May 23

Indecision

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:56 EDT

The markets are facing another bout of weakness after a strong showing on Monday and early Tuesday.  Almost all of those gains have been wiped out as the S&P500 is flirting with 1300 again over renewed Greek concerns.  But so far we continue holding above Friday’s low, keeping the rally attempt alive.  If we honor Friday’s low, starting tomorrow we could have a follow through day if there are nice price gains on higher volume.

While there are a lot of similarities between this year’s sell-off and last year, the big difference is this market don’t seem nearly as frantic.  Last year could easily be described as bi-polar as the market whipped from one extreme to the other, but this time around things seem far more orderly, lacking those violent changes in sentiment.  If last year was bi-polar, the current market is simply indecisive.  Similar Euro and economic headlines are weighing on the market’s mind, but the market is no longer fearing the end of global civilization and is doing a better job of keeping headline risks in perspective.  These unresolved issues will continue to haunt us for a while, but the market is acting far more rational and that is giving the market more stability.

Even if the indecision continues through summer, I expect we’ve already seen the bulk of the sell-off.  We’ll probably dip under the 200dma or 1257 to go flat for the year at some point, but that will most likely be the process of building a solid foundation for this correction to bounce off of and that violation of support will not be a trapdoor triggering a massive sell-off.  Of course this assumes a fairly orderly resolution to the Euro debt problem and modest economic growth.  No doubt the markets will unravel if the Euro comes apart, China crashes, or conflict in the Middle East threatens oil supplies.  But barring those unlikely events, the market should be fairly stable going forward.  Of course there is a big difference between stable and rallying.  It will take a period of price consolidation to find suitable resolutions to these headline issues and that will delay the indexes from making new highs for a bit.  But while the market might trade sideways, there will be opportunities to locate leading stocks making big price gains once the market headwinds stop knocking them down.

Not a lot to say about individual leading stocks right now as most of the favorites continue trading under their 50dma.  But standard bases take at least two months to form, so we shouldn’t be expecting many of these CAN SLIM stocks to start making new highs any time soon.  Patience is the name of the game and we just have to wait for the market and individual stocks to move back into buyable positions.  If we were being optimistic, we should hope for a tradable fall rally to help end the year on a strong note.  If someone has problems sitting on their hands for the next couple months, you’d probably do better buying the dips and selling the rallies.  In a sideways market, buying breakouts can be a frustrating and expensive game. No doubt there will be a handful of strong performers, but these will be the exception, not the rule.  So be very selective and disciplined with any buys for a while.

And of course I reserve the right to be 100% wrong and revise my opinions as the conditions warrant.

Stay safe

May 22

Up, down, or sideways?

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 11:54 EDT

The markets opened flat, but rallied out of the gate in continuation of yesterday’s strength.  While yesterday’s price gains were impressive, the lack of volume demonstrated a reluctance of people to jump on the bandwagon.  Of course this is not a red flag by itself since most traders are late when recognizing a a reversal.

Part of the reason I’m suspicious of this most recent rally attempt is I would feel better if it undercut a major technical level in order to flush-out a large number of holders on huge volume before bouncing higher.  Potentially 1300 could be that obscene level the markets often trade to before reversing, but it just doesn’t feel like the dip under 1300 triggered that huge, emotion driven sell-off.  No doubt Friday’s volume was high, but given it coincided with options expiration, the volume was fairly mediocre when compared with previous options expirations.

The other thing is the sell-off hasn’t been drawn-out enough for traders to grow numb to headlines the way they did last fall before kicking-off our most recent Q1 rally.  Traders continue to be fairly sensitive to headlines and any bad news could trigger a new wave of selling, hampering a sustained rally.  Plus I don’t think the sell-off has reached obscene valuations due to irrational selling that provide such a compelling value that stocks can bottom and rally in the face of dire headlines.

But a lot of what we should expect depends on what direction the market is headed.  There are three general market directions; up, down, and sideways.  And based upon where we are headed will determine what kind of price action we should anticipate.  Much of the above expectations of a huge volume undercut is based on forming a bottom and resuming the previous uptrend.  This shakeout of weak holders is what clears the way for a move higher.  But if we don’t get that flush-out, the bottom is less solid and will more likely lead to a sideways range until time and repeated pullbacks demoralize and humiliate weak holders, thus setting the stage for a continuation of the previous rally.  And finally we could be experiencing a temporary bounce on our way much lower.  But given how far we have come already, a large portion of the correction has already occurred and barring a huge shock to the system, I expect we are fairly close to this move’s lowest point.

