Are we there yet!

For days I have been writing that the sell off is not over yet because the fear factor is not high enough.

The stock market is ruled by greed and fear. Unless we see high fear, verging panic, we cannot call a bottom. How many investors purchased the 200 DMA? It seems quite a lot. It goes to prove that one should not buy based on TA, however TA is very useful while selling. All the TA indicators have been screaming oversold, buy and what not and yet the fear factor was absent.

This is the only chart one need to know. The Eur/Usd.

Remember that the stock markets are price driven not news driven. News follow the price. The 24/7 financial TV and channels have to report something to stay alive and seem relevant. So they spin any news according to the price action of that day and time. If the prices are moving higher, they paint the news rosy and if it is going down, the sound bites are gloomy. But no matter whatever the MSM ( Main Stream media) say, it is almost always irrelevant and on the borderline of being false news. One should see the latest of Jon Stewart on Fox news.

Moreover, we always find that the big movers and shakers (some hot shot hedge fund manager or bond king ) comes and gives their opinion regarding the future of the market. Or Gsucks give advice to its clients which are made public. 9 out of 10 times, we can be sure that they have an agenda. They want to sell high and buy low and they will say the exact opposite of what they are actually doing. A healthy distrust of these people or recommendations are essential for survival in the jungle of the stock markets.

A case of point was the last hour rally in the stock markets yesterday,23^rd June 2011. Basically the market rallied on headline and without reading or understanding the full context. As if Greece has really been fixed! Like some one yelling fire and people rushing out in panic. In this case it was greed. The retail investors wanted to catch some early windfall and the news barons, who are billionaires, added some more to their wealth. Today morning all that gain was given up.

I still think we need to sell some more, go down below the 200DMA and have a panic situation. Only then we can call a bottom. But in this manipulated market, one can never be sure. 

How they cook a lobster.

The Asians (Thailand, Korea) do it the conventional way. They throw the thing in hot boiling water.

In Latin America, they hammer it over the head and then cook it anyway they like it.

In Europe, they put Greece in a pot of cold water and then slowly turn up the heat!

Talk about the humane way of doing things without cruelty.

One would think that the colour of the skin of the lobster has everything got to do with the way of cooking.

When the economic crisis hit Asia in the 80s, these countries did not get pampered with all the Keynesian stimulus stuff, they did not get endless bounty of love to prop up their banks or any such sop. But ahh, there you have it. The banks in Asia did not owe money to the Banks in France. So the benevolent Europeans had nothing to lose if these countries went under. The currencies of the Asian tigers collapsed, businesses closed down and there were untold human miseries all around. Where was the humanitarian concern of IMF at that time? In fact IMF forced these Asian countries to do a cleansing without any social safety net at all. Why then the double standard now when their own European countries are facing the default.That's called new age of colonialism.

In fact if Greece were to default, it would not be the end of the world. Like the Asian countries, Greeks would get up, dust up and fix their economy in a way to become competitive once again. Greeks gave the world democracy but unfortunately today that is a society in decay. Tax avoidance is rampant, in fact at the highest level in Europe, the rich and powerful are in collusion with their political class and have already sent their money out of Greece. It is the bottom 90% who are being asked to join the belt tightening program. But they have got used to the easy life for last so many years and they will not accept anything less. In fact, instead of being thankful to the Germans for the good money that the Germans have thrown after bad money, they are now calling them Nazis. The ungrateful b******s. Not my word. The German press is saying it. The Greek society is blaming everyone else for their plight except themselves.

   

Anyway, the Lobster got to get cooked. The world will not end. At the most, the hierocracy and double standard of the Europeans will get cleansed along with some ill gotten wealth of the bankers. The growth will resume only after the mess has been cleared off.

It is still " Sell the Rally".

Today was a double POMO day. Approx. US$ 10 Billion was pumped in the market but all S&P 500 has to show is only a rise of less than 7 handles. Not impressive at all.  One more thing to look for, S&P up for 3 days in a row but volume down 2 days in a row.  This is called price volume negative divergence and is normally a short sell set up.

I am not buying in the rally yet  for two reasons.  For one, I expect a lower low than the March low and second, the fear factor (VOX) has not yet reached the high 20s where we can see some panic. In fact at 3 pm, the put call ratio was .88. Means there are more calls than puts and people have reached the conclusion that the bottom is in.

I keep talking of the fear factor because stock market is ruled by greed and fear. Not by news, not by economics. In the past with SPX pullback of 10% or so, the VOX was on an average in the range of 28 +. By that reckoning, we have still some more way to go.

Stock market corrections are like quick sand. They advance two steps lower and rebound one step back, so that the fear factor does not build up too quickly. These countertrend rallies keep everyone interested and invested till such time the capital is gone.

Buying stocks in the face of fear and selling it in the face of greed is the only way to make money in stock market. I am not convinced that I am seeing that fear yet.

