I think I'll start with where I planned to before the electoral chaos in Europe and primarily in Greece took the spotlight.
I thought I would first share some responses I emailed to some members as I found my responses taking on a certain trend that perhaps everyone should hear, I'll try to edit them to make them more succinct.
First I was asked about my opinion with regard to the "Mamis Sentiment Cycle". I include this email because my response is very similar to an email I received Friday about a well documented "Presidential Election Year" effect, that goes like this...
"After a DJIA gain in the first four months of an election year since 1904, there has never been a losing year and only three minor losses during the last eight months of the year from May to December."
If you like data like this that tracks historical trends, then the "Trader's Almanac" is a great book to have on hand.
As for the Mamis Sentiment Cycle", it looks like this...
I have had several emails recently that have been similar in nature and while I'm a firm believer in the emotional cycles of the market, I have found my response to be nearly identical in tone. To summarize my response, here are a few excerpts from email replies I have sent.
"I've had a lot of members send me cycles, Trader's Almanac Election year predictions and various other "historical" data. The problem I find with each of them in general is that the market has changed enormously since about 1990 with the technological revolution, a mass migration from traditional brokers to online brokers, a huge shift toward technical analysis, one of the bigger changes is Globalism which historically is at its height (What happens in Europe, China or the BRICS really effects our economy/market like never before in the history of the market), not to mention dark pool trading and High Frequency Trading, as well as Historical economic policy intervention in which we have no historical precedent to look as to see how these interventions will effect not only our economy, but the world economy.
Bernie himself wrote a paper before becoming the chairman in which he did not support the very programs he has instituted. Because the US is running such a huge deficit (again bigger than anything we've ever seen), the F_E_D was pretty much forced in to these policies to continue to raise the money that politicians are spending as tax revenues can't cover them and traditional buyers of our debt have lost confidence in our ability to service it, thus the F_E_D has become the mechanism to support the continued spending and even with their record balance sheet, we still face government shutdowns as the debt level keeps increasing. The F_E_D is no longer working to support their dual mandate, but has become the piggy bank of last resort for the politicians.
The truth is no one, not even the F_E_D knows how these policies will effect the economy in the long run, some very smart economists have said the F_E_D is basically trying things and using the US economy as a lab rat to see what happens. The fact is that while we have had recessions and depressions, we have never had one with the world so interconnected due to Globalism that started mainly in the 1990's, the entire idea of the Euro-zone is a free-trade zone to make exports more competitive. We've never faced an economic downturn before in which there are so many new factors that influence economies and the market. We've never had such interventionist policies and no one can really predict the outcome of all of these new conditions and how they effect each other. I think anyone who is vaguely familiar with economics knows that we are not solving any problems, but simply kicking them in to the future and we are running out of tools to keep doing that.
The entire market structure has shifted from one that use to be based (many decades ago) on actual discounting of a stock's value to a mechanism that is there solely to benefit Wall Street now and financial firms having almost nothing at all to do with discounting value or price discovery.
The point is, all of the historical models and concepts are really irrelevant to the economy and the market, there's simply no precedent to look to since things have changed so dramatically.
I hope to see one last move higher so I can add to short positions, but I think things are really going downhill from here. I'm sure we'll get some more interventionist surprises, but the big picture looks darker than ever. I just don't think the models, cycles and past historical precedents are useful anymore. I have said many times I expect we will see a secular bear market and there aren't any traders alive who have ever seen one in stocks, so who ever figures out how to trade that market first will be the winner. Those who stick to the past will likely be annihilated. That's my general opinion, but in the mean time, I just try to watch the market and see what it is telling us and adjust accordingly."
While I have written at least 4 replies like this (this is only excerpts from one), the general tone is the same, we are in uncharted waters and historical precedents don't apply to the degree they would have before the Global economy and the stock market itself changed so radically over the last 20 years.
