Wednesday, February 10, 2016

DB = Dead Body

You always want to know why people are panicking.  You want to have bad news when you buy, not no news.  You want to see the dead body floating on the river as a signal that what was feared is finally discovered.  It sounds confusing from a logical perspective, but in the stock market, fear of the unknown takes on a life of its own while fear of the known is contained.

We finally got one of the main reasons for the extreme weakness in Europe:  Deutsche Bank and the other group of zombie European banks.  They are huge, unprofitable, but too big to fail.  Unlike in 2008, you don't have such huge leverage on the balance sheets as back in the day, just because of the regulatory requirements, so there is very little systemic vulnerability.  But memories are short, and selling begets selling as thoughts of 2008, and 2011 are fresh on the minds of fund managers.

I built longs on Monday and Tuesday expecting a bounce in the coming days.  We are entering the shoot the majors and captains portion of the decline.  The majors and captains are Japan and Europe.  Those stocks have been massively underperforming versus US this year.  China and the emerging markets were the front line foot soldiers and they have already been shot and killed in January.  This week killed the majors and captains.  It will take time for the enemy forces to reset and reload and go after the generals (S&P 500) in their fortified bunkers.  During that reload, expect a bounce in the coming days.

But remember, the enemy forces are merely taking a break, not quitting.  They will come back again, with even more ammo, going after the generals in a few weeks.  In the meantime, play on the long side as the bears got too bold and confident this week.

Yellen is a non-news item today.  She has learned to stay on script and here pre-release pretty much tells us that the Fed is a bit more cautious but not willing to reveal their hand till March.  It was consensus.

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