Over the past week the market has displayed the classic fourth quarter emotional rally that occurs when professional money managers find themselves sitting on the sidelines with too much cash on hand. The move is amplified even further when placed inside the context of a very challenging year for hedge funds in general. Now that the market has broken through resistance at SPX 1257, the build-up of capital on the sidelines will likely extend the rally beyond where it would technically exhaust itself.
The market has exhibited price action to date, which has been so far away from the mean that it brings even more risk in participating on either side of the field. I find it noteworthy that the ever-resourceful Sentiment Trader, Jason Goepfert, has numerous data entries from 2011, that brings to mind 2008 – where the data sets were once again tarring the scales of market history.
Speculative sentiment continues to vacillate from one extreme to the other as a result of instability within the system. While there is some contrarian merit at the extremes, its utility quickly fades – because the market is maintaining its inertia across the now expanded range. For example, speculative bullish sentiment in the long dollar/short euro trade reached five-year highs during October. The net result was a move that went too fast in the face of sentiment and leaned too heavily to what everyone perceived as inevitable – the collapse of the euro. The question inevitably comes down to timing the ultimate centrifugal force – the market – and as we know her signature rarely plays in 4/4. After today’s rally, the dollar has lost crucial support at 76. Technically speaking, it is in no-man’s-land with long-term weekly support around 73. If needed, further stimulus is now questionable, considering the Fed’s quantitative handbook is heavily tethered to the dollar (see, Here).
The comparisons of Greece to the subprime crisis is still of value, when contrasted with how our own market expressed itself on the Continuum of D’s (yes it is my own) –Denial, Discovery, Discounting and finally – Despair. After this week’s historic rally, I believe it is safe to say Europe is now in the honeymoon period between the Discounting stage and where the rubber finally meets the road – the Despair stage. Where you can find a harmonic equivalent with our own crisis, is in the late 2007 tape where the Fed started to ease and where some major financial institutions, such as Countrywide, American Home Mortgage and Northern Rock started to fail. What interests me particularly in that period that I have mentioned in my previous notes (see, Here), and which rhymes technically with this market – is the extremely negative breadth artifact that accompanied the lows in August of 2007. In hindsight, the breadth readings make sense, because we now know the final lows were much further down the road in 2008 and 2009. In 2007, the market was between emotions and riding the false hope that the crisis was resolved rather tranquilly. As Yogi would say, “It’s deja vu all over again” these days.
A simplified, yet logical way of interpreting the credit crisis is we never truly emerged from it – it just transferred from a private to public concern.