Sunday, January 7, 2007

Late Weekend Musings

Much has been said about the topping out appearance to the equities markets - not only here in the USA, but also in places like China, HK, Japan, and likely in Russia when trading resumes there after a long New Year's break. Look at any chart of these marts and it is indeed a story that we're well aquainted with. Goldilocks gets just a bit too much action - to0 much attention from the three bears, the bulls, Ben Bernanke and whomever else (sounds a little seedy) and suddenly the markets are back in this overbought mode as I noted at the end of the last year; overbought along with looowww complacency. The interesting twist, thus far, is that so called "better than expected" economic data has knocked the bulls for a loop as bond yields have actually turned higher - pushing the dollar higher, walloping commodities and hurting emerging markets. The popular theory is that the surprise strength in last week's data means we won't be seeing a rate cut until the 2nd half which, according to the conventional wisdom, means less juice for the stock market bulls.

But it goes deeper than that and are things really "better than expected"? I think there are an awful lot of mixed signals right now. For starters, John Murphy at makes an excellent reminder about the correlation between the drop in bond yields since the Fed stopped raising Fed Funds and the rise in the stock market and noted the recent rebound in those bond yields has coincided with the drop in the markets (the chart shows that to be almost true:Sure, it's a relationship that's as old as the hills, but the recent rise in longer term yields is an interesting situation.

Then there's the commodities rout... Looking at the CRB piercing its 200 week moving average doesn't engender confidence about prospects for the global economy. We're talking about important "stuff" here and prices for that stuff... prices that are heading down. Energy, Copper have at the very least broken down. Gold, silver, lumber, sugar, coffee, cotton, hogs and wheat are all falling as well. With wheat buckling, perhaps corn and soybeans will soon top out and follow suit. The "stuff" that is consumed, or purchased as a raw materials seems to be falling and falling rapidly. Sure, the Global Warming winter shoulders some of the blame, but I can't help to wonder about troubles in the Global economy, starting right here.

So commodities plunge which has the implication of weakening demand while U.S. bond yields rise which has the implication of a stronger economy, or some other inflation trouble.. neat situation.

So I think one way or another I am soon going to be jumping into a SPY put play and certainly a VIX call play and assorted other individual equity plays whether it's because a rate cut is delayed, or because the economy is slowing. One way or another it looks like the stock market is in trouble as has been discussed for a number of weeks on this blog. I'm still leaning toward the camp of the slowing economy, dollar trouble from complete fiscal disorder, etc.

Zen Trader: throws alot of other stuff into the mix, including some interesting bullish considerations... worth the read, and he also has an interesting link to some other deep thoughts at Kevin's Market Blog.

Remember, a real "correction", if we get one, is defined as a reverse movement in stocks of at least 10%. As usual the word will be glibly used by people who will feel that once the Dow falls a few hundred points the "correction" will be over. But that's the problem with an average at over 12,000 - a 10% "correction" could be a lot more than a few hundred points.

The March EuroFX contract is quiet, but down 12 points as the Euro-Dollar pair plays with a key support area:

What more can be said about the above chart? The Euro became overbought... 38.2% retracement looms down at $1.2708. No doubt there will be a fight to get down there, but given the 50dma has been broken on the upside in the DXY, it doesn't seem unreasonable to expect a full fledged correction in the Euro.

Meantime, the guessing and speculation continues over what's going to be coming from Macworld.... Tonight the Ely Times chimes in from lovely Nevada. Not to be outdone, The Herald Tribune also dedicates some lines to Apple. I wouldn't be surprised to see an attempt at pushing the shares higher. BUT, will there be a battle between Apple and Cisco over the iPhone name? This blogger tackles that:

No comments: