every day.

    Thanks for everything you do.

  4. The two charts showing the COT data - where did you get those from?


  5. Over the last several years, anytime the $VIX got this low, it preceded a fairly nice drop in the s&p. Rallys have taken off from a much higher reading on the vix.

  6. Amazing data - thanks BB. Didn't know about the XRT/XLP index - interesting. I have a question about the source of your COT data - did you get it from the cftc or from another source? If you assembled the plots yourself it would be great if you could also plot the short/long ratio of com and nonCom, in comparison to the S&P. Also it would be interesting to see whether there's a time delay in the correlations and how large it is. From you plot it is not so easy to tell but it looks that towards mid of March the short/long COM ratio was more pronounced than it is now - and SPY continued moving up until begin of APR - which would suggest a lime lag of ~2 weeks.

  7. PS: also, current COT histograms and relative short/long ratios - but also in trem of absolute values - seem to look quite similar to end of January - in the midst of LTRO - which would suggest that there's more room to the upside that we think.... thanks again!

  8. Sorry for the late response guys. The best source of Cot date is here:
    This two charts were sent by a friend of mine.
    I will ask him about the corn and your other points.
    It is going to be crazy busy for me for the next 30days or so.

  9. I know this sounds like a conspiracy theory but what are the chances the Fed and other central banks try and drive down the price of gold in an effort to prevent gold and silver from being a safe haven against the printing presses? I have heard rumblings that the Fed would like to see gold below $500 per ounce.

  10. Hello BB,
    would really appreciate your comments on VIX- made a low today not seen since March- do you see a bottom here ?

  11. Hello BB
    Would appreciate your comments on the VIX- lowest today since March- do you see a bottom soon?