I love " Love Stories"!

I love this story which came out just 2hours ago.

From AFP:  Germany 'dismisses Greek debt compromise plan' (http://www.google.com/hostednews/afp/article/ALeqM5hh6sw4CF1nPYouOGX-rOU6zcTdNA?docId=CNG.105975a399e42bed5c5d964daff21f4a.761 )

“A German compromise plan to resolve a dispute with the European Central Bank over the Greek rescue that was reported by Der Spiegel magazine is no longer on the table, a government source said Sunday………. But a German official, who spoke on condition of anonymity, said that while "several options" were being debated to involve private creditors in an Athens rescue, the reported proposal was "no longer on the agenda".

The source added that the initial plan had differed from the reported proposal in "key aspects".

German officials say they seek a plan with as few "unwanted side effects" as possible. ”.

So already the “Non-Default” event of last Friday and the perfect family reunion photo-op of Mom and Pop shaking hands has been washed down the drain. Anyway the Bond Market has already called the bluff and the brief EUR rally might come to an end sooner than expected.

 I have a feeling, those who are looking for a rally on Monday, 20^th June, might be in for some disappointment.

 I love this cartoon and could not resist copying it here. Courtesy Philstockworld.com

Whom they are trying to fool?

The pompous jacka*s duo Trichet and Sarkozy keep telling everyone who care to listen that there will be no haircut in Greek bailout. Everything will be voluntary and a Greek default is out of the question. They passionately defend everything that is European and throw hissy fit if anyone dares to say the inevitable.

One starts to wonder is it pure stupidity that these men cannot see the obvious? Or is there something else.

For an answer, let us look at the following chart.

Now we know!

The fact is, Trichet is a Frenchman and along with Sarkozy,  all he wants, is to keep the French banks out of the harm’s way, as long as possible. They know that they are just buying time and in the mean time, take money out of Germans and other still solvent European countries. They are doing the bidding of their masters after all.

Good to have such lap dogs!

In search of a bottom!

The stock markets have been selling off for the last 6 weeks and have barely had a green close this week.

Lots of people including many subscription based newsletters have been advising their readers to look at the long side of the trade again.

Some are saying the VIX has gone out of the BB and come back and that’s a sure sign of market rally. Some are looking at the high put/call ratio. Many are looking at chart patterns and technical Analysis to find the coming trend.

In my long association with the Stock Market, I have come to few conclusions and I base my trades on that. I do not believe that TA gives you any clue of the future. It just represents history.  I would be better off reading tea leaves. I also do not do day trading. Because I think it is like sitting on a rocking chair. It keeps you occupied but doesn’t take you anywhere. Moreover, when you are always looking at one minute or five minute charts, you tend to miss the big moves.

For a longer range trade I still depend on old fashioned fundamental analysis. But for trading purpose, I would rather look at market psychology. The stock markets represent the animal instinct and primal gambling nature of human being. Did you ever notice that there are more men than women in the field of speculation? That’s because men take more risks. Women make better investment decision although we men think we know better!

Stock markets are governed by greed and fear. And the pendulum swings between the two extremes. My measure of fear factor in the US Stock Markets is still VOX. Not VIX. VOX measures at the money options where as VIX measures out of the money options. VOX measures only the top 100 S&P companies which are more liquid and highly traded. In all similar selloffs / corrections where S&P has corrected between 5% to 10%, bottom has come when VOX has reached the level of 30%. Today it is still in the range of early 20s, which shows that while some fear is still there, panic has not yet set in.

And unless we see the panic, we would not see the bottom of this correction.

That is my humble view but market knows best and I can be very well wrong if we start a rally on Monday. After all it’s a double POMO day.

For me, I would still sell the bounce.

Bond Market has called the bluff of Europe.

This morning we work up with the wonderful news that Greece has been saved. Mom and Pop have made up and have given a nice photo-op. The “non default, default”  event was conjured up by the Politicians of Europe in the style of Prof. Dumbledore.  For a brief few hours we were transported to Hogwarts, the mystical and magical land. And then, poof! The magic went out of the window. The Bond Market called the bluff, lie and farce of the European politicians.

Let’s start with Greece.

Two year yield was near 30%. Not a sign of confidence, eh?

May be Ireland was doing better?

But last we saw, it was over 11%

We would probably have better luck with Portugal.

But no such luck, the rate was nearing 11%.

How about Spain?

Hmmmm, getting near 6%. What the bond market is seeing that we are missing?

But nothing to worry. Core Europe is fine.

Really?  Let’s look at Italy.

But if it is so fine, how come the rate there is near 5%.

The pompous fool of Trichet and Sarkozy is giving media show and gaining some more time for the Banks of their country, France. I don’t think they really care about Greece or united Europe or Euro, I think they are concerned with their jombi banks which are definitely going to go bust along with Greece. By the way, banks in France will be affected more badly than the banks in Germany when the time comes.

