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EYES
WIDE SHUT
by Gary
Tanashian
biiwii.com
October 28, 2007
If there was any doubt about
the true nature of this market and this financial system, there should
be none now. The market reversed higher on rumors that the Fed planned a
rate cut and then zoomed even higher on Mister Softie's quarterly
results and some happy talk by Countrywide Financial. Bulls are
desperate to keep the drunken party going and perhaps they will with the
likes of GOOG, RIMM and AAPL - fine companies all - leading the way. But
there is one problem for the bulls however; this was all in the script.
Reference the note
from last weekend written as those slap happy bulls were being led
to a short term mini-capitulation by the major financial media and its
constant harping on the anniversary of 'The Crash of '87'. As noted on
the blog, I covered the
majority of my short positions by the close on the 19th for good profits
- when this dream machine gives you profit as a bear it is advisable to
take them because hope is a powerful aphrodisiac for this market - and
then covered the final position for no gain upon seeing the "whites
of their eyes" along with a glint of rampaging greed.
As noted, there was little
chance that the most recent leg down was going to be the big one and
instead, it was just more manic behavior by the alternately greedy and
fearful bulls. Now we witness a quick reversal to the opposite pole. Do
you think this is healthy behavior? I took new short positions this past
week with the assumption that our scenario (support and a bounce to
noted resistance) would hold. We are there now but to complicate matters
we have a Fed that is being seen as the embodiment of everything we
thought we knew about Heli-Ben to begin with. It appears he will err on
the side of rampant liquidity creation; a luxury afforded him by the
something-for-nothing fiat regime in force throughout his academic
career and which he apparently does not question, along with perhaps 90%
of the public and official sectors.
[click on charts to
enlarge]
 Without
further delay, on to some charts. First up we have the S&P 500. In last
week's note the Dow was shown. Here we take a look at the broad
S&P 500. Support at 1490 held with no problem, except in the minds
of manic and emotional bulls. But now we watch resistance at 1540, a
weekly close above which would get me looking for the exit signs on my
short trade (SDS ultra short SPX) on this index. But again, there is
nothing here as yet other than a predictable bounce and some still
turned-down momentum and trend indicators for the bulls to hold onto.
The bulls refuse to loosen their grip on Dr. Bernanke's punch bowl. This
is one FOMC meeting that is very important in that it could well decide
whether the broad market rejoins other assets in blow off mode. But if
that committee ever grows a collective backbone and at least acts like
it cares about the US Dollar, watch out below. In other words no rate
cut = no continued party (in the short term) for the bulls. In the
meantime, along with the bearish momentum indicators on the chart the
bulls face a still-bullish (bearish for the markets) VIX, possible
double bottoming long term treasury rates and a put/call ratio 2o day
moving average that appears to have bottomed and is turning up (.94
exponential and .90 simple).
 The
next chart I would like to look at is the NDX, of which I am short via
QID (ultra short QQQQ). This is a chart that kept me tempered on the
short side once I saw that inverted head and shoulders formation
beginning to form (those who cared to open their eyes could see what
the bulls were up to back in early September). And here is a chart
from mid September that clearly shows when the bulls took control as
they held the inverted H&S neck line. That is the 'whites of the
bulls' eyes' if I have ever seen it - a glint of greed and fury that
would not be denied. But the formation has expressed itself to our
target and is forming a small, tight reverse symmetrical triangle, which
being of modest duration is not cause for any great bearish projections.
In fact, I would be happy to get the two noted gaps filled and then go
back to a more routine risk management regime (after all, I am primarily
short the market to protect gold and silver miner positions for which
the macro becomes better every time Bernanke's backbone looks a bit
rubbery) as the performance of some of the captains of the NDX like
Google, Apple and R.I.M. is very impressive. I also took a new long
position in Texas Instruments (TXN) on the day it was torpedoed, as
owning this semiconductor (I am aware the SOX
is bearish) company is akin to holding a bit of relative
value against being short an index of high fliers. It should be noted
however that if this does indeed whip itself into a bull frenzy/mania,
the high fliers are likely going a lot higher relative to the likes of
TXN. But until the bulls show me the whites of their crazy, lunatic
eyes, I'll hold short the index here. The whites of their eyes would
likely be a break above the top line of the reverse symm-tri.
 Next
up is oil, another asset rising in bullish fury but which is in reality
likely another manifestation of the sacrificial status of US Dollar. I
am bullish on oil (and any other precious commodity) for the longer
term, but folks, this thing is rising now in a furious and desperate
speculative environment. In my book the rise in stocks, oil, the Euro...
they are no different than what is happening in China, and what is
happening in China is a bubble. A bubble that I have shorted - in very
modest doses - of late. I think the US Fed's true nature has been
exposed; they simply cannot wait to save the day for asset owners and
leveraged risk takers at the continued expense of savers and
non-speculators (if you own what you think are sound mutual funds but
haven't gone through all their holdings with a fine tooth comb, you but
you are a speculator - and a risk taker). People managing other peoples'
money tend to go for the gusto; go for the performance. But sometimes
performance and sound risk management are mutually exclusive. But back
to oil; the goopy stuff continues to frustrate me as a good chunk of my
investment stance is predicated on oil topping out and/or declining
(like any energy-dependent business, the gold miners do NOT like higher
oil [edit: or more accurately,
higher oil vs. their product, gold]). Biiwii.com
guest writer Bob Hoye's Institutional
Advisors have been constructive on uranium vs. oil, and as far as
energy goes, my few holdings are indeed in the u3o8 sector.
 The
airlines have not yet gotten the memo and remain a bearish divergence
for oil as long as the short term uptrend remains intact. I am long JBLU
and LUV until such time as the XAL breaks down. Painful as it has been,
the grind continues and I remain bullish until the chart tells me not to
be. As noted on the blog, this Airline
trade has been a grind. But that is the life of a bottom feeder,
which in trading practice I tend to be (as opposed to a momentum or new
highs breakout trader). Patience and ultimately having to possibly admit
I was wrong are part of the equation.
 Next
we have a chart for gold, a traditionally counter-cyclical asset that is
either aboard the speculative blow-off trade or is simply biding time as
it prepares to decouple from all the other nonsense on fiat planet
(think Euro). But if the Dollar ever catches a bid - and catches the
multitudes of Dollar bears on the wrong side of the trade, gold will
receive one of those hard whacks that its ongoing bull market is noted
for. I had projected $900
off of an ascending triangle break but a symmetrical triangle works
as well or better and targets the same level. This is among the reasons
I hold my core gold stocks no matter what.
The gold bug camp appears
have a lot of people who consider it healthier for silver to lead the
bull market in precious metals. But gold is the 'monetary' metal and its
real bull market is and has been marked by its enduring
value in the face of the wholesale compromise of global fiat currencies.
Again, I would like to emphasize the value that Bob Hoye and fellow
Biiwii.com guest writer Steve
Saville (there are others I am sure, but they are a minority) have
provided to those willing to open their eyes - as they in my opinion
correctly analyze the dynamics of gold as counter cyclical and counter
confidence and the importance of the gold/silver ratio in divining
whether we have a real gold bull or merely a rising component in the
commodity complex. As long as broad market participants choose to
believe all will turn out well, Google can make them rich and silver is
going to $100 any time soon, then gold will not distinguish itself. I am
not bearish on silver by any means. But in a contraction environment,
which I believe will persist, I am less bullish silver than gold. Our
often-watched gold/silver ratio remains in an uptrend. But that fact and
others, like the bullish stance of the Yen are merely inconvenient and
boring details as the bulls prepare for a hoped for next leg up in their
fantasy where an all powerful Fed actually can micro manage assets of
all kinds to the inflationary heavens and a certain despised debt note
to the gates of hell.
 But
what if the GSR continues upward, the Yen continues upward, long term
treasuries do not make a lower low and the manic whites of the bulls'
eyes once again turn yellow? This is not a doom and gloom forecast, but
it is best keep your feet on the ground, understand the risks and
proceed with your eyes wide open. Money is scared right now and it is
stampeding into the hottest plays it can find. But it is not sound
money, it is just too much funny munny, created out of thin air and
seeking to transform itself into something real and productive. Funny
munny fuels private equity. Funny munny promotes stock buy backs, funny
munny creates Euro and China bubbles. Some of the munny will manage to
become money, first and foremost by denominating itself in gold. But
also silver, oil and productive resources of all kinds. This munny will
also hide in good, solid debt free technologies that enable the
interconnected world we are heading toward. So you won't find me writing
a total Armageddon piece. Look at it this way, in an age where the
world's reserve currency has come under the gun and its major
competitors are not much better intrinsically, this is a game of musical
chairs and the time is now to have your eyes on the chair you plan to
sit in. When the music stops you do not want to be stuck with the wrong
'assets' or obligations.
Secular changes are at hand
in how we define 'value'. The above is TA piece that became a bit long
winded (it's not the first time). I am interested in effective short
term trading/investing and in fact enjoy few things more. But I always
operate against a backdrop where I keep a sober eye on the macro
framework. In a soon to come weekly letter, this framework will be kept
in focus along with shorter term trends and trading ideas. If you are
interested in joining me, watch the website,
TA blog and Commentary
blog for details.
PS: As if his ears were
burning at the sound of the bubble talk above, yet another Biiwii.com
guest writer, Clif Droke checks in this morning with his views
on matter. Mr. Droke, while maintaining a differing perspective from
my own as to the implications of liquidity creation, has been one of the
most consistently correct analysts I have seen in recent years as far as
calling the direction of what he would call a market and I might call a
casino.
© 2007 Gary Tanashian
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