Friday, June 3, 2011

6/3 Weekly Commentary

The stock market spent the week discounting an expected weak jobs report.  The actual jobs report was even weaker than forecast and caused me to chase the market to re-instate DXD 2% position.  Stock futures closed near their lows.  SP and DJ are approaching their April lows.  The next increase in stock short position will occur on strength.
Raw I1 is in a sideways-to-down position for the next several sessions.  This is primarily due to one of it's components, the short-term timing series.  This series indicates that the decline will not accelerate until at least Tuesday at the close.  The market will probably rally until then, affording me an opportunity to short.

The market decline over the past 5 weeks has not brought the technical condition to oversold.  The decline has proven itself by breaking the DJI critical M/A as well as the 50-day for all major averages. I'm looking to increase short position on strength to the SP futures 30-minute M/A and DJI critical M/A. 

The precious metals PM1 sentiment gauge is declining.  I've been waiting for gold to peak before shorting silver again.  Too much time has elapsed waiting and the new high in gold is no longer a requirement  (the top may already be in).

A silver rally back to it's 90-minute M/A's (green and blue lines) will get me short.

Economic and Sentiment Background
The fallout from the Japan quake continues to mount as the fallout decimates Japanese psychology.  Sentiment is turning worldwide as economic releases reflect weakness.  The bulls (with their cheerleaders, the economists) are confident that the conditions are temporary and Japanese production even now has come back to near 100%.  Whatever happened to the dismal economists?  The current flock put their faith in fiat expansion and as long as government does what it should [sic] then the economy should keep rolling along in a never-ending wave of debt-driven prosperity.
The following factors apply to the stock market trend until April of next year:
  • The sentiment damage in Japan has already occurred and production levels will not change it. 
  • Corporate profits have already peaked due to high costs and lack of pricing power.
  • The world is slowly shifting to more conservative finance after a prolonged bout of recklessness. 
  • QE3 is out of the question until next year (if at all) for political reasons. Next year's election may bring it out of the bottle.  It would be disastrous to attempt it but election years do strange things to people.
  • The rest of the world is shifting policy to tightening to curb commodity inflation in local currencies and counter-balance the Fed. 
  • The increasing leverage that the Fed is operating under will force it to recognize it's risk profile (hopefully before the debt market prices to that risk).  The only way to reduce risk is to sell assets.


  1. Nice weekend commentary, Steve. Thank you!

    When you say you'll use the critical DJI MA envelope to increase shorts, do you mean that you will wait for DJX to move all the way back to the UPPER end of the envelope (now at around 12,470 before adding shorts? Or would you consider adding when/if it tags the MA itself, which is at 12,304?

    Retracing all the way back to the upper envelope boundary seems like a deep retracement and therefore seems unlikely to me.

  2. Same question regarding the 30 min MA on ES. Currently ES is trading BELOW the lower envelope boundary. Again, are you expecting it to trade all the way back to the upper boundary, currently at around 1316?

  3. pima,
    I expect Monday to be an up day. I'll short both at the 30-minute and 5 points past it with stop on the .5% 30-minute close.

  4. Thanks, Steve.

    I also expect Monday to be an up day.

    So you're saying you'll short at the MA and another short at 5 points above the MA, and use the upper envelope boundary for stop loss (on a 30 min close above it).

    I like that plan.

    I am short spx, djx, nq, and tf, via short index etf's (sh, dog, psq, and rwm), but my positions are small so far. I will add on Monday and may follow your lead.

    Enjoy the rest of your weekend!