I have also addressed F_E_D intervention and talk about the likelihood of more to come, however I also feel that the F_E_D and Global Central banks DO NOT have the policy tools they had in 2009 and their balance sheets are vastly different (much bigger), furthermore there is a shifting attitude toward interventionist policies from "If they hadn't done it, we would be worse off" to one that questions whether intervention has had any beneficial short term effect other than levitating the market to unreasonable prices and is now considering the possibility that in the long run the effects of intervention may be more damaging than any good they may have achieved. Furthermore the Central Banks Interventionist policies are starting to be seen with skepticism and CB's like the F_E_D are actually losing credibility. After all, the Chairman himself penned a paper arguing against the benefit of stimulus until he became chairman and instituted the widest reaching interventionist policies the US has ever seen. There is clear discord among F_E_D and F_O_M_C members behind the scenes as to the benefit and potential consequences of simply kicking the can down the road. Naturally one of the questions I have is whether additional stimulus may start looking like the Bank of Japan's FX interventions which have almost no credibility and have proven to fall way short of expectations, if not outright failures.
Additionally, as Peter Tchir noted,
"The F_e_d and government policy has been to ensure the least amount of pain in the near term. Those decisions have consequences that affect the long term. We still seem to get away with an immense debt load, but even here, prior spending decisions are limiting future ones.
In spite of a relatively unified front presented by the F_e_d, dissension within it seems to be growing, at least in their private conversations.
Launching a new program too close to the election would make even more people question the independence of the F_e_d."
Quickly addressing Friday's Non-Farm Payroll shocking disappointment, upward revisions to prior month jobs means the slowdown is accelerating.
The Unemployment rate CANNOT be used as a true measure of employment in the U.S. People continue to leave the workforce (making the U.E rate look better as they are not counted), yet programs such as disability and food stamps continue to grow in size. Trimtabs collects IRS receipts in real time, while the UE rate may seem to be stabilizing, the federal tax receipts DO NOT lie, they have declined, once again showing how the government uses accounting gimmicks to make things look better than they truly are.
As to the week ahead, this week’s data calendar looks relatively thin, so the market will focus on analyzing and interpreting old data and reacting to new data related to the European elections and subsequent effects of those elections, which even at this very moment remain VERY FLUID, mainly in Greece. Here's a link to this week's US economic data, it is relatively dull.
Secondly I "was" going to address where the market is, where it "could go", why and what the mitigating factors are. This analysis is totally based on market trends and does not take in to account the very fluid situation in Europe, but is still worth addressing briefly.
AAPL was a prime example and the reason I predicted AAPL would underperform (although I did expect a very late comeback before the bounce completely ended and we could argue that we did see that after AAPL earnings which 3C showed a very positive divergence in AAPL and Tech on the 24th of April just before their earnings release, but that wasn't the extent of my expectations) is because of the publication of Dan Loeb's (an influential Hedge Fund manager for Third Point) top 5 holdings in which one month AAPL was there, the next month it was gone. My expectation was that there would be a mass migration out of AAPL based on Loeb's lead. On April 10, as we speculated the market had reached a short term bottom and would see a volatile bounce up with SPX $1400 as a target, AAPL from the 10th through the 24th lost -10.89% while the SPX gained 1%. The theory was correct and the reason? After seeing Loeb's top 5 holding, hedge funds all tried to exit the same small door en masse which revealed two things: 1) Hedge Fund managers were herding together even if they had to sell in to lower prices which they are loathe to do (this became a matter of survival) and 2) As I also suspected, we would see a "Every person for themselves" effect. While these two statements may seem counterintuitive, "Hedge fund managers all doing the same thing" and "Hedge Fund managers breaking away from the herd to sell no matter what", they clearly are not counterintuitive as AAPL's performance during this period contained aspects of both.
Furthermore, the "every person for themselves" effect of hedge fund managers doing whatever it takes to get out of the way of an oncoming train has created the more volatile, less predictable environment that I expected to be magnified as we approached the end of this bounce and top pattern. This makes the market very unpredictable and it is a micro version of the bigger topping pattern called a Broadening top.
