Wide Angle Lens Look At The Upcoming Quarter

Time to take a “wide angle” view of this market to get our bearings on where we stand heading into this last quarter of the year. It has been a tough trading year for most hedging strategies as the “one way” up market has, so far this year, made alpha generation a very tough affair and beta chasing the order of the day. The outlook heading into year-end is book cased by two very strong arguments. As I mentioned above, there is no denying that many money managers are going into this quarter behind their benchmarks and the scenario for a year end “mark up” in equities could be a real catalyst for the bulls. The resolution of the extreme uncertainty that will come about by the outcome of the elections should also be supportive of a push higher no matter who wins the election. Business and markets in general can deal with a tremendous amount of obstacles but one thing that it often has trouble with is lack of visibility or uncertainty. Make no mistake about it, the outcome of the elections will make a huge difference in the market environment going forward but the difference is from “good to better” as opposed to “good versus bad” in my opinion. The effect on the economy going forward by which side wins the elections will be drastically different in my opinion but the market will deal with that in due course. The ever more dovish Fed stands ready with gazillions of dollar at the beckon call of financial markets and the “Bernanke Put”, which investors have come to rely on so heavily, stands ready to bailout markets. The recent throw the kitchen sink announcements of QE should provide ample liquidity which banks will gladly throw put to work in the stock market.

Against this rosy backdrop lies the ever worsening domestic and Global economies. The slowdown that started to rear its ugly head back in March of this year has escalated and the recent economic data points have been worsening. Today’s Chicago PMI was one of the worst reports I have seen in a while. The Fed had reason to go so big and if the data points are any indication, we may be headed to another recession in 2013. Corporate earnings are also on the downside and many companies have slashed earnings outlook for the 4th quarter which was heavily weighted in the overall projections for the S&P 500 year end EPS targets. This fundamental slowdown in earnings growth will weigh on a market trading near multi year highs.

Headline risks abound. The situation in Europe is far from over and markets are vulnerable to shock events from this crisis. Like it or not, this risk premium will be with us for a while and will keep multiples pegged to the lower extremes of the recent trend. The political brinksmanship we are sure to see in dealing with the fiscal cliff later this year will augment that headline risk premium as I am fairly certain it will be a drawn out affair particularly if President Obama wins re-election and the Republicans maintain control of the House.

Finally from a technical standpoint, markets are going into the quarter somewhat overbought. The one way move higher since early June had pushed the S&P 500 into real overbought levels at 3 standard deviations from its 34 week moving averages. This had not happened since early April of 2010, a period that was soon followed by a sharp pullback. We have backed off of this extreme over the past 2 weeks but could very well consolidate some more. From a price perspective we are right at the midpoint on the 1 standard deviation regression channel from the March 2009 lows and the recent highs. From this vantage point, a move lower is very probable and my first major downside target here would be 1375 on the SPX. The stochastic oscillator and the accumulation/distribution histogram have shown some signs that support this thesis.

So, from a broad perspective, there you have it. There are several compelling reasons to be either bullish or bearish here. Figuring out when to be either is the name of the game.

C.J. Mendes

cjm

Trading Options For Income
8770 Sunset Drive 201
Miami Florida 33143

http://www.tradingoptionsforincome.com

 

Earning – A Wide Angle Lens Look At The Upcoming Quarter

Wide Angle Lens Look At The Upcoming Quarter

Time to take a “wide angle” view of this market to get our bearings on where we stand heading into this last quarter of the year. It has been a tough trading year for most hedging strategies as the “one way” up market has, so far this year, made alpha generation a very tough affair and beta chasing the order of the day. The outlook heading into year-end is book cased by two very strong arguments. As I mentioned above, there is no denying that many money managers are going into this quarter behind their benchmarks and the scenario for a year end “mark up” in equities could be a real catalyst for the bulls.

The resolution of the extreme uncertainty that will come about by the outcome of the elections should also be supportive of a push higher no matter who wins the election. Business and markets in general can deal with a tremendous amount of obstacles but one thing that it often has trouble with is lack of visibility or uncertainty. Make no mistake about it, the outcome of the elections will make a huge difference in the market environment going forward but the difference is from “good to better” as opposed to “good versus bad” in my opinion.

The effect on the economy

going forward by which side wins the elections will be drastically different in my opinion but the market will deal with that in due course. The ever more dovish Fed stands ready with gazillions of dollar at the beckon call of financial markets and the “Bernanke Put”, which investors have come to rely on so heavily, stands ready to bailout markets.

