Clearly my call from 2 weeks ago was premature and wrong. The squeeze has been epic but even more epic than I thought. Additionally, the cyclicals and credit have decided to put on a nice move as well since April 7th. At this point the bear case has become weakened due mostly to improving credit. Credit has improved because Draghi has backstopped it and Janet and Obama have been rumored to talk about backstopping the banks on their energy losses. As a result, the VIX has been crushed and volatility has returned pre-August levels. However there are numerous signs of waning momentum and converging DeMark signals in all different types of assets classes. Could we melt up? Yes the possibility is there. I still believe that this is a head fake but I have been stopped out of many positions and would rather see a turn at this point than commit any more capital. I am still short some financial frauds that continue to bleed.
I have come to realize that the CBs are losing power as it takes more and more candy to prop this up. However, I now also realize that they act before in what they call macro prudential actions before the ball really gets rolling. If it is true that they will back stop the banks then this is unprecedented manipulation and moral hazard. This will result in shallower corrections than we might expect. Trading two ways is recommended at this point. The disconnect in financial assets and fundamentals has never been greater than it has been. We have record valuations with declining earnings. The systemic threat has never been greater to both the financial system and the fabric of society as it is now given the political backdrop. If it is true that losses are being absorbed behind the scenes then the 99% will not be pleased. Just the mere threat of this seems to have gotten the job done for now.
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