A deranged title for a de-ranged (breakout!) market.
A few short weeks ago, it was all beaver pelt top hat, seven fold Italian silk necktie and solid gold links on the French cuff. This week I feel like I am dressed in a dirty wife-beater, flat brimmed, slightly cocked trucker ball cap and have flames tattooed on my neck. What a mess!
Had I stuck with my simple, yet effective premise from a few weeks ago that sellers would get drawn and quartered throughout the summer at every possible opportunity, I would have bought this last dip with both fucking hands. And today I would be penning yet another blog ridiculing ‘Johnny Raincloud’ shorts for betting against the awesome power of the wild-eyed, 8-ball lifted, dip-buying chimps.
Instead, I am back in cash after stopping out for a small loss on my mutant leveraged ETF trade and am not participating in the upside. I have paid too much attention to the shrieking air-raid sirens and billowing black smoke coming from Europe this past two weeks, not to mention the disconcerting creaking and groaning underneath the lastest round of quarterly earnings reports. Couple that with significant divergences in VIX, XLF and IWM, I was fully convinced that the market was poised to roll over and die, which actually looked like a pretty goddamn sweet bet Monday morning.
Clearly, it wasn’t meant to be.
A humbling reminder that no one will ever know what drives the market or which way it will break the next day, week or month. All we can do is react. Stop loss orders and position sizing are all that really matter over the long haul. You can afford to be wrong, you just can’t afford to stay wrong. Don’t lose money and live to fight another day.
That being said, there are always clues in the market. One clue I disregarded over the past few weeks was the big gaps left open on the way down. Gaps in index charts tend to get filled, more often than not. Two runaway gaps left overhead early this week was a warning sign that the market could trade back up and fill them in, which it promptly did. While we’re on the topic of gaps, SPY filled the May 3rd 139 gap today, it looks like the leading DIA is just cents away from filling it’s May 3 gap and the lagging IWM is just ticks away from filling the July 19th gap. The VIX has now filled the gap up from last Monday and is now putting in yet another major divergence with the SPX, holding well above recent 15 lows while the SPX blasts to new highs. There are two large gaps below price near 129 & 135 SPY.
So what now?
Just so I am clear. That wasn’t some fever induced hallucination over the last few weeks. Runaway bond yields in Spain and Italy are a precursor to the financial equivalent of main nuclear core reactor meltdown. I can almost promise you that if ‘jawboning’ wouldn’t have halted the decline, there would have been emergency meetings over the weekend. Next week may produce some sort of a inflection point. Atop the rather large load of economic reports, the ECB and Fed both have planned meetings for the last time for 6 weeks. One or both had better either produce or convince that raw, unfettered and wanton currency debasement is forthcoming. The tell will be the next Spanish bond auction on Thursday and it had better go off without a hitch. The ECB, over the past 2 years, couldn’t manage to pull Greece out of the fire and the clock is running dangerously low on Italy and Spain.
We’ll know soon enough.
To keep it simple, if it looks like ‘all systems are go’ by mid week, I am looking to enter long on trend continuation higher, likely basic materials and DIA / mega-cap leading stocks. If more divergences appear and the market turns back down, I am right back on the mutant ETF carnival ride.
Have a nice weekend.