This is not a textbook example, but in the real world they rarely are. I didn't choose the Dow Jones 1929 as hyperbole, but simply to show the emotional make up of the Broadening top and its increasing volatility and increasing lack of predictability and comparing that to the situation now as we have expected. I am not suggesting we are in a Broadening top, just showing the emotional fear and panic of the two situations.
At this moment the market looks like we have reached that point, I am simply pointing out that the volatility "can" continue and one more move to a higher high above SPX $1415 is still possible just as the Broadening top makes wilder, more volatile swings; although it is looking increasingly less likely after today' events. Just be ready to take advantage of the situation should it materialize. Shortly I will tell you why it looks less likely after today, but before that I will give you the trends in the market that make it still a possible outcome. Those trends in the market would include: 1) the concept of increasing volatility in the topping process, 2) the fact that the market likes to make as many people wrong as it can at ant single point in time, 3) we have broken decisively below support and this is where we often find the head fake move, 4) As volatility increases the volatility of the head fake moves increase as well. As to number 4, the more shorts caught in a short squeeze on a strong break and reversal, the higher the market can move because of the short squeeze. After today's action across Europe, I can't say that such a move is high probability, but those are several of the market trends that would support such a move. In dealing with today (Sunday's events) I'll address specific issues that will effect the near term in both potentially short term positive and obviously negative ways. This is why I have been building a short position over the last month or so and to be clear, if I wasn't clear enough in my last post, I am very bearish on the market due to the hard facts I have been putting together for you over the last several months.
Today's Super Sunday in Europe, What Happened, What the Implications Are and What The Possibilities Are...
If you have kept up with the news out of Europe where 3 elections took place today (Greek Parliamentary, German Regional, and France's Presidential Race) you probably know that Sarkozy lost the presidential election to Hollande which is probably not too surprising for the market, the real market event has been Greece.
France: Sarkozy lost the Presidential race to Hollande and has conceded defeat, however the biggest loser tonight may be the one still in power, Angela Merkel. An anti-austerity drive emanating from a newly socialist France is threatening to topple Angela Merkel's carefully constructed European hegemony. Sarkozy was Merkel's most important ally in imposing harsh austerity on many countries in the Euro-zone, often referred to as "Mer-Kozy". The anti-austerity movement is clearly what toppled Sarkozy as Merkel campaigned for Sarkozy and much to Merkel's dismay, Sarkozy stopped using Merkel as he saw his poll numbers sliding, the "New EU Fiscal Compact" led by Germany is obviously deeply unpopular with Greece being the poster child of the harsh austerity measures, leading Greeks to depict Merkel as a Nazi.
Hollande has made it clear he does not support Merkel's vision for a new European Union and has pledged to end "Germany's dominance within Europe". Hollande wants to end the severe austerity measures in Europe and has voiced opposition to Merkel's main goal of a new fiscal compact in the Euro-zone. Hollande has also campaigned for "Euro-Bonds", something Germany has ALWAYS opposed.
Hollande rode the wave of anti-German austerity discontent to victory. For more on what the elections mean for Chancellor Merkel, see this story from Speigel.
One thing to watch for this week will be Hollande's comments specifically related to "Growth". Hollande "may" be successful in the very near term of convincing the market that he can create growth which would be positive for market sentiment, however this sentiment, if it materializes will be VERY short lived. While retail may buy it, smart money knows that growth in Europe is not coming, however any short term bump from the keyword will be used to sell into. It remains to be seen if Hollande can convince the short sighted market participants that he has a plan for growth. Expect the bond market to severely punish France in the coming weeks, watch for rising 10 year yields as the bond market WILL NOT but in to any "growth" propaganda.
As mentioned, this is a severe blow to Merkel, not only at home where her base is likely to slip, but in her plans to transform Europe; she may become the highest profile victim of the anti-austerity movement, which is not the same as anti-EU.
The German regional elections for now are not a major market issue, although Merkel and the CDU party she heads will continue to see their support decline as Germans are just about as angry at Merkel for putting them on the hook for bailouts of countries like Greece as are Greek citizens that have been thrust in to poverty (not only from the Greek economy, but from the austerity demands emanating from Germany and the Troika which have only made conditions in Greece worse).
