Friday, November 18, 2011
Consolidation
We should consolidate the past 2 days move, we cliff dived from 1225 to 1207, and traded mostly between 1207 and 1216 for most of yesterday. So there is a lot of trading to be done between 1225 and 1216. The chasers are getting nervous here, they bought at high prices, and are anxiously hanging on to their shares at bad entries. Expect them to eject those shares in the next 2 weeks, as we test 1175, and perhaps 1150, where there is a gap left behind from mid October. I would not rule out a run all the way down to 1120, but it would take some serious fear in Europe for that to happen. The sentiment surveys all came in bullish this week, the sheep are finally on board.
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6 comments:
1175 doesn't seem so far away. could happen in 1-2 days not 2 weeks and then rally. wait too long and u miss the boat again the other way around
You're right, better to be in a little bit early than to wait and be left behind. I would start legging in next Wednesday if we are at 1180 or lower. We will go back up by the middle of December.
I would bet that by end of year we are much lower as too many have joined the BTFD crowd... few ex the odd elliot wavers calling for sub 1000 points. Too many people talking up seasonals.
Cramer-
Time to do some handicapping. What are the chances that the fatalists -- the Germans -- win out and are able to crunch the bond issuers and the bondholders of the sovereign states in the euro? What is the likelihood that they let junk be junk, that they accept the subprime nature of the debt that's been put out there and let the market decide ... which means default, because there is no natural buyer of this merchandise, just the ECB?
As recently as a month ago, it looked like a bailout was assured, orchestrated with printing presses run by the ECB and endorsed by Germany. That slipped to about 70% when the Italian bonds ticked at 7%; now the odds of a bailout have fallen to 60% after the Spanish auction failed so miserably yesterday. I arrive at those odds with the help of my friend and colleague Matt Horween, who has done some excellent analysis for this site about the state of the world and the precarious nature of things right now.
What are the options here? We have the bailout option just mentioned, which is one where tons of paper has to be printed to buy the bonds of these nations and take them out of circulation. That's just unpalatable to the Germans, because to empower the central bank with the ability to print money at will without taxation almost automatically leads to some sort of sinister inflation reminiscent of the Weimar inflation that brought on fascism in their country.
Then there's Door No. 2, which is an endless continuation of what we have: the ECB bidding underneath when bonds get to 7% and then disappearing when they feel that things have stabilized. This method is good as long as it is accompanied by capital raises by the banks and discipline by the countries, something that seems too hard for anyone to swallow. That makes it, ultimately, a failed option.
Finally there's a let-the-market-decide scenario, where the nations and the bondholders get crushed, bringing on a severe deflationary recession or even a depression, the price that the EU has to pay for the profligacy of so many of its members. The sainted euro is preserved but liquidity goes away and so does business. This is the option that increasingly is gaining adherents, and you can measure it by the strength of the dollar vs. the euro.
Watch monday 11/28/11 for a turning point. If we are puking hard this day to the downside get long stocks and short treasuries.
Below 1175 either on Monday or Tuesday at the latest is what I'm expecting. The only force holding the market up today was OE.
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