Saturday, February 4, 2012

Extremes are everywhere...

Yes, I have seen the risks in the market as biased towards the downside in the bigger picture and yes, I thought the limits of the counter risks were in the 1,312 to 1,318 area on the S&P and yes, I clearly underestimated the deleveraging pressures that are driving this asset ramp…but that’s exactly what is happening, the deleveraging and resolution/derisking of derivatives obligations and portfolios in the financial system - especially European - triggered by and exacerbated by implications/clear effort to undermine contract payouts and settlements by central planners and their facilitators are driving very contrived and unnatural fractal behavior in the markets including the current  overthrows.

Usually, on bullish moves, close to close price variances are somewhat noisy and diffuse - this creates opportunity to trade. However, in these last moves in the markets, the activity driving upside price momentum is much more akin to the normal forces driving downside activity and contain little noise or price variation. At this point, the extremeness of this ultra smooth condition is TOTALLY UNPRECEDENTED. The smoothness of the data series and the collapse of traditional correlations and orderly behavior is being pushed to its limits. 

Whether one buys into the jobs report from yesterday or not…the momentum in the markets has been unsound and unprecedented in its character - as I suspect the reaction to it will also be as the current derivatives deleveraging winds down and reverts to a more normal asset to capital deleveraging process rather than the reverse. We do need to be aware that the derivatives markets are in the 800 trillion range and the obligations which are now being addressed simply in those markets alone are able to drive absolutely unprecedented behavior in markets in ways that one would never normally associate with deleveraging.

For what its worth, the bounces off the lows in the major equity indexes as shown below ARE clear A-B-C patterns and what’s more are picture perfect at symmetry. I NEVER in my imagination thought that the large one-to-one symmetry that is most common in A-B-C patterns would actually play out. I was wanted to be early as I felt getting to a 62% to 76% projection of wave A would be far more likely. Clearly, I have been very wrong with that view…and as implied, early with it as well. However, that does not change the fact that we have now reached nearly perfect symmetry and VERY long-term resistance at the same time and the reactions should be significant. 
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