Given the headlines, economy, and forward looking nature of the market, it is not surprising the market got ahead of itself with the Q1 rally and needed a rest.  Of the above scenarios, I expect trading range is where we are headed until the market can sort through some of these headline risks and then ultimately finish the year with a nice rally.  Now, I don’t expect last Thursday was the bottom of the trading rang and the one of the follow-on dips will likely test the 200dma or 1257 area before bouncing.  For an example of how this might look, refer back to last summer’s trading range.  I don’t anticipate the same volatility we saw back then, but the we could trade sideways in a similar fashion through this summer.

If we are transitioning into a trading range, the best way to trade this is to buy the dips and sell the rallies, capturing profits early and often before the market has a chance to take those back.  It could be months before we switch into rally mode where you can hold stocks for extended periods of time.  Of course trading sideways does allow some of the strongest stocks to sustain a rally, but these will be the exception, not the rule, so plan on capturing profits on most of your trades and avoid taking round-trips on your trades.

But these are just my opinions and I could easily be wrong, so we need to follow and trade what the market gives us.  In the markets, it is okay to be wrong, but it is suicidal to stay wrong.

Poor FB was again getting destroyed this morning, down 7% in early trade.  Even more interesting given how difficult it is to locate shares for shorting, meaning most all of the selling pressure is coming former FB bulls dumping shares by the truckload.  This could be setting up an interesting buying opportunity if the selling becomes too overdone.  And even as I write this, the shares have rebounded and are only down 2% by late morning.  Given the volatility, I would only view this as a trading opportunity because I remain skeptical of FB’s future growth opportunities since they already have 1/2 of the planet’s internet users.  I have little doubt subscriber growth is will decelerate and to plateau as they reach the saturation point and growth tapers to population growth and global internet adoption rates.  But regardless, the stock presents a great trading opportunity for the nimble given the high volatility in the name.

LNKD daily @ 11:53 EDT

LNKD is recovering nicely from the FB induced sell-off as investors are recognizing the difference in growth and revenue potential between the two companies.  In addition, some of the liquidation pressure on LNDK in order to make room for FB in investor’s portfolios has relented and this relief has allowed LNKD to bounce back.  It was a nerve wracking ride, but LNKD has recovered its 50dma.  But that is the volatility home-run hitters should expect when trying to hold high-beta stocks through a correction.  I don’t have those kind of nerves and why I prefer selling on the way up even if it means giving up some upside potential.

Stay safe

May 21

Waiting for the bounce

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 12:25 EDT

The indexes rose nicely in early trade, a welcome sight given the streak of six consecutive down-days and 11 losses in last 13 trading sessions.  Is this finally the bounce everyone has been talking about, or the inevitable up-day that is part of most larger sell-offs?  And lets not forget many of the previous down-days were up early too.  Of course the difference today is the markets are up far more than those more modest rallies that quickly fizzled.  Either way, I think buying today’s bounce still counts as catching a falling knife and is best avoided by any prudent trader.  One day does not make a trend.

The news driving today’s rally is word from European leaders they want to keep Greece in the Euro.  Glad to hear that Euro problem is finally solved and we can move on.  (sarcasm)  If I were a wagering man, which all stock traders are, I would say a sizable portion of today’s rally is driven by short-covering.  By itself short-covering is unsustainable without real buyers stepping in to support the new move.  From here we need to wait and see if a meaningful number value buyers are ready to venture back in.

On Friday the S&P500 closed under 1300, while not an important technical level, it is a key psychological mile-marker and no doubt got people’s attention.  The 200dma is the next major target at ~1280 and also coincides with some technical levels dating back to last fall.  1257 is another major psychological milestone on the horizon since it represents giving back 100% of the Q1 rally.  Will we bounce off of this region?  Break through it and then bounce?  Or will it simply be a speed bump on the way to lower prices?

