Wednesday, August 11, 2010

Over throw over?

Often a Fed day closes are a fake out. The market attempted to show strength...that strength was not supported by the small and mid caps. This is not a good sign... additionally, my systems have NO longs right now although there are a few mixed biases for some of them. There are however, systems that are short as of today's close and over the last few days. I think that a very many people are looking at both an inverse head and shoulders and a bearish wedge, my preferred scenario would be to see the market over throw and confuse both of those views. What I am pointing out is that the market is at a high risk of failure - the ripe looking retracement in the EURO and bearish indications on my earlier charts of the TF (among others) are not to be underestimated. We may yet get our over throw, and my systems may not be piling into shorts here but the next confirmed system entries should be large trades. If there is a further bounce up, it is likey that the systems will use that opportunity to take shorts - as many of the mixed signals among them have reverted back to "bias short". For reference, further bounces up in the SP500 should find very hard resistance at the 1160 area - a previous trending cycle breakdown level.

One other note: If you are wondering why I have not included charts of the system trades as I usually have done, I have, due to inappropriate/unauthorized action of a few individuals and additionally, for other reasons I have previously discussed, reduced the publishing of trading charts of the systems. I will continue post information I feel is relevant and will likely post systems at major market inflection points as, hopefully, a neutral opinion for reference. I have set up a non-public managed blog to continue to share proprietary systems activity etc with clients and selected individuals. If you are interested in participating please email me directly at by clicking here.

Some additional comments and my overall opinion: There are very good probabilities of a 30+% drop in average wages in the US in the not so distant future. I see that already happening for quite some time now. In the software development world I see plenty of people with earnings power reduced by a magnitude of 70 to 80%. In many other fields I see similar though less extreme compression. 

Real Estate is currently highly unaffordable assuming the quite optimistic earnings power factored into current valuation assumptions. Additionally, there will be further contraction of credit as indicated by my recent charts of treasuries. Considering what I anticipate to be the highly deflationary earnings power for the average US and even global employees, housing is still in a bubble of similar magnitude to that of 2005 to 2007 (much worse in China, Canada and Australia and a few other countries) and will likely have very far yet to fall... very likely well in excess of 50% lower than current already depressed(?) prices over the next years. As for the equity markets, I would not be surprised to see 20 to 25% drops in the major indexes before the end of the year and much more as the total volume of money continues its dramatic contraction (40% in the last year alone). As far as GDP, I would expect greater than 10% contraction over the next few years - after the Government gets done revising the numbers downward it will be 5 years later however.

Though I do not trade fundamentals, none of the above analysis is fundamental valuation based, its liquidity based. All of my systems analyze liquidity and price. Fundamentals are just another derivative and of similar value for measurement and decision support as an out of the money option on a futures contract or a structured product promoted by Goldman Tax or JPMorgan. They tell you nothing since they are completely arbitrary. 

For reference, I would like to point out that the SP500 has vacillated from a PE of 1 to a PE of something over 50 (based on casual recollection) over a large sample of time. At both of those extremes people were equally confused. Why because the fundamentals always change in interpretation since they are derivative values. Book Value is important if a company does not face a calamity or a drain on cash or a decline in book value assets. In other times, future earnings and earnings growth mean you need to worry about book value much less or better can mark them up like JP Morgan likes to do (calling that earnings). in most instances, you can attempt to use book value (or any other fundamental metric) to base asset purchase decisions on and you only end up with the worst companies around because those are the only ones that trade as substantial discounts. Of course there are exceptions, but as a general rule, trading below book value tells me as much information as Moncia Lewinski's ads for handbags do about President Clinton. Both of them are completely arbitrary and essentially non correlated to the question at hand. What we are going though here and now is a change in the measurement of monetary units...fundemental values, assumptions and collateral will be distorted drastically in this process.

One last comment...I hope I am wrong.
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