I also think, Merkel agreed to go along with Sarkozy for now because Germany have set September as their date of reckoning and the banks in Germany need some more time to withstand the catastrophic effect of the Greece default.

But the Bond Market and the Stock Markets called their bluff. The S&P 500, which went up 10 handles in the morning with the news of the “Non Default”, gave up almost all its gain for the day and at some point, was on the verge of going negative. Only some last minute monkey job saved the day for option expiry. The investing community knows a default when they see one.

I hate to say, “I told you so”, but I did tell you in the morning don’t believe this rally. It was running on empty.

A Stock Market rally is coming today.

So Greece has been saved while we were sleeping!

Germany and France apparently agrees on the common ground and there will now be another bailout package of $ 150 billion. No haircut for senior / private investors. And so the S&P futures are already up 12.5 points one hour before the open. A rally is coming today. Isn’t that a perfect world!

I have already said in my blog that we should expect the Stock Markets to go up on Thursday and Friday. How did I know? Did I have a dream or vision? No, but I am getting a feeling of the pattern of the manipulation in my head.

But I said that the low is not in yet and don’t believe in any bull$hit rally. There was not enough panic in the market for the market to go up. There was no gut wrenching despair and talk of share market crash. Everybody was expecting a bounce and bounce we are getting. Now everyone cannot be correct at the same time. To quote from one of my favorurite blogger Rohan from Australia:                                                                   ” if everyone has the same opinion, and has entered into the same trade in anticipation of that opinion playing out, then no-one is left to ‘buy’ or ‘sell’ to deliver the outcome that is the expected by the consensus opinion.”.

I think the stock markets will go up substantially today, not because the problems of the world have been kicked down for few months, but because the manipulators have to kill maximum number of puts and calls and so they have to pop the market today. Today might be a perfect opportunity to close all the longs and go on the short side of the market. 

I am expecting a lower low in the coming week.

Till “Debt” do us part.

The Stock markets in USA, reached their bottom only two years ago.  It was June 2009 when S&P 500 reached a low of 666, Dow reached a low of 6470. Two years hence S&P reached a high of 1370, Dow reached a high of 13870. They doubled!

So the factors which caused the stock markets to collapse in the 1^st place have all been sorted out, correct? Otherwise how come such a parabolic gravity defying moves?  But then we are shocked to see that unemployment is still above 9%. We are shocked. Even after spending over US $ 2 trillion, what we have to show for? Only the wealth effect in the stock market and commodity speculation. Sad but true. So what is driving the stock markets? For answer let us look at the following picture.

It is the huge amount of leverage built up on margin , helped by QE1 and QE2 , that has encouraged the investors, speculators and yield hungry pension funds to pile on to the long side based on the mantra  “ don’t fight the Fed”.  Margin levels are almost at the same level where they were in 2008.

But debt on debt does not help growth of GDP. If you have read the excellent book, “This time is different” by Reinhart & Rogoff, you know that after the debt has reached a certain percentage of GDP, it actually reduces growth and leads to default. Reinhart & Rogoff have given numerous examples from the last 700 years of various countries, where Countries have defaulted because they took on excessive debt. And we see that happening in Greece, Ireland, and Portugal and in so many other places. Japan has become a country in perpetual deflation for the last 3 decades and most likely the same situation awaits us here. The similarities between USA and Japan are too much to ignore, but that is a discussion topic for another day.

When the going was good, Greenspan was giving away free money and creating another bubble, all these banks and speculators have borrowed and invested, rather speculated on various assets, whose value today is less than half of what it was initially. Thus there is debt destruction or balance sheet contraction. Even the two trillion US Dollar that helicopter Ben has pumped in the system in the last 2 years, have not been able to increase the money  supply in the system because the banks are busy repairing their balance sheet to the extent they can. They are now holding approx. US Dollar 1.5 trillion in their cash reserve and hoping that when the sushi hits the fan now, they would be able to survive.

The problem facing us is not inflation, in spite of the money pumping because everywhere the value is getting destroyed, be it home equity for the individuals or loan portfolio of the banks. The powers that be have tried to fight this with more debt and it is failing. And they know that they are facing the demons of deflation.

Now we go back to the chart at the top. When deflation finally hits the shore, when the contagion from Europe catches up with USA and the dominos fall, the margins will be called 1^st and this time there will not be anyone to re-inflate it again. According to Russell Napier, the S&P 500 will reach 400 at the end of the true bear market. If such a situation should arise, all the castles of sands will be washed out to sea because:  the final bear market stage "is caused by distress selling of sound securities, regardless of their value, by those who must find cash market for at least a portion of their assets."

Low is not in yet.

I have mentioned in my morning post that today would most like be a green day. So it was. And I expect a big jump tomorrow and possibly on next Monday as well. But do not read much into these counter trend rallies because the next week may not be pretty. The low is not in yet.