Sentiment in the market is getting precarious and any further declines creates the very real risk of triggering a irrational, fear based sell-off.  People have been able to rationalize most of the recent decline as normal pull-back and and part of a healthy refresh of the phenomenal Q1 rally.  But what was supposed to be a 3-5% correction is quickly becoming uncomfortable. Regret is mounting, as is the fear of greater regret by allowing additional losses to pile up.  No doubt today is a relief rally for those still holding, but to have the market turn back around and make new lows will push many traders to the point of selling simply to make the pain of stop.  And of course that whoosh-down will be the capitulation point that often signals market bottoms.

Part of the reason I suspect we haven’t seen a mad rush for the exits yet is the powerful Q1 rally has left many people sitting with winning trades even in the face of the recent sell-off.  As any of us know, it is one thing to see profits dwindle, yet an entirely different feeling to watch your account go into the red.  Maybe this lack of significant panic selling is because many traders are still up for the year and this is acting as a stabilizing factor keeping the markets more rational during this correction.  But it is something to be aware of if we continue to fall and that pushes more traders into the red for the year.

FB intraday @ 12:24 EDT

FB is providing a lesson in market sentiment and supply and demand as the most assured IPO pop in history is plunging 12% instead.  And no doubt FB could have crashed on Friday had the underwriters not dumped a ton of into the name in order to avoid a an ugly first day sell-off.  Yet again the market proves that the best move is to trade opposite of what everyone else thinks.  Of course this doesn’t mean the stock is dead and it could easily rally after forming an IPO base.

And so this brings us back to the indexes again.  How many people are saying the market is set up for a great short vs how many say the sell-off is overdone and ready to bounce?  There are no numbers to gauge this in real-time so we need to go with our gut based on the clues around us.  Now this is simply my opinion, but it seems like not enough people have been demoralized yet to justify a turnaround from this aggressive sell-off, leaving me highly suspicious of today’s rally.  No doubt today’s strength could continue for a couple days, but that is how a sawtooth decline looks.  But regardless of bear or bull outlook, the disciplined CAN SLIM trader is waiting for a follow though day to avoid falling prey to a sucker’s rally. And when we do get that follow through day, we need to be ready to start buying the market.  Often the more reluctant you are to buy the follow through day, the more likely it is to work.

Stay safe.

May 18

Facebook

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 12:45 EDT

Markets opened slightly higher as everyone was eagerly anticipating the public trading of FB scheduled for 11am.  But the early strength was fairly constrained given all the other things on the market’s mind.   And when FB finally started trading, it could only be described as underwhelming.  It opened a few dollars higher, but quickly retreated to the offer price where it found a floor, no doubt a result of many traders putting in limit orders at $38 and the stock will continue finding good support there until all those limit orders are filled.  But given early trade, it seems like the FB IPO generated far more smoke than fire as the frenzy was more more manufactured by the press than a real phenomena among traders.

LNKD daily @ 12:45 EDT

The big loser with FB’s tepid IPO seems to be LNKD as it sliced through the 50dma on the less than enthusiastic reception of FB shares.  No doubt there was a FB premium built into LNKD since they close cousins and this let the air out of LNKD shares.  Just another example of a strong leader stumbling and falling victim to the recent weakness.  But there is still a lot of trading left in the day as IPOs are often volatile out of the gate.  In fact, as I write this, LNKD has bounced off the lows and FB has also moved above the offer.  Who knows, we could still see the FB rush this afternoon as many traders were afraid to buy at the open.

Back to the markets, the good news about the recent sell-off is it has created attractive levels in many leading stocks.  Of course the challenge for the savvy trader is figuring out when the storm has passed and it is safe to move his chips back in.  It is interesting to hear many professional traders mention how attractive prices are and they are wading back in on the long side.  Are these savvy traders getting ahead of everyone else, or are they simply representative of sentiment felt by a large number of traders?  If too many people think these are attractive levels and are buying right now, this will lead to short lived support because once they are done buying, the market will resume its previous trend.

