I grew up near Coney Island in the shadow of the world famous Cyclone, once the mightiest roller coaster of them all. The Cyclone has nothing on this market. We’ve been all over the map but ended higher once again as the VIX continues to drop.
The highlight of the week was 163, 000 jobs. I can finally come here and give you some good news and not have to go on a rant about the ills of the world. I think it’s a good number given the last few months and what the expectations (100,000) were. I’m happy the economy is producing jobs in a 6 figure number. If you project this over the course of a year, then 1.6 million jobs would be created over the next 12 months. That’s not great, but it would be a major step in the right direction. Even better, the tendency over the past three years was to have contracting numbers in the summer. Last year at this time, we were suffering a black swan event in the form of the debt ceiling crisis. This week Congress came to a deal to keep the government going until after the election. Amazing how the most important jobs in this country are those of Congress!
Think about where we were just a year ago. We might have a stagnating economy but it was just 12 months ago when Washington, DC, engaged in a game of chicken and Wall Street blinked. So there’s tangible improvement we don’t have to deal with another black swan and since they pushed off beyond the election, the hope is we don’t have to deal with the government shutting down again.
It’s always the reaction to the news that’s important and the non-committed bears covered yet again. This came on the heels of yet another sequence where the ECB lack of action disappointed traders on Thursday. Now the Greenback is in danger of breaking down but when I see it I’ll believe it. The chart of the week shows the roller coaster volatility where the Dollar is at support which is representative of the kind of action we’ve seen.
The other challenge to this market is while we have a lack of bears, we also have a lack of bulls to push events higher. I know it sounds like a broken record but it’s the same condition we had to deal with in the 4th quarter last year.
This is a major problem for some hedge fund guys who are starting to throw in the towel and contract their fund size. One trader, Louis Bacon has given back $2 billion to investors because his fund is down over 3% this year and he blames it on the indecision in Europe to take a unified stance on fixing the economy. He believes the whole of Europe is being dictated to by Merkel. What we’ve seen for the 2nd consecutive year is a roller coaster ride as huge hedge funds have trouble taking big positions with all the twists and turns. The problem is that you and I can go in and out of the market whenever we want but if you are managing billions, it’s like managing an oil tanker. It’s not easy to turn. These are guys famous for capturing big trends and in this environment it’s really difficult to capture the trend when you see this kind of action.
It’s a great market for the micro high frequency traders who take it up and down and liquidate when we get to a climax bar. So where does that leave the rest of us? You must stick to short term trading and perhaps micro-manage yourself to work within the framework of the intraday action. You don’t have to be high frequency trader and smaller traders can’t because there are no way you can keep up with these computers than measure movements in nano seconds. But if you can catch a nice move that lasts for an hour or 2 you’ll be fine.
Perhaps the good action is finally going to make an impact in China because they seem to be setting new lows. This is troubling because the one economy which is dependent on the risk on trade is Australia and lately their risk on sectors like Materials and Energy have been trying to bounce and China doesn’t want to confirm the action. Sooner or later that divergence has to give one way or the other. But China is trying to turn up 720 trading days off the secondary high in 2009.
Next page: Sentiment's role
Of course my main concern is the bigger time windows coming due when we have markets that think they might want to challenge this year’s highs. With a VIX in the 16 handle we could very easily find a double top come October. I’m on Twitter regularly and one of the discussions we have there is the overall lousy sentiment when it comes to Europe and the economy in general. What confuses people is how could people feel so crummy about the economy and the direction of the country at a time when sentiment indicators like the VIX are so bullish? Something is not right about that. The truth is we do have GDP at 1.5% which could get Romney elected and we have controversy concerning Chick-Fil-A. I’ve discussed my feelings about CFA elsewhere but it does relate to the market. The reason the country is so at odds on this issue right now in terms of mass crowd psychology is the frustrating market that won’t commit either way. People are getting frustrated and taking their anger out on seemingly unrelated issues to financial markets. Don’t get me wrong, this is a serious issue but why now? You probably don’t see this kind of thing boil over during a great bull run.
So in terms of the market sentiment we have all this frustration boiling over at a time the VIX is down in the middle teens again. We know the VIX is an iron law to the market that when it reaches a certain point (10-13) the market is going to top. But how could it top when there’s so much lousy out there? It’s very simple, really. Markets don’t make very long term tops which such lousy economic conditions but they can make intermediate term ones when the VIX is as low as it is. But the game is still going until the clock hits zero. This week we’ll be 80-90 trading days off the high made earlier this year. It could give us a smaller high but by now you know what I’m point to. I’m looking at the big window in October which is where the clock strikes 12.