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Monday, June 20, 2011

Market Thought... power play

I am not shy to actively trade when I think there is an opportunity, and I believe conditions have aligned to which I will seek to make a power-play.  I have been keeping cash readily available, and I have been patiently waiting.

Recapping the conditions of the current market:

In the Market Thought post 'no boom-boom?', four potential systemic risks were assessed. IMO, the post is still very valid, but what has engulfed the current mood of the market is Europe's handling of their debt crisis.  This issue was always an over hang, but a crappy Jobs report in early June caused much of the technical breakdowns with the market.  The breakdown was sparked because of the reduced earnings assumption coming from slower economic growth.  This was highlighted in the Market Thought post 'top-down'.

Since May, after earnings season, the market has seen a systematic sell-off causing a huge discount within the market. (An example of this is AAPL literally selling below a 12 PE, backing out cash. Or GOOG selling with 13 PE when backing out cash.) The list of examples can go on-and-on-and-on.

Technically, we are in an interesting position.  In the Market Thought post 'obvious', the obviousness of the big-boys was highlighted. Also, the fact that the NYSE composite index has strong support at its 200SMA.  This was predicated on past performance.

This performance is correlated to the SP500 performance in that, the SP500 major support is the 320 SMA.

But right now we are in a situation where the SP500/NYSE composite supports are not lining up. Either we bounce from here or we test the 320 SMA on the SP500.

Current market players have a situation where earnings of companies are yielding north of 7-9% (1/PE), while short-term rates are very very low.  Global economic growth rates are slowing, but still growing pretty nicely. And, unfortunately, have uncertainty from Europe and the US (on the debt ceiling) that have very real potential systemic threat concerns.

The current discount the market is seeing (market yields of 7-9% vs a 10yr note of 2.9%), is so severe that it looks to be pricing in a 'shock' to the system.

Basically, at current market levels, the market is expecting more than just a 'soft' restructuring from Greece. It is expecting some level 'harsher' debt restructuring. (The market has gotten so many mixed messages from EU leaders that I do not blame the big-boys for systematically selling-off the market. Uncertainty causing a discount in pricing.)

Based on performance of companies, I just do not know how the market declines further with out a systemic threat to the system.  How I will play it:

1. IF, the EU maintains fiscal support while cleaning the structural issues in Greece, weakness toward the 1250 level I will add long positions. (IBM, AAPL, GOOG, POT etc)

2. IF, the EU keeps up with the bullshit confusing media leaks, and the SP500 decides to tests the 1200 level (320 SMA) I will look to enter the markets pretty heavily.

I think Europe provides fiscal support, while fixing the structural issues (that should have been fixed long before allowing countries to enter the unified currency).  The only way I sell my entire position, and go very heavy short the equities markets is if Washington does not raise the debt ceiling. (By not doing so, they will have effectively lost America's economic dominance, and quite literally will put the entire system at risk, again.)

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