Riding a bike up the hill through dense fog...

We have to think in terms of gravity which means....picture Ben riding up the hill on his bike through a dense fog. He has no idea where the top is and keeps pedaling, trying to get higher and higher (....avoiding the bad weather down in the village...). At some point he will have reached the top and will accelerate down. There is nothing he can do!! (it's just the nature of speculative manias, no matter whether they are artificially induced or not).

This means you don't need a catalyst just time to reach that point.

Listen to Bob Hoye to get more on this idea

http://howestreet.com/2011/01/bob-hoye-rally/

The more interesting question revolves around the concept of a safe haven when the day arrives. Will it be GOLD or the US$ ?

Mr. Market will tell.

...be patient Jason

Thoughts of a schizophrenic Deflationist

I'm a schizophrenic Deflationist who believes in the Deflationary Ideas of a David Rosenberg and Gary Shilling and holds a sizable physical Gold and Silver position. (..will add on Monay...)

Why? How ?....because I believe both scenaries could be possible in a world where we have the separation btw. the 'have and have not's'. I'm imaging a world where deflationtionary forces from housing in the US or from Energy & Food Inflation in China, US, Europe will hit the have 'have not's', where they will also struggle with wage arbitrage into the Emerging Markets and Unemployment in the western world. This is a world where Ben Bernanke tries to prop up the Banks, HedgeFunds and the global Stock Markets, but he seems to have a date with destiny. Ben works hard to keep up the Illusion that the Global leaders demand from him and his buddy Trichet. The degree of exuberance hints at a brutal date!

Why?...because the Playas have made lots of money, the optionbooks are full of wealth but each incremental Dollar of new return comes with an increasingly higher risk factor. The average investor has left the market (see flow posts of today), breadth is deteriorating and it seems like we are reaching irrational exuberance. Maybe this can go for another round, maybe not, BUT GRAVITY IS OUT THERE BEN!!

In a market with lacking liquidity (look at the 5 big figure move in the EURO last week!!), 'the haves' have hedged or are in cash or waiting for corrections in Gold to follow the Chinese, the Indians and half of Switzerland and the Middle East.

This is why I'm a schizophrenic Deflationists.

SUSI medium term special

When I first experiemented with SUSI I also set up a feature that does Fibonacci Fans and Retracements on Weekly Charts with a special twist. The Twist being that we apply these ratio on log-price data rather then on the raw price data (which then only gets charted on a log scale). Both approaches have their merits whereby the latter one is easier to chart and has therefore found its way into all charting software packages. I found the other variation as valuable as the popular one and when you look at the enclosed charts you will find the same.

I use the usual Fib ratios from 23.6-38.2-61.8-78.2-127-138-168 for the Fans as well as for the RETs. (The charts have no Y-axis for technical reasons)

Beyond that I played with the concept of important/ meaningful support/resistance trendlines (following some algo that weights and selects pivots for that). You will find these trendline in red and blue.

Here is what SUSI showed today for last week:

1) EURYEN

2) SEMICONDUCTORS (SOX)
3) GERMAN DAX
4) BANKS (BKX)
5) OIL & GAS/ Energy Sector (XOI)

Above you'll find selected key sectors and they all seem to tell a similar story. Maybe there is a way to spin this positively but I'm lacking the fantasy of how ....

The beauty of these charts is the fact that they present a true representations of Mr. Market's state of mind, because these levels are not frequently targeted and played by the ROBOT-traders that mostly focus on the popular Fib-lines to play their hunting games. (WHERE YOU ARE THE PREY!!). This is what I call my 2nd Derivative concept, where we look at what all the others look at, try to understand their conclusions and do something else ...like with a proprietary Indicator....

Bottom Line:

We have taken out some key Fib Levels and the Bulls have to regain those before we will loose the ghost named "DOUBLE DIP".

In other words, buckle up for some rough sledding into October.

Vix Squared Echo analysis and Long Term Pitchfork scenarios

Here we just want to show what technical damage the "new bull market" has to overcome to prove himself or in other words how things have to be different this time to reconcile with the spin of the "main street view".....

The Liquidity Mirage or what you should know about High Frequency Trading

• This seems like an exotic topic for the trading aficinados only.
• This is also not a trivial topic.
• This is another example of how my 2nd Derivative theme, where the smartest and sharpest minds found ways to exploit "commonly accepted and employed procedures" of the "average" institutional investor.
• This is most likely right now the most profitable and risk minimal trading strategy on Wall Street. (Zero guesses $ 4bn for Goldman alone per year)
• This works because most participants (read YOU and YOUR investment and/ or mutual funds) don't even know that they are fleeced (you know about the old proverb saying that if you don't know who the sucker is it is most likely YOU...).
• This is completely legal !!

good Videos explaining the basics.....
http://zerohedge.blogspot.com/2009/07/joe-saluzzi-provides-further-color-on.html

http://zerohedge.blogspot.com/2009/07/themis-trading-principal-program.html


related white paper http://www.themistrading.com/article_files/0000/0348/Toxic_Equity_Trading_on_Wall_Street_12-17-08.pdf

or here

http://zerohedge.blogspot.com/2009/07/toxic-equity-trading-order-flow-on-wall.html



more background info on Program Trading on the NYSE
http://zerohedge.blogspot.com/2009/07/is-case-of-quant-trading-industrial.html



This also means that you have to be very careful with your standard VOLUME analysis, because the volume you see is a derivative of program trading and black pools and might not represent liquidity in the original sense.


hat tip to http://zerohedge.blogspot.com/ for their in depth coverage

VIX Future is flying again.../GOLDMAN/ BUSTED CHART PATTERNS

The Vix Future is at 1.14x the VIX in the middle of the option expiration week.