The recent throw the kitchen sink announcements of QE should provide ample liquidity which banks will gladly throw put to work in the stock market.

Against this rosy backdrop lies the ever worsening domestic and Global economies. The slowdown that started to rear its ugly head back in March of this year has escalated and the recent economic data points have been worsening.

Corporate earnings are also on the downside

many companies have slashed earnings outlook for the 4th quarter which was heavily weighted in the overall projections for the S&P 500 year end EPS targets. This fundamental slowdown in earnings growth will weigh on a market trading near multi year highs.

Headline risks abound.

The situation in Europe is far from over and markets are vulnerable to shock events from this crisis. Like it or not, this risk premium will be with us for a while and will keep multiples pegged to the lower extremes of the recent trend.

The political brinksmanship we are sure to see in dealing with the fiscal cliff later this year will augment that headline risk premium as I am fairly certain it will be a drawn out affair particularly if President Obama wins re-election and the Republicans maintain control of the House.

Finally from a technical standpoint…

markets are going into the quarter somewhat overbought. The one way move higher since early June had pushed the S&P 500 into real overbought levels at 3 standard deviations from its 34 week moving averages. This had not happened since early April of 2010, a period that was soon followed by a sharp pullback. We have backed off of this extreme over the past 2 weeks but could very well consolidate some more.

From a price perspective…

we are right at the midpoint on the 1 standard deviation regression channel from the March 2009 lows and the recent highs. From this vantage point, a move lower is very probable and my first major downside target here would be 1375 on the SPX. The stochastic oscillator and the accumulation/distribution histogram have shown some signs that support this thesis.

So, from a broad perspective, there you have it. There are several compelling reasons to be either bullish or bearish here. Figuring out when to be either is the name of the game.

 

 

Market- “Sterilized, Conditional and Unlimited ECB Bond Buying Program”

Market- “Sterilized, Conditional and Unlimited ECB Bond Buying Program”

I had high hopes for today’s ECB announcement and I was disappointed that Mario Draghi and the ECB central bankers chose to use a sterilized bond purchase plan and failed to lower rates. A sterilized purchase plan, particularly one that is conditional, even if “unlimited” in size, is basically taking from “Peter to give to Paul”. Because they are not expanding their balance sheet, the ECB is basically going to divert funds away from the performing countries to support failing ones.

The German courts will decide on the legality of the ESM (European Stability Mechanism) in the next week or so. I am not an Economist nor do I play one on TV but in my humble opinion, the EU needs to allow the ECB to expand their balance sheet. Europe needs growth and they need both monetary and fiscal actions that support economic expansion. To tie these emergency efforts to austerity is not going to help get these economies moving which is what is desperately needed across the European continent .

The market’s initial reaction primarily focused on the words “unlimited” and “bond buying” and risk assets took off to the races. I had anticipated this initial reaction yesterday and reason why we added the bullish call spread on the DIA and It may very well be that we rally for a couple of days. The mega caps of the DOW should outperform if that is indeed the case. The weaker shorts are covering positions in mass today and it remains to be seen if there is some “buy in” from investors over the next few days. From a technical standpoint, I still think there may be some downside ahead before the next major leg higher.

We have not made a test of support at the bottom rails of this channel since early August and we are very much short term overbought with the SPX well within 3 standard deviations above its 40 period MAs on the hourly charts. It remains to be seen if the “conditional” and “sterilized” terms which in my opinion are bearish aspects of the ECB announcement, get some more play over the next couple of sessions.

Headlines abound with the NFP (Jobs report) out tomorrow, the Fed next week along with the German court decision on the legality of the ESM which could theoretically put all of today’s gains in question. Tomorrow’s NFP number is expected to come in at around +120,000 jobs. Again it is very much a day by day market as traders react to the headlines “du jour”.

 

 

Market Commentary 6/11/12

Monday, June 11, 2012

The news flow out of Europe over the past 24 hours did manage to push up the futures and when we opened the session yesterday evening, the initial hour saw the best prints of the overnight session. From there on it was a slow and steady fallback to earth as participants digested the bailout’s lack of “fine print”. The lack of detail raised all sorts of concerns as traders continue to ask the same question which simply raises doubts about the efficacy of these piece meal programs.