The Real Shocker-Greek Parliamentary Elections...
This is what is really having a shocking impact on the market right now. Several weeks ago polling data seemed to indicate that the New Democracy and PASOK, who are pro-austerity, would easily win the elections. Preliminary exit polling data seemed to confirm that the two parties would have enough seats to form a coalition government, one the Troika and Germany would prefer. However at last check with 63% of the vote in (and this is very fluid), Greece's New Democracy (in first place) and PASOK (in 3rd place) have around the 152 seats needed to be asked on Monday by Greek President, Papoulias to form a coalition government. The combined percentage of the vote of these two pro-bailout parties is at 35.5%. In second place is the radical left, anti-ausrerity party, SYRIZA. Other than the two pro-bailout parties, the New Democracy and PASOK, there are about 10 other parties that are all anti-bailout/anti austerity. Combined, the remaining parties will hold around 60% of the vote. If the ND/PASOK get the 152 seats needed, they will try to form a coalition government, if they can't, the president will then ask the remaining smaller parties to form a coalition government. If these smaller parties that all stand for anti-austerity/anti-bailout can put aside their differences and form a coalition government, everything Greece has signed up for, the bailout, the austerity measures, etc, will all be on the chopping block-more on that in a minute. If neither side can form a coalition government, there will be new elections.
If the anti-austerity parties are successful in forming a coalition government or no coalition government is formed either way, several major events will likely occur. First it is likely that the IMF will cease bailout funding to Greece. It is likely that the EU would do the same. Or the "Troika" would simply use the carrot as leverage to try to reach the desired political outcome by threatening to withhold bailout funds.
This is an important point no matter who may or may not come in to power. On May 15th there is a Greek "International Law Bond" maturing with a payment of $440 mn Euro's due. While this isn't a large amount of money, these bonds are held by the PSI (Private Sector Involvement Debt Restructuring) holdouts who refused to take the new Greek bonds at a 50+% haircut. These bonds have better legal protection and if Greece decides not to pay them or cannot afford to pay them the fallout could be much more significant than the amount as Greece will almost certainly be sued by the bond-holders creating a potential default situation. "IF" the maturing bonds are paid, there will likely be an intense political backlash.
For whoever is in power (if anyone is in power) on June 2nd a decision must be made regarding the additional cuts Greece had previously committed to. There's no wiggle room in their budget which means to make the cuts, more public sector jobs will be lost and it is possible more severe austerity measures would be imposed to meet the cuts and deadline. Of course if Greece decides not to follow through with the promised cuts, this would almost certainly stop all future Troika bailout payments.
To summarize the situation in Greece, the two largest political parties that are pro-bailout may have enough seats to be asked to form a coalition government, but as for the vote at large, a large number of smaller anti-austerity parties received the bulk of the vote, probably nearly 60%.
As these headlines make the situation clear:
"Greece's Left Coalition called on Sunday for an anti-bailout coalition, saying the country's general election showed that austerity policies had been soundly defeated and a peaceful revolution ushered in."
"Mrs Merkel needs to understand that austerity policies have suffered a huge defeat," said Left Coalition leader Alexis Tsipras, referring to German Chancellor Angela Merkel.
"With their vote, Greek people gave a mandate for a new dawn in our country with solidarity and justice instead of barbaric bailout measures."
"The parties which signed the bailouts without Greek people's consent are now a minority," Tsipras said."
Tsipras' party has emerged as the surprise star of the election and is on track to finish in second place with 16 percent of the vote, according to early results. The success comes at the expense of the big pro-bailout parties, New Democracy and PASOK, who were punished for backing austerity.