The structural problem facing the markets right now is typically it takes enthusiastic buyers to move a stocks price higher and they fight each other as they bid up the price.  And no doubt enthusiastic sellers will also drop a stock.  But that is not the only thing that causes a stock to fall.  Lack of buyers can also pressure prices as they fall under their own weight due to a dearth of buyers.  Why this is important is even if we have exhausted enthusiastic sellers, we could still continue to decline if buyers remain gun-shy over headline risk.  So while a rising stock will typically reverse when it runs out of buyers, the opposite is not true with sell-offs as the market can continue declining even after it runs out of sellers.  And compounding this is many experienced traders have long ago learned defense is an important part of successful trading and declining prices can trigger automatic stop-losses, which in turn pushes the market down and triggers yet another wave of stop-losses.  This continues until either we run through all the stop-losses or the prices become so tempting to value investors that they rush in and prop up the market.

Back to FB related trades, could the pressure we’ve seen in AAPL and other leaders be liquidations by big money in order to free $16+ billion of capital necessary make room for the FB IPO?  It is an interesting thesis and we’ll see how these stocks trade going forward.  Of course there are several components to a stock’s price: 1) Fundamentals  2) Technicals  3) Supply and Demand and  4) Sentiment.  AAPL’s fundamental story is still intact, so that is not the source of the correction.  Selling to make room for FB falls under supply and demand, so once that phenomena stops today, it will remove that downward pressure.  But the wildcard is if AAPL’s slide dented the euphoric sentiment and technicals that lifted it in the first quarter.  These two factors could turn into a headwind going forward.  Time will tell.

Stay safe.

May 17

Thin ice

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:20 EDT

Markets moved lower in early trade, continuing recent weakness.  The question remains how much longer can this continue?

One thing to remember is the current price is a balance between bulls and bears.  Moves occur when a slight imbalance occurs between bulls and bears due to new information or changes in sentiment.  The result is prices adjust to relocate that precise point where exactly half the money is on each side of a trade.  So while you have an opinion one way or the other, 50% of the market has the opposite view and this disagreement is what makes markets work.  The challenge for a successful trader is figuring out which side to pick.

The interesting thing to ponder is if this sell-off has become too obvious as we clearly broke support?  Most often profits go to those who get on a trade early and those showing up late are stuck with the bill.  Keeping this in mind, can we continue assuming the upward bias and overbought condition remains in the face of these horrible technicals?

Using an analogy, it seems the market is on thin-ice.  Apprehension has been building as prices decline and renewed fear of headlines is haunting traders.  But the thing about thin-ice is you only get in trouble if it breaks.  The market could easily skate past this thin patch unscathed and come out the other side ready to rally.  If this is the case, we might see the market begin bottoming soon.  But the danger with thin-ice is we are one bad headline away from a plunge where everyone panics at the same time.

Last summer we found ourselves in a similar position with lots of storm clouds on the horizon leaving investors fidgety.  Then the one headline hit that sent everyone running, S&P downgrading US debt.  The downgrade was telegraphed for months and the actual result of the downgrade turned out trivial as the Treasury market rallied in the face of the downgrade.  But once the selling started in the equity market, it quickly spiraled into a two-week free-fall as the S&P500 lost 17%.  The market was in the mood to sell-off and it found its excuse.  Could this market be setting up for the same thing right now?

The silver-lining to our current sell-off is it has been fairly orderly and so nothing like the fall-off-the-cliff we experienced last summer.  Further, traders who saw the world did not come to an end due to Euro contagion last fall will feel a sense of been-there-done-that and won’t be as panicky this time around.

All of this is a long way of saying, I think we are one bad headline away from a material sell-off, but baring that, the market could find support soon.  But if the latter case plays out, the rebound won’t signal an all-clear as any rally still has significant technical and sentiment resistance to breakthrough before moving to new highs.

As for how to trade this, the short is a bit long in the tooth as it has become fairly obvious and the market doesn’t like being obvious.  Anyone putting on new short now is a late to the party unless their game plan is entirely based on a waiting for that backbreaking trigger to send the market tumbling.  But when comparing the risk/reward, the short continues to be the more attractive trade because on the long side you are currently risking ~$3 of downside to make ~$1 of upside.   With that skew, the best play continues to be waiting.

AAPL daily @ 1:20 EDT

AAPL is dragging down the NASDAQ and its relative strength line is breaking under recent lows as it continues its trend of under performance after its awe inspiring rally last quarter.  There doesn’t seem to be much technical support because the previous rally was nearly straight up without much consolidation.  This could be hindering the stock from arresting its slide.  And much like the gold trade, sometimes overbought/oversold sentiment overrules fundamentals.  By all measures, AAPL continues to be a great company, but the trade appears too crowded and it will take some time to rebalanced sentiment before it can resume its move higher.