Same old same old and as I anticipated Friday, the continued hesitancy to devalue the Euro, i.e. by lowering rates and/or by rolling out a Euro bond program, is hurting the credibility of the current European leaders to get ahead of this problem. The longer this festers, the lesser the impact of these band aid programs when launched.

Markets tried to push higher but there was no reversal to the building weakness from the futures session. As I mentioned above, we opened the futures session up nearly 200 points on the Dow futures and went into the open this morning up only around 45 points.

The early opening follow through of the futures action served to push the cash indices to that neckline I mentioned Friday. At the moment this remains the high for the session for both the RUT and the SPX and staying with this theme, if we are to trade this bottoming pattern to fruition, we should trade lower to around 745 RUT and 1295 SPX before the sustained move higher. The timeframe of the Greek elections on Sunday do lend credibility to this scenario playing out as I anticipate markets will deteriorate for the next couple of days in anticipation of a bad outcome and perhaps then recover strongly on the possibility of Fed/ECB intervention next week.

CJ Mendes

cjm

Trading Options For Income
8770 Sunset Drive 201
Miami Florida 33143

http://www.tradingoptionsforincome.com

Market Commentary 6/8/12

Friday, June 08, 2012

So what happens if Spain’s eminent bailout of its banks comes from the EFSF or the ESM? Because Spain is one of the largest economies in the Eurozone, its contribution to these facilities is approximately 13% with only Germany France and Italy having larger allocations at 29%, 22% and 17% respectively. If we zero out Spain’s contribution, as has been the case for Greece, Portugal and Ireland, we would have to believe the burden would shift once again to the core nations to pony up more funds… While perhaps easy to absorb the smaller contributions of Portugal, Greece and Ireland, Spain’s may be a bit harder to swallow.

While Greece’s upcoming elections and the threat of an abrupt Eurozone exit still looms large in traders psyche, the issues surrounding Spain pose a much more severe economic impact to the Eurozone in the long term. Spain and Italy are not only too big to fail, they are too big to rescue.

Rumors began to swirl around midday that European authorities and the IMF may be meeting regarding a possible petition from Spain for a bailout of its banks this weekend. This helped markets turn positive, hopeful that a resolution would be forthcoming sooner rather than later. President Obama also made some comments regarding the economy and in particular made comments about the European crisis and what many participants are taking away from the comments is that it seems the administration may be easing its stance against using IMF funds to aid Spain. Another day another set of variables to consider!

What I do know is that this weekend will be chock full of economic data from China which following an aggressive rate cut this week, promises to be below par. How much below par is what many are (have been) handicapping. With the Greek elections in the near horizon and the upcoming Fed FOMC meeting, the next two weeks promise to be very interesting. The VIX (cash) has backed off from its recent highs at around 26 sitting at 21.56 today. I am surprised that the VIX has managed to remain flat to slightly lower heading into the headline driven weekend but, along with the bullish price action today, it seems participants are willing to take some upside exposure into next week.

I would very much like to see a trip to SPX 1292 once again to retest that base and perhaps that is what we will get sometime next week. The price action in the major indices looks to be building an inverse head and shoulders pattern, a bullish structured if confirmed. The pattern is most clearly defined in the RUT (Russell 2000) as the neckline stands just slightly north of where are trading currently. Should this pattern confirm, as I believe it will, we could make a move lower to around 745 or so to complete the right shoulder of the pattern early next week before making a strong push higher, breaching the neckline of the structure at around 775. Upside from there should take us to around 835 very quickly if this plays out.

CJ Mendes

C.J. Mendes

cjm

Trading Options For Income
8770 Sunset Drive 201
Miami Florida 33143

http://www.tradingoptionsforincome.com

060812wtp.pdf

Market Commentary 6/6/12

I mentioned yesterday that it would not take much to push markets 20 to 30 handles and well, here it is. The market was desperate for something positive to hold on to that just the slightest hint of progress in the situation in Europe would get those speculative bears to jump in and cover their shorts. This in turn always brings out the momentum traders/day traders who piggyback on the move for a quick ride.

The news/headlines out of Europe today was mostly expected and was a lot of the same old same old. The ECB did not lower interest rates which most did not expect anyway and again mentioned their concern that more needs to done by the fiscal authorities. They are basically playing a game of hot potatoes between the politicians and the bankers.

So we got our oversold pop and from here on, the going gets a bit tougher. The short term intraday studies will have pushed out of their very oversold levels and in some cases have already entered overbought territory. The daily studies suggest that we have bottomed out and are beginning to build a bullish posture but as I mentioned before, looking at the intraday timeframes, it seems likely we will give back a bit either late into the afternoon or perhaps into tomorrow.

