Wednesday, September 15, 2010

9/15 Daily Commentary

What is behind the increased correlation between world stock markets, individual stocks, and other asset classes?  The culprit appears to be macro-economic uncertainty and the potential for political failures.  For the first time since world war II the prospect for dispersion of nations into ethnic splinters is compelling.  This is due to the combination of debt load and growing intolerance for economic stagnation.  In turn the intolerance for the splinter in the right middle toe has grown.  That splinter is "others", no matter who they may be.  If they are not like us they will increasingly become the enemy.  Besides being sad, this has implications for the investment climate around the world.  People have been buying gold as a reflection of this very trend for 10 years running.  Stock markets do not benefit from this environment, but central banks and governments have been creating the illusion of progress whichever way they can in order to offset the reality.  Even China will splinter if continued good economic results are not forthcoming.
When prospects for reflating are improved then equities and commodities benefit and vice-versa.  Shorting gold now is an expression of the lack of reflationary impetus in the future.  It does not require deflation to puncture gold prices, merely the absence of governmental fiat meddling.  Money supply in the broadest sense is shrinking, not expanding, in the developed world.  This reflects the enormous debt burden that these societies bear and the lack of willingness of capital to add to it.  Government has been creating debt but not money due to the lack of lending.  Cisco has started paying dividends.  This is not bullish, but a reflection of the lack of investment potential that the company perceives.  It is this inability of the balloon to expand that explains the asset correlation.  Individual companies' fates are tied more to the macro world than to their micro decisions or products.  Commodities' fates are tied to the macro world's aggregate demand, not to the crop harvest or mine output.  Countries' fates are tied more than ever to their ability to reflate in order to escape the debt burden. 
Thus the tug of war in the stock market over the last 3 days.  Reflationists are grasping at Basel and their lack of action in order justify deploying cash. Commentators are saying what a wise decision it was to wait 5 to 8 years to implement increased capital standards, but it's just kicking the can down the road. Nobody wants to be on board when the capital chickens come home to the economic roost. 
So, the stock market had another leg today, almost reaching the highs yesterday. 
I posted an SPX chart showing an abc completion 1:25. It appears that the market has completed a double-zigzag and has gone into a triangle. If it breaks up in the futures market tonight then it is the spike and a triple zigzag. If it breaks down then the move is done and the highs have held.

The implications of the DJI breaking it's trendline from April is problematic. It did not exceed yesterday's high, but a final hour rally is not to be summarily dismissed.  The SPX did not exceed the high yesterday or the highs registered in June or August.  However, the DJI is the general and the idea of a spike to force bears off the field is compelling to me.  I suspect that the night session might see a spike that is reversed by the time the cash markets open tomorrow. Consequently, I have covered my DJ short at 10,507 and will await the spike to short again (or the break down from the triangle).

I bought 4% SDS at 30.51 and am attempting to sell in ARCA at 30.55 to bring me back down to 11%.

Gold and silver are consolidating their recent gains.  The trigger point to shorting the metals is well beneath the market and I'll open up commentary when it gets closer.

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