LULU is selling off aggressively as it is breaking support at the $70 level.  LNKD is also dropping 5%, but it is still remains above its 50dma.  These are reminders no matter how strong a stocks, very few can make progress in the face of a weak market, and high beta stocks feel the pressure more than most.

Stay safe.

May 16

Bulls struggle to hold gains

By Jani Ziedins | Intraday Analysis

NASDAQ daily @ 12:10 EDT

Markets opened up and pushed higher in early trade, but  have since given up most of those gains by late morning.  It doesn’t appear the recent selling in the indexes could be described as irrational panic selling with the tell-tale giveaway of wild moves on high volume.   But if it isn’t panic selling, is it real selling?  And if it is real selling, should we be concerned “smart” money is moving for the exits?  Could this be what we are seeing as every attempted rally is exploited by big money to liquidate even more of their long positions?   Like the tortoise and haire, quick sprints down are unsustainable and often signal a climax, but the slow and steady tends to grind down for a while. No doubt we’ll see up-days here and there, but will they have the conviction and support to reverse the new trend and sentiment taking hold in the markets?  And of course the thing to watch for is when the scale tips and complacency turns to fear as market participants start rushing for the exit en mass.  That tipping point will be a good setup for a reversal, but it will lead to some sleepless nights for anyone still trying to hold equities.  The advantage of this scenario for the nimble trader is these oversold conditions present great buying opportunities for those in tune with the market.

No doubt the above scenario is just one of several possible outcomes for the market and we need to watch closely to identify and trade the one that is playing out.  This could be nothing more than a quick shakeout to refresh the recent rally and we continue higher from here because not all sell-offs need a climax to rebound.  We could simply see the selling pressure exhaust itself and the correction ends with whimper as the market resumes higher.  But using history as a guide, a sustained 12-month rally is exceedingly rare and we should expect some gut-wrenching volatility even in the most bullish of years.  If trading stocks was easy, everyone would be rich, and as we all know that isn’t the case.  We should always expect the market to throw us curve-balls that rattle our resolve and tempt us into doing something stupid and the key to making big money in the markets is resisting the markets deception. Unfortunately that is a lot easier said than done.

GLD daily @ 12:11 EDT

FB bears are coming out of the woodwork demonstrating there is some counterweight to this seemingly euphoric trade.  I’m not sure how many are simply skeptical vs how many will actively attempt to short the stock, but a certain level of skepticism is necessary for any stock to move higher because structurally if everyone is bullish, then there is no one left to bid up the price.  The one significant headwind for a FB investor is it takes far more buying to push a $100b market cap stock to $200b than it takes to move a $2b company to $10b. This is simply the laws of diminishing returns.  The unfortunate thing for us retail investor is FB didn’t come public years ago to give us the opportunity to ride that wave up to $100b.

It is interesting to see gold selling off in the face of renewed Euro troubles.  Wasn’t this supposed to be the safe harbor to protect investors from money printing and inflation?  It might ultimately play out that way over the long-term, but it seems like gold is at the very least temporary correcting from an overbought condition.   Too many people were seeking refuge in gold and that imbalance invariably leads to a reversal.

May 15

Continued indecision

By Jani Ziedins | Intraday Analysis

NASDAQ daily @ 11:36 EDT

Stocks traded higher in the premarket, opened flat, rose early on and then retreated back to the opening levels.  The indecision is a symptom of the political uncertainty as we are moving back into a headline fearing market.  The thing to be wary of is one bad headline can do far more damage than an equally positive story will move the markets to the upside, presenting a fairly skewed risk/reward.  Further, it is almost comical to hear pundits talk about how oversold the market has become after a ~6% pullback.  Maybe I’m missing something here, but it takes a raging bull to label a 6% pullback oversold.  The interesting thing is many experts were calling for a 3-5% pullback in the markets to refresh the recent rally.  But most often the expected outcome is the least likely to occur.  So if we discount a 3-5% pullback, that leaves us with more than or less than 3-5%.  Since we’ve already sold off more than 3-5%, that eliminates less, so it looks like we are facing more.  Will it be 7-10% or 10-15%?  Who knows and only time will tell.  As I shared earlier, I would prefer to see us refresh by dropping to the 200dma before bouncing to finish the year higher because as a directional trader, I make all my money when the market is moving and the sideways chop is simply frustrating.  So here is to hoping some Euro headlines spook the market into a panicked sell-off and after the dust settles, the market comes to its senses and rallies strongly, giving us the opportunity to buy discounted shares for a quick profit.