Lots of headline risk this week with Ben Bernanke in the airwaves tomorrow. Although any major comments regarding the Feds easing stance are not likely, we can’t discount the possibility that the Fed will use the bully pulpit to either “talk up” the market or perhaps to temper expectations.

Gold is an asset that is bucking the trend today. We had a huge move higher earlier in the week as traders anticipated that central banks would have no choice but to get involved again. Today’s lack of a more pronounced move in gold is perhaps indicative that this had already been priced in as the metal has failed to push higher even with the dollar index off nearly .75%. The long-term price structure for gold is encouraging and looks constructive from a technician’s perspective. Gold prices remain in an offensive position within the long-term weekly chart. The bad news for gold bulls is that the dollar index continues to trend higher and exert bearish pressure on gold prices. The dollar is being driven higher by the weakness in the Euro and the situation in Europe is only getting worse. Now here’s the tough part for gold traders. Do gold prices collapse as the crisis in Europe accelerates and drives the Euro lower (lower Euro = higher dollar =lower gold)? Or could we instead see gold gain bullish traction as a safe haven trade if Europe deteriorates dramatically?

Gold is at an inflection point right now and I expect a catalyst to emerge sooner rather than later. I like what I see from a technical perspective when I look at the long-term charts for gold. Gold prices surged last August and created a speculative “blow off” on the upside. This was exhaustive price action and strongly suggested that gold would be entering a consolidation phase. The metal has moved back across the weekly uptrend range and consolidated the rally started in 2008. This is a bullish price structure and the action remains constructive within the technical context of a long-term uptrend.

On the other hand, fundamentally speaking, the dollar index is creating a bearish headwind for gold prices. The dollar index has fought its way higher in what looks like a counter trend move within the long-term weekly downtrend for the dollar index. The crisis in Europe is keeping bullish pressure on the dollar index and without a resolution of some sort in Europe I expect this dynamic to continue. The fundamental backdrop and the normal inter-market correlations between gold, dollar, and euro suggest that gold prices should remain stalled at best even while the long term technical studies are telling us that a leg higher should be starting to develop at these levels.

CJ Mendes

Trading Options For Income
8770 Sunset Drive 201
Miami Florida 33143

http://www.tradingoptionsforincome.com

060612pop.pdf

Market Commentary 6/5/12

Tuesday, June 05, 2012

All eyes are on the ECB and other central banks around the world for signs of action taking to stem the continued deterioration in Europe and the slowing global economic picture. The Aussies lowered rates overnight and the British are expected to offer another round of QE this week when they finally get back to work. Fed speeches tomorrow and Thursday by Janet Yellen and Ben Bernanke respectively could shed some light on their current views on new easing measures and in the eyes of the market either raise or lower the probabilities of eminent Fed action.

Markets are in a holding pattern going into the late afternoon session, seesawing back and forth between flat and slightly higher. We could see a more robust move higher into the close today on a very oversold bounce. The dollar is trading firmer today and the Euro is slightly lower heading into the important session overnight. The Euro is very oversold here and we could see a relief bounce higher based on this technical factor and on any indication that measures are being addresses to limit the fallout from the over levered, undercapitalized European banks. The bounce will be brief and just long enough to serve to relieve the oversold condition. The longer term bearish trend in the Euro should quickly return.

From a technical standpoint the market setup is very favorable to an oversold reversal here and it won’t take much in terms of a catalyst to push us higher 20 to 30 handles in the S&P 500 just on short covering alone. The weak early session yesterday followed by the late afternoon rally is indicative that perhaps those who wanted out of this market have already done so. All we need now are some willing buyers!

The pullback yesterday following the weak session on Friday failed to bring about any sense of urgency to sell the market and it seems the bearish pressure has been completely exhausted. The early session had a feel of capitulation in some regards and there was clearly a changing of the guard as the early session bears handed the reins to bargain hunters.

The market is at a critical inflection point once again. Traders have to deal with their fear of a global recession or worse, versus the bullish opportunity created by the steep oversold conditions in the market and the potential effects of the “Fed On” or “Fed Off” bias. The rest of June should be interesting to say the very least!

C.J. Mendes

cjm

Trading Options For Income
8770 Sunset Drive 201
Miami Florida 33143

http://www.tradingoptionsforincome.com

060512gcb.pdf