Where are we, market-wise?

This is the 30-minute bar chart of SPY (the S&P 500 ETF) since 5/2 (click to enlarge).

So basically, for all the gyrations of the past few weeks, we're pretty much where we were almost 2 months ago. The market has been trapped in a 149-154 range.

The orange line is the 20-day simple moving average, a very useful measure of the intermediate-term trend. It has started, for the past 2 days, to turn down which is a fairly bearish sign (again on an intermediate-term basis, not a long-term basis).

The 149 support level is therefore all the more important. If it breaks, the fall will be nasty and quick and I don't see it stopping before the 200-day moving average at around 143.

Great read on the Toro's Running of the Bulls blog on "sub(merging) prime". Get ready for some real fireworks this time. Apparently, the ratings agencies are the ones who will emerge as the real villains in this whole mess. They have been using Monte Carlo simulations to rate those toxic CDOs and as any reader of Nassim Taleb will tell you, Monte Carlo lulls you into forgetting the possibility of a Black Swan-type of event.

And I thought lower rates meant a higher stock market!



Every day the market has been down the past 2 weeks, we were told it was because rates were going up. There goes that theory. Today, 10 year rates went down 25 basis points while the Dow went down 185 points. As most so-called expert explanations in the media, this one is not worth much. Same with the dubious relationship between oil price and stocks or dollar and stocks. You can make the case (as I do sometimes) that, over the long term, such relationships/correlations do exist but not day to day.
On the other hand, one very significant relationship today was the fact that Google went up 2% with a market down 1.3%. Google closed at a new all-time high and I would expect it, after this mighty show of force, to keep going up. I will be posting an update on GOOG in absolute as well as relative terms shortly.

The trading person's contrarian

Tim Knight, founder of Prophet.net, a very serious trader and the author of one of the best trading blogs out there, is of a bearish bent most of the time. He has therefore been used (with some success I must say) as a contrarian indicator by a few wily traders. Two weeks ago, for example, after the market rolled over following the lead of treasury bonds, he was jumping up and down bearish and utilizing his sentiment as a contrarian indicator paid off. Now the situation is very different. Yesterday's action was, to say the least, very preoccupying for the bulls. They're all afraid to even think about it let alone utter it, but the expression "double-top" is on their mind. Yet Tim, as his entry yesterday indicates, is only "cautiously bearish" and his sentiment is imbued with new found humility and all sorts of caveats.
That, my friends, is problematic for the Tim contrarians out there. Is it time to be the contrarian's contrarian?
Market action today and tomorrow should go a long way in answering this question.

J.C. Penney in trouble?


This is the daily chart for J.C. Penney (click to enlarge).
This could be a head and shoulder pattern in the making in which case an initial target would be something around 65. This chart does have many bearish things going for it (or against it if you're bullish-minded). A solid support at 75 was broken, the 200-day moving average (which often acts as support, as it did in mid-May) was broken decisively and both the 20-day and the 50-day moving averages are trending down.
I would advise caution though (as in: don't go and short 10,000 shares right this second). The 200-day has not started to turn down yet, the RSI is at potential snap back level and the 75 support is still within reach. So there could be some sort of rebound. Ideally, and to get deeper and deeper into the details, JCP would rally back to a turning 200-day Moving Average and then head back down again. I'd give the odds at 50/50 of JCP breaking here for good vs having a last gasp. So I'm short a little with a stop at 76.20.

The Stock Market on borrowed time?

I mentioned John Murphy and intermarket analysis before. This seems a good time to dwell on the subject a little bit.
Intermarket analysis involves the simultaneous analysis of the four financial markets: currencies, commodities, bonds and stock. J.M. uses chart analysis extensively to that end.
It's noteworthy that, according to intermarket analysis, near the end of an economic expansion, for example, stock prices and commodity prices are usually strong, while bond prices are weak, a situation not unlike the one we have at the present time. Bonds peak before stocks do while commodities peak last.
Bond prices have an impressive record as a leading indicator of the economy, although the lead time at peaks can be quite long. Stocks and commodities also qualify as leading indicators of the business cycle, although their warnings are much shorter than those of bonds.
Bonds turn first (17 months in advance on average since the 1920's), stocks second (seven months in advance on average) and commodities third (six months in advance).
Now, what this is telling me is that, should this bond dowtrend continue, the stock market would be on borrowed time. How much time would obviously depend on many factors such as the willingness of the Fed to cut rates, the state of the Chinese economy, etc... But in light of all this, it wouldn't be altogether unreasonable to consider late 2008 a possible danger zone for the stock market.

Very enjoyable read on the dk report. Besides being exhaustive and to the point (and bullish), it has that California laid-back quality to it.

Another piece on quants, this time in Barron's. Time to short quants? The usual spiel about how quantitative analysis is now mainstream and gets inspiration from evolutionary biology, signal-processing techniques, etc... An interesting bit about how the best protection against a market crash would be a contract based on the maximum drawdown of the S&P 500 index as opposed to a put option on the index. It would basically be equivalent to a trailing stop and would theoretically be better than both a put option on the S&P and a call option on the VIX (very unpredictable). This maximum drawdown contract would need to be traded actively though.

Interesting Barron's this week, I must admit. How about this gem of a comment by none other than Mister Bond King himself, Pimco's own Bill Gross:
"If [the Chinese] are not going to be buying Treasuries, maybe we should be unloading some of ours before they unload some of theirs".
Which means that Pimco has been actively participating in (causing?) the bond destruction of the past two weeks.
He decreased the duration of his bond portfolio because:
"it is safer to analyze what the Fed might do than whether and what the Chinese might buy."
Maybe he should emulate commodity investor Jim Rogers who not only hired a Chinese nanny so that his daughter (and presumably himself) can become a fluent Mandarin speaker, but is planning to move to China.