2/25 Weekly Commentary

I went short last Thursday and took profits Monday near initial bottom.  I1 shows only a minor downward move to 3/4.  What caused me to short was primarily the wave count, which was completed 5s at multiple levels.  My re-entry Tuesday was perfect but I closed out the short when consumer confidence came in 4 points better than expected.  Since then I've waited for the first 5 down to complete, which happened Thursday in DJI and Wednesday for the other indexes. 
TLT was bought last week as well and has been a very good position thus far. 
Today started with 4% TLT and no stock position.  I bought 2% SDS when the 5 up to complete the irregular flat in SPX completed.  At that time I expected an extension because the important M/As were all above the market.  I bought another 2% SDS when SPX hit it's first 15-minute M/A and DJI came close to it's critical M/A.  At the same time a standing order to short NQ futures was filled at 2349.50.  I still show potential to SPX 1325 for a final leg to complete the extension. There is a count that counts c complete but I prefer to expect a rally from the congestion this afternoon.  Neither count agrees with EWI.  Monday I plan to buy another 2% SDS at SPX 1325.20 if it makes it that far.

I covered my short NQ at the close 2345.25 due to my expectation for a final pop.  Breaking down below 2345 Sunday evening will get me short again.



March 4 is the end of the continuing resolution for interim spending.  2011 budget has not passed even though we are 5 months into fiscal.  The House passed a TeaParty-fueled $61 billion cut to their draft of the 2011 budget and lobbed it over to the Senate.  GOP passed a 2-week continuing resolution today so if Senate Dems like it we get another 2 weeks.  March 4 is also when I1 bottoms so it is a good time for a bottom.  With only 5 days remaining in the decline it is probably going to be another 5 down to complete an abc at a new low.  I do not expect the stock market to fall apart until after mid-May, even though I expect a final top either 3/25 or 4/19.  Of course, if oil runs to $120 it will be due to a supply squeeze, not demand, and stocks will remain under pressure.

The stock market has reacted to the world tension rationally. 98% of the time the crude market is demand driven and oil tracks the stock market. In recessions demand falls and producers are chasing prices downward. In expansions demand rewards production, which can be increased to accomodate it. When the oil market is supply constrained due to unforeseen production cutbacks then the normal relationships with other markets inverts. Crude price rises sharply past the point where world economies are in equilibrium and their demand and GDP fall over time. Oil past $100 is not priced into oil and byproduct consumption. As opposed to Egypt this supply disruption is real and may be prolonged, so the Saudis will become the swing producer to make up the shortfall, stretching their capacity near it's limit. However, the Saudis need to produce more than the Libyan shortage to bring down the speculative fever. As long as Qaddafi stays in power the stock market is vulnerable to sharp downdrafts because the crude spec fever will remain. Hedge funds are gaming crude.