The Beginning Of The End For The Greenback...?

In the last 2 weeks, the USD sentiment has gone from mildly bearish to extremely bearish, with the primary hits coming against the yen and the euro (the latter two being up 4% and 3% against the 'ole dollar, respectively). What's even more disturbing is that all of this is happening while the U.S. treasuries are taking hit after hit, pushing the 10-year yield above 5%. In other words, no longer are interest rate differentials of any importance for the greenback and structural considerations (current account deficit, etc.) are back in fashion. I think we are at the brink of an intense and super-violent USD correction -- much, much lower from here.

On another note, watch the SPX (S&P 500) over RTY (Russell 2000) outperformance, going forward. I think the time for the small caps is over -- they are expensive, illiquid and overbought. Their P/E ratios are astronomical when compared to the large caps cheap-as-chips valuations. I've been telling all my friends about this trade -- it is going to be a winner over the next couple of years! Watch this space.

Time For Large Caps?

The small-cap dominated Russell 2000 has outperformed the S&P 500 by over 40% in the last 3 years -- valuations being driven up and up by private equity firm deals, plentiful sloshing liquidity and virtually no fear from what's happening out there in the macro world. All of these favorable circumstances are coming to an end. Hence, I would like to propose going long SPX @ 1310 and going short RTY @ 772 for the foreseeable future. This trade will work wonderfully if we are indeed going to face a 10%-15% equity market correction driven by growth and/or inflation scares. Watch out for warning signs from small metals and mining companies (within the Russell 2000) -- the valuations of those have outpaced the gains in the commodity market by a good margin, and in certain cases are trading at ridiculously lofty multiples.

Metals Meltdown...

The high-to-low range of silver today was 20%. A bit of old-style volatility, to put it mildly... The contagion effect spilled into gold, palladium, copper and a few other base metals. This was to be expected, as there was virtually no short base out there (to provide short-covering support), and, consequently, any long liquidation, given the stellar performance of these metals year-to-date (silver being up well over 50% YTD until this morning), would have been met by nothing but empty air.

Nobody and I mean nobody can tell me that they reaaally know the fundamentals of those metals. It's just a pure speculative thing of hot money chasing something quite illiquid and in limited supply. These markets are therefore very prone to corrections like this and while one can make the usual "China argument" about "every metal" going through the roof, one needs to be careful and see at what price one is buying all these volatile commodities. Otherwise, it's just a greater fool's bubble -- of the 90s-Internet-type. Caution is needed, as the market taught a painful lesson to a lot of overly-exposed commodity funds today.

Take The Gains From The First Week of 2006 OUT...

... and we get a flat market for the year!! That is an amazing fact, given all the hoop-la going around about earnings, strong growth potential, etc. Well, it would seem that not all is well -- I have never seen gold and oil spiking through the roof and equities going up as if nothing was the matter. Even with all the talk that the Fed may soon be done (at 5%), the market just can't seem to muster enough strength to take off from here. I've been thinking about going long large caps (say Dow Jones Industrial Average) against shorting the small caps (Russell 2000), purely on a fundamental basis. I simply can't see how small caps can keep delivering in the current macro environment, M&A or no M&A activity. More on this a bit later when I do my homework...

Well, Easter Week NOT Boring Me To Tears Anymore...

It seems the S&P 500 has decided to start rolling over and get some people spooked. The break of 1,300 on the June futures side was a psychologically important factor. Coupled with the fact that some important technical indicators are starting to (negatively) diverge, oil is trying to break $70, the Fed doesn't look like it's pausing at 5% (though I think they WILL!), the market seems to have knocked the confidence out of the screaming-head bulls, at least for now. I expect us to retest the SPX 1,275 cash level, which is the 100-day moving average support that so many Americans are obsessed with, before we decide whether this bull market is over, or is set to continue into the summer. Until then, I've got nothing to do, and I am glad I sold my longs last month close to the yearly highs.

One negative indicator I would point to is the proliferation of these inane TV fantasy equity portfolio trading challenges, such as that Squawk Box nonsense -- the interest in that has been immense!! If that is not a sign of a toppish equity market, I don't know what is! Reminds me of the 2000 equity mania all over again. Stay alert!

Easter Week Is Boring Me To Tears...

Clearly, the market has decided to take a much-needed breather after a bunch of important economic news last week, which culminated in the equity mini-massacre last Friday. As you know, having sensed a whip-saw type of action for some time now, I have been well out of this mess, and am quite pleased about it. It seems all the action is concentrated in the commodity markets anyway!! Silver, gold, zinc, copper, nickel (to name a just a few!) are making multi-decade (!) highs and it doesn't look the party is going to be over there any time soon!

So, dear Fed big-ivory tower thinking honchos, if there is really no inflation in the economy, why are precious metal prices going through the roof, and equities are unable to rally in any meaningful way (hence my being out them)?? Answer me this, Ben!

Buy/Sell Programs...

Yes, they are the bane of this market. Today was a prime example of how shorts got themselves stopped out above 1,320 in the SPX June futures (with the high of the day being 1,324) before a global sell-program leaned on this thin market and pushed it down a full 1% from the previous day's close, and just about 1.5% from the intraday highs!! This is what I call a total massacre, what technicians frequently refer to as an "island reversal technical pattern", and what surely left a lot of hedge funds/speculative accounts nursing a sore head after a long week. The decent NFP numbers were only part of the excuse. Inflation is still all around us despite the best efforts of the U.S. government and the Fed to convince us otherwise. I am still mighty glad I am out of this market -- one can get whipped around like a milkshake in this see-saw type of price action. It is probably time to think about shorting the SPX after all, if next week doesn't bring respite to the bulls (which looks highly unlikely at this point!)

Time To Resell GOOG?

GOOG's SPX index entry seemed to have done the trick and put to sleep a lot of people who would have otherwise sold the stock in the mid-300s. I, for one, haven't changed my opinion and would be looking to resell GOOG, should it start to move a bit higher (3-5%). $425-$430 seems to be the level that most bears are thinking about. At first glance, it indeed looks like a nice one where GOOG stock realists can start re-initiating shorts.

Otherwise, the market refuses to go down (or up for that matter) ahead of the NFP numbers this Friday. I am in the "one more and done" Fed camp, so for what's it worth, I believe we are close to an inflexion point -- volatility across asset classes is about to explode... Just ask the FX dudes who were short eurusd gamma ahead of the eurodollar's recent upside breakout on good volume. Stay tuned.

The More I Look At This Market...

...the more I am glad I am out of it. I sold my equities longs right around here and I see the market has basically stalled, and is currently in waiting mode -- for what or for whom, I don't know. What I do know is that the market is entering a seasonally weak period (April-September, 2nd and 3rd quarter) with mid-term elections in the U.S., tremendous geo-political risks and uncertainty as to the Fed's stance on interest rates. I am starting to look for a good place to short, just as everyone is getting bulled up on the prospect of a continued strong U.S. (and global) economy. Yeah, goldilocks lives on in the minds of some wishful thinkers.

From what I can see on the charts, the SPX should be shorted aggressively between 1,325 and 1,340 with a target of... oh 10% lower, around 1,190-95 or so. That would wipe off a lot of lazy bulls' P&L from the previous quarter, but it wouldn't be anything more than a healthy hiccup in my mind. I am still waiting patiently for the last hurray from hot, performance-chasing money.