Containment and other Fairy Tales

Friday marks the one-year anniversary of the new (I can finally stop calling it that!)  Despite all the twists and turns, it’s been a pretty successful year [see: RESULTS.]

But, I’m always on the lookout for ways to make it better.  So, please take a moment to share your thoughts when the 1st annual pebblewriter survey hits your inbox. 

It’s just a few quick quick questions regarding and a managed fund under consideration.  If you’d like to be on the mailing list once information becomes available, just CONTACT ME and tell me “put me on the list.” 

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Just how top heavy is the market?  According to a study posted by Albertarocks, complacency is at an all-time high.  The SPX:VIX ratio just tagged 138.37, topping even 2007’s peak.  To give you an idea how big a deal this is, that’s almost 3 standard deviations above the 30-month moving average.

This is the lap into which the Cyprus mess was dropped. With exquisite timing, the euro-bumblers have unwound all the feel-good kumbaya momo generated by Draghi who, we were promised, would do “whatever it takes.”

Never fear, though.  According to a note Goldman Sachs put out earlier: “…assuming the package is passed, the direct ramifications from Cyprus will likely be contained.”

Containment.  Didn’t we hear that word a lot when the Fukushima reactors were melting down… and when the London Whale was blowing up?  It reminds me of language back in late 2007, this from The Guardian:

The Wall Street bank Lehman Brothers dodged the worst of the credit crunch to achieve a 5% rise in annual profits to $4.2bn (£2.06bn), driven by tight risk control and impressive earnings from global equity trading.  A strong performance in the first nine months offset a 12% drop in profits in the quarter to November, when fears over the sub-prime crisis returned.

Chris O’Meara, the bank’s global head of risk management, said: “Although we have not emerged unscathed from the recent market turmoil, we believe we have done a good job in managing our risks.”

An analyst…said: “For many investors, it is not necessarily about beating expectations but the lack of skeletons in the closet of fixed income. Lehman seems to have fewer skeletons.”

The dollar is consolidating at the target level identified last Friday and is struggling with whether to continue in lock step with US equities or revert to its more traditional role (of late) as the risk-off instrument of choice.

While, the EURUSD — which had made a valiant effort to break out of a rapidly declining channel — is again testing its recent lows.

Not to worry, though; the FOMC meets today and tomorrow and is certain to have the situation, well, contained.

SPX almost reached the .786 retracement of the drop from 1563.62 yesterday before falling back to support at the purple channel midline.  Bulls need a strong move above 1553-1555; bears need a drop through that midline — currently around 1550.

Anyone playing the bounce from yesterday’s 1545 low would do well to keep an eye on the  channels for signs of a breakdown.  I remain short from 1561, but won’t rest easy until we can score some lower lows.

Yesterday’s reversal just shy of the .786 opens up the possibility of a Butterfly Pattern to the 1.272 or 1.618 extension of the recent 1563 – 1545 drop.  The 1.272 Fib is at 1568.65 and the 1.618 is at 1575.05 — one point below SPX’s all-time high.

It’s not that the market should trade through 1576, but the opportunity might prove fleeting and the target too irresistible for TPTB.

UPDATE:  12:00 PM

Finally getting some action — SPX just broke beneath yesterday’s 1545 low.  We’re seeing a bounce on the 1.272 of the drop from 1530 to 1485, but it will probably only reach 1545 as the market continues to drop.

Now that things are loosening up, I’ll hazard some more specific downside targets.

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