FRAN daily @ 11:46 EDT

Seems FRAN has gone the way of INVN and turned into a wild speculating stock more suited to gambling than disciplined investing.  But breakdowns in leading names are not uncommon in corrections and what really matters is how they respond after the broad market pressure lifts.  Will these stocks remain broken, or will they form the right side of a base and present good entry points?  That is what will separate the wheat from the chaff.  There is no way to know ahead of time and we simply need to wait for the leaders to re-exert themselves and rise to the top before we pick stocks to buy in.  Bottom picking is a riskly game and is why disciplined investors don’t play it.

LNKD is one of the few leading stocks still holding up in this correction, but it will be interesting to see how it trades once it’s big brother goes public this Friday.  Will LNKD ride on the coattails of FB, or will it be cannibalized as a source of funds as it competes directly for the same pool of investors?  And what happens if FB sells-off and forms a base after the hugely hyped-up IPO frenzy dies off?  I’m actually constructive on LNKD and expect it will continue to do well even in the shadow of its much bigger brother, but there is no grantee and is why we still follow our rules no matter how much potential we see in a stock.

And a follow up to my Greece/Euro posts, just because it doesn’t make sense for Greece exit the Euro doesn’t mean it won’t happen.  Politicians and common sense mix like oil and water, so anything could happen if politicians bow to populist pressure from the ignorant masses. But we need to be extremely cautious if we see Greece and the EU making moves to remove Greece from the Euro, knowing this will be the start of the mess, not the end.  With an overnight devaluation of the Drachma in the range of 60%-70%, it will renew solvency issues for banks in the region and fan fears of more widespread contagion.  No matter what happens, we’ll get through it, but the near-term volatility will make it a rough time to be long equities.  The silver lining is the Drachma will make it super cheap to sail the Greek Isles.

May 14

Fresh undercut

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:23 EDT

The indexes undercut their recent lows in early trading, resetting any rally attempt from last week.  But rather than trigger a cascade of stop-loss selling, the undercut quickly reversed and bounced higher, cutting the losses in half.  It is to early to say if the buyers that rushed in and propped up the market are geniuses or fools, but bottom-picking is a bold game and any disciplined CAN SLIM investor will wait for the follow through day confirmation.

The VIX continues to trade at a modest 21 and the lack of stop-loss selling triggered by a new low demonstrates most market participants are fairly comfortable at these levels and willing to hold on for the expected rebound.  So this leaves us wondering if the crowd is right or if we should take the opposite side.  No doubt I am skewed toward the contrarian view, but the truth is the crowd is more often right than wrong as sustained moves are far longer in duration than reversals that tend to happen rather quickly.  So when deciding whether or not to trade with the crowd, we first need to decide if the recent price action is part of a continuation or a reversal.  And of course time-frame matters a lot in this debate because it could very well be a short-term reversal within a longer-term continuation.

VIX daily

Again my bias continues to be for more near-term downside and I have a leveraged bearish index trade on.  I’ve been looking at struggling high-flyers for a shorting opportunity, but the volatility in both directions scares me and since I expect a more controlled pullback, an index play seemed to provide the best risk/reward.  Of course if the sell-off picks up steam, I’ll get more aggressive in individual names, but for the time being, picking up a few bucks on the downside is keeping me engaged.

Stay safe.

May 13

More thoughts on Greece

By Jani Ziedins | Intraday Analysis

The problem in the Eurozone is there is no way Greece, and others, can make good on their debts and European leaders are simply figuring out how Greece, and others, are getting off the hook.