So I hope that makes the situation a little more clear: 1) Merkel's policies have suffered a huge defeat in both France and Greece. 2) Merkel lost a key ally in France and has a new enemy looking to destroy everything she has backed thus far. 3) The Greeks have rejected Merkel and the Troika's austerity measures, but it is unclear whether a coalition government can be formed and there are several important deadlines rapidly approaching that could result in much more dire consequences for the EU. 4) The wave of anti-austerity backlash is very clear in France and Greece, the question now is how will other leaders in countries such as Italy, Portugal and Spain react as they are in dire need of assistance, yet a politician's first priority is remaining in office-two realities that clash? 5) How does this effect Europe on the whole as they have had little success in formulating feasible solutions and the ones they have create are now in jeopardy, how will the market's react to a European Union that looks more disorganized and in greater danger than ever before?
As to the market's reaction:
It has been very ugly and we must remember that desperate times often breed desperate measures.
First ES (the S&P E-Mini Futures which open Sunday night) has dropped below the $1350 level, likely clearing out many stops.
The ES open in the light blue area takes out $1350. This has taken out the 4/10 and 4/23 lows and would look like this on the SPX chart
Approximately where the SPX would open at current levels.
The Euro opened Sunday night below the recently supported $1.30 level. There's been much speculation as to who has been supporting the Euro, trying to keep it above the important $1.30 level, some say China to help Chinese exports so they don't become to expensive as China has seen 6 consecutive months of weak/declining exports, others think the Bank for International Settlement, whoever it is, it is clear $1.30 was a line in the sand, it will be interesting to see if they try to support the Euro and get it back above $1.30.
The daily EUR/USD chart shows the $1.30 level being defended for more than 3 months, that defense failed tonight on the open.
Probably partly because of the stronger dollar with the Euro opening down and probably partly because of the economic trouble Europe is in, which spiderwebs throughout the global economy, WTI Crude oil has dropped below the 12/20 levels, the lowest print of the year as well as below the 200 day moving average. I'm not trying to imply anything beyond what I write, but last week I showed several charts that suggested Energy was about to rotate out and XOM was the only short that I added to. Beyond what was seen last week, I really don't know how or if it has some correlation with European events on Sunday, it seems like the Greek vote came as a shock to the market.
As the dollar is stronger due to the drop in the Euro, gold should be lower and it is. However gold is (at last check) is holding up better than other $USD correlated risk assets. This may be because of the recent discovery that we confirmed, gold is acting as a "QE" sentiment indicator, which would suggest the market may be expecting a Central Bank intervention similar to the November 2011 Global Central Bank intervention in which the F_E_D , the PBoC and ECB injected about $1.3 trillion dollars in liquidity.
The other scenario may be that since the Treasury market wasn't open, gold was the only flight to safety trade. The Treasury market is open now so we'll have to see how this plays out. You may recall that ES had also fallen hard just prior to the intervention.
As the Treasury Market opened at 10 p.m,. (thus far I have been researching and working on this post for 6 hours and events are shifting rapidly) the US 10 year Treasury saw its yield drop to below 1.84%, which is the lowest since the start of February, suggesting there is a major flight to safety trade in treasuries as the bond price moves opposite the yield.
I suspect at the time since gold was the only flight to safety trade open that it was used until treasuries opened, this chart would tend to agree.
As you can see Gold has continued to drop and saw a pretty significant drop just before the treasury market opened.
Compared to the Euro, gold seems to be losing more ground now than the Euro's price would suggest, which I would take as gold moving closer to the FX implied correlation after the Treasury market opened and treasuries became the flight to safety trade.
I'm not even going to post 3C charts right now as the Greek vote probably won't be official until the morning and with a few seats making all the difference, a small change in the vote count can have an enormous impact on the situation and no 5 min chart is going to stand a chance against the surprise that is the Greek elections and the implications of such.
For the moment, ES is relatively stable at the $1348 level, thus far in a range between 1352 and 1342.
Several months ago when everyone had forgotten about Europe, we warned Europe was about to come roaring back in to the spotlight, but even I had no idea the implications could be so potentially devastating.
At this point, NOTHING would surprise me.
I appologize for the VERY long post and the VERY long time it has taken to get it out, but I wanted to be as thorough as I could in what has been a very fluid night.
Have a great week, I'm hoping we will find some incredible opportunities in all of this chaos.
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