Information Overload, The S&P, and Some Bond Action

The release of a plethora of information this week should make for a very interesting, if not volatile, trading environment.  Between the housing numbers, industrial production and the CPI, we also have the FOMC minutes being released which will give us a glimpse into the minds of the Fed governors.  As far as capital flows are concerned, the housing numbers which will be out later today and tomorrow will drive near term sentiment as recovery, or at a minimum, stabilization of real estate prices is factored into the equation. 

With the S&P 500 futures getting very close to taking out big resistance, the question will be what next?  If the S&P futures (Front month) take out, and stay above the 1082-1085 level then we must reevaluate the short side of the market and concede that underlying strength has kept prices from correcting a full 10%.  If there are any clues as to the why the market is firm, look no further than the Russell 2000 and ND indexes which have shown amazing resilience in the face of renewed short selling.

Prices started to show the evidence of what looked to be an asset allocation last week which kept stocks firm and put pressure on rates, in particular the 10 year note.  Let’s keep a sharp eye on whether the inverse relationship between bonds and stocks continues this week…Remember, bond yields go up as prices go down.  An asset allocation from fixed income to equities would put upside pressure on 10 year rates while simultaneously keeping stocks firm. 

-JB

A Big Newsday, Greece and the Euro, and Berkshire

Every once in a while comes a day when the news surrounding the market makes for a great trading session.  Today is one of those days.  Not only do we have the situation in Greece to watch, but it comes at a time when the Chinese announced another raise in the reserve requirement (the second in a month) to cool off an overheating economy.  Take all of that and factor in the dollar volatility and the release of retail sales and you have the formula for increased price action.  

The situation in Greece is critical.  The developing story is not only from an economic outlook but also from a political view.  If the EU does not handle the situation in Greece to the satisfaction of the Euro Community then it could be the beginning of the end of the Euro experiment. Watch the action in the Euro against the dollar…that should give investors an idea of what smart money thinks might happen.  One thing to keep in min d is that the EU ministers are meeting on Monday, which turns out to be a holiday in the US markets so liquidity will be a problem if there are any surprises.  

Berkshire Hathaway B shares are being placed into the S&P 500 index at the close of today’s trade. This creates an interesting opportunity for traders.  Remember, BH B shares has a larger market cap than Burlington, which was removed, so indexers and portfolio managers must raise cash in order to buy the appropriate amount of the newly added stock. That comes out to billions of dollars that must be adjusted by the close of today’s session. The trade for the risk arbitrage community is one in which they are long BH and short the index. This trade is short lived and will be unwound on the close.

-JB

Greece, The Dollar and A Play Off Of The Bounce

When I asked about what a veteran market observer thought of recent action in stocks, his reply was, “It’s all Greek to me!”…And he was right!  It’s all about Greece.  The problems facing the EU are more than just a bail out of the overspending Greeks; the ECB is in danger of setting off a domino affect which will involve Spain, Ireland and possibly Portugal.  If Greece is rescued then the precedent will be set for other member countries to come running with their proverbial hand out!! Keep an eye on Europe as the movement in the dollar has become the barometer of developments as they happen…This is a dollar story!

 
The bounce in stocks, led by the turn in the US currency, has proved to be a wonderful trade for active managers as the volatility has created plenty of 2 sided opportunities.  It appears as if professionals continue to try and sell rallies…That might change with a sustained trade above the 1080 level in the front month S&P 500 futures contract.  The treasury auctions this week seem to be taking a back seat to the news coming from the Euro zone but watch for a surprise with the longer term paper being auctioned off today and tomorrow

-JB

VIX and The Treasury FX Relationship

It’s amazing what an 8% pullback in equity prices will do to a volatility index which was under 18.  If anyone was wondering how quickly fear can reenter the investor mentality look no further than the vicious spike in the VIX over the course of the last couple of weeks.  As I wrote in this blog a couple of weeks ago, complacency had become prevalent throughout the investment world.  Both institutional and retail traders began to believe that it was once again possible to be long the market with confidence.  It’s become apparent that the market is working off some of the excess pricing we witnessed in November and December giving way to a much needed relief correction.  It would be expected that ‘fast money’ will continue to sell rallies until it no longer works.  Look for previous areas of support to turn into tough resistance as the market bounces off of the near term lows set last week.

This is a big week for treasuries as 3, 10 and 30 year paper supplies an already saturated market.  It will be a good test as to whether the appetite for US government securities is as strong as has been over the course of the last few months especially in light of the fact that the Fed has announced the end of QE and other programs in March.  This is an issue which will affect not only the interest rate market, but also the FX universe as currency volatility becomes the norm.

-JB

Jobs and S&P

The jobs report was mixed at best with the headline number beating expectations but job losses greater than the estimates. How can another 20k job losses be considered good news when we need approximately 150k jobs created just to maintain those going into the workforce?  WE NEED JOB CREATION!  It must be organic in nature and sustainable!  The report showed 52k jobs created in temporary work. It used to be that temps were a precursor for job growth but things have changed…Temporary workers will remain just that…Temporary! Markets are starting to get the idea that the ‘free money cash giveaway’ is coming to an end and policy makers must focus on real organic growth rather than the smoke and mirrors used to show recovery using inorganic, costly stimulus.  (Now that’s a scary thought with a congress led by Pelosi, Reed and Frank!!) Today’s jobs number has done nothing to stop the professionals and ‘fast money’ from selling into strength which has been the case for the last couple of weeks.  The other important fundamental event which is driving market volatility is the situation in Europe.  Readers of this blog are aware that my concern over the deteriorating condition in the EU will force the dollar higher and with it the end of the dollar carry trade.  That is the main reason commodities from Gold to Copper are under pressure as positions using a cheapening dollar are forcing global margin calls.

A sustained trade in the S&P 500 futures under 1065 would signal a further acceleration of the corrective action which should take the trade down a full 10% which coincides with the 200 day moving average (as measured by the front month S&P futures contract) roughly 1015 to 1020.  Keep in mind that the market seems to have become a bit nervous over events in Europe so the appetite for any risk trade later in the afternoon might be difficult to muster. At 2pm Chicago time consumer credit is expected to show another decrease of -8 billion dollars. This follows a larger than expected contraction the prior month of -17 billion dollars which tells us the consumer is clearly continuing to become less apt to spend.  Maybe that’s the new normal…Frugality!!

-JB

ADP Report Thoughts, Some Technicals and Europe

The ADP jobs report which precedes the monthly unemployment number showed that corporations cut fewer jobs than expected in the month of January.  One of the things to consider is that there aren’t many jobs left to cut!!  With many businesses running operations using skeleton crews, any further reduction in labor would hurt production…Something companies cannot afford!  Once again, the center of every problem facing the economy is job creation.  Let’s see if the predictions for a positive number on Friday come true. My feeling is that we’ll continue to see job losses in the range of 20k to 50k.  We will see benchmark revisions which will show that the job losses for the last year were much greater than reported….That revision might be very unpleasant to see.

The market bounce has taken the trade up into the 1100 area of resistance for the March S&P futures contract.  If the market is to fail and work its way back down to test the near term low which was set down at 1066, then this is a logical place for the selling to begin.  

Traders should also keep a sharp eye on the dollar as the ECB deals with the growing problems in Greece.  The uncertainty over the debt situation in the European community (Let’s throw Spain, Portugal and Ireland into the mix) has kept the US dollar from moving lower.  If fact, in a strange way it has helped the Fed by relieving the dilemma of a quickly deteriorating currency in the middle of a massive recession….But the ancillary effect is that buyers of US equities might find a firming dollar to be the catalyst for any corrective price action. 

-JB

The New Month, The Budget and Some Pre-Job Movement

The beginning of every month brings with it market volatility created by cash flows which work in and out of the market depending on the psychology at the given time.  It’s been clear to students of the markets that the general public is clearly comfortable buying into the recovery story.  The evidence is in the renewed optimism and the VIX back in the lower 20’s.  The beginning of February was no different with the retail public running into stocks so they don’t miss the next big move up.  Let’s see…In the battle between the retail public and ‘smart money’ (which is selling into rallies), anecdotally, the general public is on the wrong side of the trade. Although every now and then, as proven by the parabolic move in stocks from March 9^th through December, the herd mentality can be right, history has taught us it won’t last!

With a budget, and projected deficit which makes this market observer sick to his stomach, becoming more and more of a headline, It’s good to see Paul Volcker being dusted off for the battle. It’s time to bring an inflation hawk into the equation. I have always seen Mr. Volcker as the ‘fixer’ (Having been the Fed Chairman under Reagan made him one of my personal heroes)…The Obama administration has had him behind locked doors with a sign that says,” Break glass in case of emergency”…Well the time has come!  Paul…Do your thing!!

Keep a sharp eye on the nature of any rally in the market between now and the release of the monthly jobs number on Friday morning.  It seems that, until further notice, the strength in the market on recent moves has very little traction and expectations for a further move higher are starting to fade. 

-JB