Buckle up this could turn into a bumpy ride......someone here REALLY needed his options in the money this week.....

Pls also see sentiment trader on this.

Talking about risk pls see how Goldmann is pumping up the Value at Risk figures to really produce some exceptional numbers. This all shows that all you need is a rally, you double up on risk and VOILA you get a dream Q2. This unfortunately makes you very susceptible to BLACK SWANS or proves your ignorance of MORAL HAZARD. If you on top then manage to get MAMA BEAR of the FINANCIALS (Meredith W.) to change here short term view (now that she is independent, running here own research shop...) you have a fair chance to live through a short term (option expiration week!!) fairy tale....

Just as an aside has anyone noticed that we see more and more chart patterns go bust in a way as if some large trading book(s) is (are) trading against them as soon as they become obvious knowing that everyone is seeing the same. (my 2nd Derivative theme!)

This lead makes the the busted patterns your best bets to play the patterns. Tom Bulkowski as some some remarkable work on this. Take the S&P500 which seems to bounce on the neckline (busted pattern) in order to scare and shake out the pattern followers in order to set up for the kill (?)...just a thought....

What going on in the FIXED INCOME land ....?

pls examine exhibits 1-3 

1) Zero's latest CDS update....highlights... "continuing the optimism/pessimism divergence between equity and credit/CDS.."

http://zerohedge.blogspot.com/2009/05/latest-dtcc-cds-update-week-of-may-22.html

2) Prieur du Plessis shows an "all clear" picture from the short term fixed income market

http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2009/05/26/credit-crisis-watch.aspx

3) Curve Steepening craze

http://zerohedge.blogspot.com/2009/05/2s10s-curve-just-surpassed-record.html

If you feel your head is spinning, be welcome to the land of unintended consequences. We stresses last weekend (http://reflections-of-reality.blogspot.com/2009/05/dollar-deleveraging.html)

that curve steepening bodes ill in the current environment of a balance sheet recession.  We also mapped out in our 2nd DERIVATIVE THEOREM (http://reflections-of-reality.blogspot.com/2009/05/2-derivative-theorem.html)

 how one could create a virtual Sentiment surge which we now see displayed in EXHIBIT 2.   And don't forget the SMART MONEY the high stake rollers playing the CDS Market setting up the bear play.

Does this explain the picture ? The anser is no , but it tries to find "reflections" like YETI traces in the snow to at least picture the gigantic tug of war that is taking place between the Bulls vs. the Bears, Interventionism vs. Gravity, Smart Money vs. Dump Money......

This war can drag on for some time and lead to 2008 Replay or a SPX 1200 surge (after a short correction) followed by a later day of reckoning. 

 

The 2 Derivative Theorem

The 2 Derivative Theorem means that if all paticipants are looking at the same data (like a car Dashboard),they most likely will all come to similar conclusions.

Therefore you don't look at the NEWS, DATA itsself but at how the "HERD" will interpret this info and decide whether you find the "herds' view"compelling or not.

Warning: Once everyone is looking at the same Indicators (technical and/ or macro indicators) you can easily change the  Sentiment or better the perception of reality by massaging the "commonly accepted true economic and market indicators".

The good news is that this can never be a perfect "crime" and that there will always been vestiges (it feels a bit like CSI) 

So how could this work:

......

1) start with a trust building media blitz incl. homestory with Ben Bernanke/ Obama

2) Stock market rally

3) Interventions in the Fixed Income market 

(must read from Contrary Investor http://safehaven.com/article-13233.htm)

4) Fed statments that alludes to an end of the worst of the crisis

5) Ignore the dire realities and sell hope

Pls ask your self whether the current "green shoots" euphoria reflects the current global realities. 

For this pls have a look at the graphs from the St. Louis FED provided by Barry Ritholtz

http://www.ritholtz.com/blog/2009/05/tracking-the-global-recession/

(hat tip barry)

6) Distract from economic realities and trigger emotional comfort/ solidarity by crusading hedgefunds and other ultra capitalist targets

7) Promise Welfare programs you know you can never effort

All the above buys you time which could suffice to turn the recession around, with the risk that if you fail you wind up in a position where

you have doubled down....

Don't get me wrong this could work ! But it feels like gambling in a casino where the they put all our money on red and if they fail we loose.

This seems to me as the ulimate MORAL HAZARD !!

Conclusion:

Price is the ultimate arbiter, Price is truth, You have to respect the market even if it defies your anchored believes.

On the other side we can experience temporary inconsistencies, i.e. diverging price signals in different markets due to distortions or adaptive processes (read interventions) that will trigger alerts that have to been taken very seriously.

Therefore coherent price signals are key rather then single market signals.

At the time of this writing the Inconsistencies are everywhere, in the stock market (look at previous Golden5 posts) and ever more important in the fixed income market (see again Contrary Investor http://safehaven.com/article-13233.htm). 

On the other side as Keynes used to say that the market can stay longer irrational that the participants solvent,  meaning we don't know to what extent the market can and will defy gravity .......