  • The simplest and most straight forward is for Greece to give its creditors the middle finger. That is how most deadbeats handle it, so what is the big deal? But economic experts are petrified of the consequences for the stiffed creditors as they become insolvent without Greece’s repayment and that will kick off a series of dominoes leading to a global depression. That sounds ugly and is why smart people are desperately looking for an alternative.
  • One option is having a rich benefactor swoop in and pay off all their debts. But since no one has enough money outright, they’ll simply print it and hand it to the creditors. This lead to inflation, but that is tomorrow’s problem. But the political ramifications for this option is it appears like Greece is getting a free pass as they are bailed out by all the other hard working Europeans, making this a politically challenging option.
  • An alternative is letting Greece default, but then bailing out the banks that are on the verge of collapse, heading off financial contagion and global depression. Again more money printing and the only difference between this one and the previous is whether or not Greece defaulted, but in reality, this is purely semantics because the effects of money printing will be the exact same for the Euro-zone economies. But it might be slightly more palatable to Euro citizens because it doesn’t give Greece a free-pass. But at the same time it turns into bailing out fat-cat bankers who are even less liked.
  • The most extreme of the options is to shred and rewrite every single contract in Greece or pertaining to Greece as they drop out of the Euro and re-adopt the Drachma. The advantage is it give Greece the independence needed to print as much money as they need to pay off their debts. But this will be sheer contract-law chaos as everyone fights over what debts and assets stay Euros and which are converted to near worthless Drachmas. Dose Greece have authority over European creditors to force them to take Drachmas for their citizens debt, or can the foreign creditors insist on repayment in Euros? What about Greeks who have money in foreign banks? And of course the problem of financial contagion and bailout remains as creditors who are repaid with worthless Drachmas will still face insolvency as they are unable to repay their creditors with a worthless currency they received as payment.

The last item barely hints at what a monumental challenge breaking up the Euro will be because it affects every single contract written in Europe. Even separating a single nation will be a huge, tangled mess and lawyers will feed generations of their heirs with all the money they make over litigation of these existing contracts. And it doesn’t even address the financial solvency problem since Greece will still be defaulting in spirit by paying off their debt in a worthless currency.

But no matter what poison you chose, default, money printing, or breakup, the ultimate goal is to avoid paying the debt incurred either through an outright refusal to pay or some kind of inflationary devaluation where the value paid back is worth far less than the value borrowed. But the thing to realize is no matter what route is taken, the end result will always end up with the tax payers bearing the brunt of their politicians fiscal recklessness. So if all three roads lead to the exact same place, why not take the easiest one and just get it done with? And no doubt this is what will happen once the rubber hits the road and the time for action has eclipsed political posturing.

No doubt I didn’t do a great job of explaining the above logic, but the fact remains that it is next to impossible to un-bake the Euro and for better or worse that continent is stuck with it. But hard lessons were learned and going forward there will be more fiscal unity in addition to the monetary unity and we’ll see more centralized fiscal and monetary policy like we see here in the US as a collection of states under a fairly powerful central govt.

May 11

Still finding support

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 12:45 EDT

Stocks are in positive territory this morning in the face of JP Morgan’s pressure on the financial sector.  The bank reported $2b in ‘hedging’ losses.  How that happened is anyone’s guess, but lack of risk management and oversight of the trading operation seems to have crucial role.

As for the indexes’ price-action, they continue to trade slightly above recent lows.  It is nice to see we have not triggered an avalanche of sell-orders, but the buy-the-dip crowd is also unable to move the market higher.  The one thing that remains intact is the series of lower-highs and lower-lows and it will take a material move from here to reverse this pattern, requiring the markets to break multiple layers of resistance before reclaiming the highs of two weeks ago.  We have the former support at 1360 that is now acting as resistance, the 50dma, and then finally moving through the 1415 and 1422 highs.  Not that it can’t be done, but these are several speed bumps along the way that will potentially slow down any move higher.

The thing that still concerns me is the lack of panic selling.  Typically the market bottoms by flushing out weak holders as it becomes irrationally over-sold.  It is this emotionally impulsive selling that lets savvy contrarian traders step in for quick profits.  In many instances orderly sell-offs are far too rational to form solid market bottom.   The lack of panic selling indicates there are still a lot of optimistic bulls out there and sentiment needs to come down a notch or two before we can bounce and head higher.  Of course I don’t have a crystal ball and the market is going to do whatever it wants to do regardless of what I think, but using history as a guide, it seems like we still might have more room on the downside.  But either way we need to take our cues from the market and respond accordingly.

Stay safe.