Update August 8th, 2011

Hey everyone, wild week in the market last week. I was stopped out of all positions which is unfortunate, but better than holding through all of the volatility. The key here is to abide by stops and keep positions small. I planned a video for tonight but am having trouble with the software so I was unable to put one up however I wanted to give at least a quick update on the market so I will summarize a few things in this post.

First, I am long Aug 11 MS $19 call @ $1.45 and that position is up about $.15 as of Friday’s close. I like $20 as a support because it is the resistance level going back to the financial crisis and should now act as support, especially since the stock has traded right into that level without first consolidating. A few other plays that are looking cheap or are close to critical support are WMT, F, BAC, AA, and XOM. There are several large cap stocks that have tagged or are currently hovering above support and I think this bodes well for the market.

Regarding the S&P downgrade, none of the reputable minds on Wall Street care much for their ratings. Investment banks pay people hundreds of thousands of dollars to run valuations on stocks and bonds. In other words, the rating given by an agency that has whiffed on so many obvious calls (internet stocks in 2000 and MBS in 2007) means nothing to them. There may be a knee jerk reaction, but don’t expect the downgrade to be the reason the market falls again (if it does). If anything, I think that given the timing, the downgrade is actually a nice contrarian indicator since the market is already down 11% and all of the bad news seems to be out there now. There will be a massive rally, and there will be an opportunity to make huge gains as long as we play it safe.

Currently, everyone is looking for a bounce to short the market. I too am looking for a bounce but I think that it will be bigger than most people expect and some might mistake a bull flag for a rollover, so keep in mind that the institutions will always go the opposite route that the mainstream media has the average investor expecting. Speaking of which, options expiration is this week and we have sold off very hard going into it which leads me to believe that the large funds will be looking to crush the fresh puts that have sprouted up in the last week.

Also in the wake of the debt ceiling, I am a believer that if interest rates fall, yields on US Treasuries will be decimated. Stocks, and, oil, and copper are getting hammered on. These are leading indicators of economic contraction. The US treasury is still the best bond out there and 2.5% yield on US debt still beats -15% equity in the stock market. Again, the rating means nothing and if anything is a contrarian indicator. Most would expect a downgrade to post negative performance but in this case, the fundamentals outweight the hype that the S&P and Moody’s have created.

Moving on to gold. We had a key reversal in GLD on Thursday and Friday’s trading did not get us above that high which means the reversal is still in play. However, it could just turn out to be bullish consolidation. The G-7 has said today that it is ready to act in order to calm global markets. The ECB said on Friday that it would begin purchasing Italian and Spanish bonds, which is essentially a QE program for the EU. And of course, the Fed meets this week at Jackson Hole on the anniversary of QE II. I don’t expect them to announce QE III, but they will certainly have to make themselves sound accommodative. They would make themselves look foolish if they announced a QE III only a month after QE II expired, but remember that Bernanke made his legacy as the guy would wouldn’t let the market collapse and there is no way that he will say anything hawkish while the CNBC camera is on him showing the up-to-the-second tick of the S&P and gold as he speaks. Regarding QE III, I don’t think that a third program will get the market back to the YTD highs. At this point, the fundamentals are so bearish that even a weaker dollar won’t have much effect on the obvious global contraction. The dollar will also feel upward pressure as the ECB purchases european bonds in an effort the stabilize their own markets.

All in all, the above describes my sentiment on the many issues that have developed over the last week. Keep in touch via email and don’t hesitate to ask me to elaborate my opinion. Be careful and keep it short term.

Advertisements

About Aaron Basile
Market Technician, Equity/Commodity Trader, Austrian Economist, Contrarian Investor

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: