A sudden sharp decline in stocks may not thrill retail investors, but it would be catnip for big trading desks that used the melt-up rally to get short.
One of the more useful Wall Street fictions is the naive notion that big players and small-fry equity owners alike love low-volatility "melt-up" markets that slowly creep higher on low volume. The less attractive reality is that big trading desks find low-volatility "melt-up" markets useful for one thing: to sucker retail buyers and less-adept fund managers into an increasingly vulnerable market.
Beyond that utility, low-volatility "melt-up" markets are of little value to big trading desks for the simple reason that there is no way to outperform in markets that lack volatility. The retail crowd may love a market that slowly gains 4% for the year, barely budging for months, but such a market is anathema to big traders.
It's always useful to ask cui bono--to whose benefit? In this case, highly volatile markets don't benefit clueless retail equities owners, as they are constantly whipsawed out of "sure-thing" positions.
From the big trading desk point of view, this whipsawing provides essential liquidity, as retail traders and inept fund managers trying to follow the wild swings up and down provide buyers.
I have a funny feeling the "smart money" has built up a nice short position here and as a result the market is about to "unexpectedly" decline sharply. The ideal scenario for big trading desks here is a sudden decline that panics complacent retail traders and managers into selling (or leaving their stops in to get hit).
Then, a few days later, as the carnage deepens, presto-magico, the big traders become buyers and the sudden decline ends.
Frankly, the market is looking like it's ready for a "surprise" decline. Various sentiment indicators are suggesting massive, widespread complacency--not bullish euphoria, but bullish complacency that reflects the general belief that the European Central Bank and the Federal Reserve have "fixed" the European credit crisis, and they have the power and will to "backstop" any market decline.
The most telling evidence of this is the VIX volatility index has declined for months and reached a level that typically reflects strong bull markets and widespread confidence. Yet there is abundant evidence that the global economy has rapidly decelerated and is now contracting.
This is only one widening divergence that historic precedence suggests will be settled with violent increases in volatility and sharp "unexpected" declines.
As noted here many times in 2011, "the only trade that matters" is the DXY dollar index, as stocks have long been on a see-saw with the dollar: when the dollar rises, stocks decline, and vice versa. Yet for the past three weeks, stocks have risen along with the the dollar.
This divergence has caused many traders to start looking at currency pairs such as the euro and Australian dollar or the euro and the Japanese yen for guidance as to the next move.
Bulls would have us believe the inverse correlation between the dollar and the stock market has been broken by this 3-week long aberration. That is possible, but a 3-week move burdened by numerous massive divergences simply isn't enough to dissolve a correlation with years of history behind it.
Generally speaking, there is an inverse correlation between "risk assets" such as stocks and "risk-off" assets such as the dollar and U.S. Treasury bonds.
Analyst Tony M. discusses this in a brief entry: "There have been three large divergences between equity and credit since the late 90s and each time credit forced the hand of equity."
Another analyst, M3 Financial Analysis, posted a series of charts of the eurodollar, the dollar and the Treasury bond market. His summary: "Critical Mass approaches as financial system begins to dissolve from within..."
28 comments:
Now let's see if we can get this PM and Miner party started. Let those sovereign bonds skyrocket in Europe as we will get our turn soon. I hope I am wrong about silver and that it will find new buyers. None here in Orlando, but obviously Mammoth is finding some.
From the blog (and it is on the list) SAR meaning some assembly required
"Allowance: My teen-aged granddaughters love their iPhones. Their parents love their iPads and Apple's iProfits. They, like CNBC announcers, like Steve Jobs, pretend not to know that Apple's iProfits are made by 13-year old Chinese kids living 15 to a 12 by 12 foot dorm, working 16 hours a day for 70 cents an hour. Hey, I bet there's an app for that."
"GFMS is recognised as one of the world’s leading economics consultancies in precious metals, specialising in research into the global gold, silver, platinum and palladium markets."
Gold may set a record high above $2,000 an ounce in late 2012 or early 2013, but the metal is nearing the end of a decade-long run that has lifted prices by more than 600 percent, metals consultancy GFMS said on Tuesday as it released a closely watched industry report.
"The report does acknowledge that the gold market is nearing the closing stages of its decade-long bull run and that, once the macroeconomic backdrop changes and investment in gold fades-probably some time next year-a secular retreat in the price will unfurl," GFMS said."
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Er...how will the macroeconomic backdrop change? Will interest rates increase at the end of this year? Will the FED & EuroBanks quit printing? Will the massive unemployment problem magically be resolved?
Linkey: http://tinyurl.com/74g2gzl
Well, I don't know about next year, but GFMS are right in a general sense, after a 11 year Bull market (or longer, if you count from the lows of '97 or '98, would have to dig into the price data to peg the exact start of this 'Bull'), the end is closer than the beginning.
Hard to say when exactly, but in general, past Bull markets have lasted some 15 to 17 years, and then it's the long drop.
I give it about 4 more years, more or less, to 2015/2016 roughly.
I have read that when interest rates pass 5% investor desire for gold begins to wane, and when they reach 8%, most will move to divest gold and buy long Bonds. Of course interest rates are at historic lows and seem to be stuck there forever, but we all know nothing lasts forever. Rates will rise, at or near the end of this crisis period (Central Bankstas will call it 'normalizing'), it is inevitable.
Gold has done it's job, in a time of vast deflation (credit bubble collapse), that Central Bankstas have barely averted total implosion... and we are not finished with deflation yet, Japan and the USA and a few others have to travel the EUro road to decline, which is severely deflationary.
Some good news today, from Washington's Blog:
http://www.washingtonsblog.com/2012/01/weve-won-a-brief-period-of-breathing-room-on-iran-and-sopa-lets-use-the-time-wisely.html
IMHO the odds of the US attacking Iran went down massively after the drone incident of late November. The implications of that were "encrypted communications" have been massively compromised by foreign powers, extent unknown, but possibly pervasive. Which will take years (3-5 ata guess) to fix, as many systems will have to be redesigned and new ones deployed.
Which explains the escalation in rhetoric, and Obama's clumsy attempts to widen the Iran oil boycott, which will drive oil prices higher than they should have been, and promote economic contraction in the West. Russia is very pleased, with the higher oil prices they make more money. China, not quite so much, they don't want high oil prices, but they have secured more reliable supplies now from Iran for which they can pay less than world price - as Iran's only major customer they have a strong negotiation position.
Israel has been driving the bus on this file, and their economy imports oil too - not sure what their real strategy is, other than incompetent arrogance. Co-operating with scum dictatorships like Saudi Arabia only high lights the weakness of their strategic position.
Ubuntu is a Linux operating system for PCs, it's free and open source, and replaces Windows. Can be booted from a CD-ROM, or installed on your hard drive.
Highly secure, does what you need, and all free - not much to dislike there.
If you are worried about internet security, booting from a Ubuntu CD-ROM is very secure - files on a CD can't be changed by hackers, which prevents all kinds of common attacks completely.
Reggie Middleton lambastes the US non-education system, since we were talking about kids and education etc earlier, seems appropriate:
http://www.zerohedge.com/contributed/i-illustrate-pitfalls-american-education-using-my-5-yr-old-daughte
Reggie is relentless with the self promotion, his ego is his biggest detraction, but he always has a lot of smart things to say, you just have to take his attitude in stride, and get past it to his real message.
You know it seems like every economy is doing a slow bleed. Gold and silver have had their day and may well rise back to 50 and 2000, but I am less encouraged each day as the deflation keeps eating away at the economy like termites.
Now some dumb ass went and burned down a 3500 year old cypress tree here in Central Florida about 20 miles from me. Kitty had the story up on the Dung Heap too and it was on SAR blog that I caught it as well. Some people have no appreciation for life.
As to the macro-economic backdrop, we are about 2/3 of the way through the Great Recession (which started in 2001, but was masked by Easy Al Greenspan and years of crazy credit explosion), which should be over by 2016-2018 or so.
That would be the end of the Kondratiev Winter, the time of deflation and economic contraction.
The next season, Spring, is an era of economic expansion, new technologies, higher interest rates, and generally better times. Should feature a long stock market Bull, lasting to mid 2030s, and will see actual economic growth return to the West.
The hard part is getting from here to there, of course. But like all things, nothing lasts forever, not even a Depression.
Queen, I'm still working on that e-mail for you, I have several business ideas that I want to go over with you. Your skill set is useful, and fits nicely with some of my ideas.
Was away on the weekend, and today have a contractor coming over, so time is pressing, as always, have to work afternoon shift this week.
But I will get to it soon. It is a good exercise for me anyway, will force me to put words down on paper on various scenarios I have rattling around in the back of my head.
Great comments all recently, as usual, btw.
Running out of time, will comment tomorrow, should have more time, not as much scheduled as today.
The markets have it " all priced in", or not, many more ratings agencies bombs to drop yet:
ZH: "S&P Issues Walk Thru On Follow Up Downgrades Of European Banks And Insurers"
ZH: "UBS Explains Why AAA-Loss Is Actually Relevant"
Or you can follow the MSM, who seem to think problems in EUrope have all been solved now - as if - the ratings agencies are lagging months and years behind real events. But they are playing catch up, Fitch & Moody's and S&P will have much to say on many fronts yet. And the implications are not Bullish.
The credit markets are the 'smart guys' and they are not seeing the Bullishness that stocks are - one of these is wrong, and I bet it's not credit.
That is sad, a tree can survive 3500 years of natural disasters etc - unitl the ultimate disaster, Man, comes along.
I hope they catch the idiot(s) who did that, and they would deserve the death penalty or worse punishment.
Queenbee, thanks for reconsidering and bringing back the SilverDoctors link.
There is some good material there, at times. Just like all the other information one comes across in any given day - you need to sift through it to obtain the useful 'nuggets.'
It is snowing like mad, and here I am 32 miles / 50 km away from home. The snow began falling not long after I left the house, and despite having second thoughts I continued on into work.
Unlike the frozen country to the north, us folks in western Washington State do not handle snow on the roads too well and I am hoping the drive home this evening goes okay.
The forecast is that this will be a BIG snowstorm for the Puget Sound region - we'll see...
It's probably 80 degrees and sunny in Florida right now. Blecch!
Good luck Mammoth, and safe driving.
Most of "handling the snow well" is in just driving slower, and leaving a wide gap between vehicles. Which is hard, I know, as some idiot is always ready to cut in front of you if you leave them half a car room.
Though you would probably call the expense "unnecessary", I heartily recommend 'winter ice radials' (like top ranked Michelin X) for anyone who might encounter winter driving in their area. You don't need them, until you really need them...
I have a friend who drives the highways here, and he says the ditches are full of '4x4 pickups', whose drivers think they are immune to bad weather because they have 4 wheel drive. Not so much, the ice radials are of far more worth when the rubber meets the ice.
He drives a pickup too, but has the ice radials, and drives in a sensible manner - which leaves you watching as the more adventurous drivers speed by - but revenge is sweet, as you very often see the exact same idiot that passed you a while back now in the ditch.
btw, while Charles Hugh Smith is a good read, he suffers from message dilution, and trying to wear too many hats, IMHO. I used to read him years ago.
Years back, he used to post a new Blog post irregularly, and each one was a gem of very fine writing.
Now, he seems to comment several times a day, on every topic, and no one can keep up the quality with such quantity ( or very few).
He is also a perma-Bear, nothing ever goes right, which is not true. Things are bad now, and may get worse before they get better, but taking an always negative tone is not always called for.
We all know how bad things are, it's time to focus on getting past that, instead of endlessly reciting how gloomy the outlook is.
Him and James Howard Kunstler too, the same can be said there.
Taking a negative tone is not necessarily a bad thing.
However, it is up to all of us to put our heads together and figure out how to make the best of - and improve - our situation.
yeah, I had thst feel about Simth's report; he thinks that the market just has to crash because of macro.
Remember March 2009 when eveeything looked terrible ... and then what happened.
i don't know how many times we've said this already, but you have to go by the charts, not what you believe. That's goes for perma bears and perma bulls (eg silver a few months back).
if you find yourself blaming all and sundry - the cartel, the manipulators, JP Morgan, the Fed, whatever takes your fancy- then you're doing something wrong, imo.
Mamoth I have a love hate relationship with the silver doctor. Some of the comments make my blood boil and he rotates threads to fast. However he is back. GAW I look forward to some of your ideas and I am glad that Charles Hugh Smith came on my radar again. I cannot keep up with all the links and blogs or I would never get anything done. No need to be depressed just because we are in a depression. It really does affect ones state of mind, but it doesn't effect everyone. Some of the millionaires and billionaires are doing just fine.
Mugabe well said. It's not all bad and you have to follow the tape or you may as well go out back and put a bullet in your head.
I have more of a hate-hate relationship with the silver doctor which is why I don't read him. No need to click on what you don't want to.
Anybody gotta an argument contrary to what I think in that the market will actually go up when Greece defaults?
Mugabe I agree. We all gravitate towards what we like and respect. I guess I want an eclectic blog roll and he is the only silver bug I have. I just couldn't get through the long FOFOA thread that he updates so infrequently. Gold and Silver are not the end game. We have already had gold backed money and it was just as manipulated as fiat currency. Also unless you plan to be buried with it or leave it to inheritance then you have to trade it some day for cash. I appreciate your honesty and each to his own. Just like The Turd. I just cannot read his blather anymore, but I leave his link up for those who do.
What me Worry? I don't have an opinion on Greece defaulting. This whole thing is too convoluted for my tiny brain to figure it out. It sounds sensible though. Did the markets go up when Iceland defaulted?
I am open to adding new blogs on the blog list or links as well if anyone wants to email to me or post in comments.
so, I'm hearing Greece got buyers and everything is just fine. They now have a 'deal' with creditors.
EVERYTHING IS COMING UP ROSES (unless you stop and think what roses GROW in...ie manure).
Personally, I don't care what Greece does. Or the Silver dr. Or gold. Or the politicians. Why?
Well, we had cardio dr. (who thinks he's God and calls everyone honey, sweetie, etc. I'D KILL THE SOB WERE I TO WORK FOR HIM, but that's me ;-)
He did an echocardiogram test (and I was too: FOOLISH/WORRIED/ FLAT OUT NOT THINKING) so I didn't realize that it's a NEW YEAR so with $500 deductible we'll end up eating a HUGE bill for this. Had I thought, I could have said, NO, STOP, LET'S WAIT UNTIL NEXT MONTH WHEN HUBBY IS ON MEDICARE.
Ah well, I have learned and lived long enough to know that nothing happens without a reason. Said Dr. told me hubby " isn't going to die." He also said, "he doesn't have Parkinson's" (but I missed that day in med school cause I was off with my wife.)
Being me, I told the technician, "Nice the dr. thinks he's God but I've had experience with people given a clean bill of health (heart and other) who go home and died of heart attack the next week.
It will be what it is..in life; in politics; in markets. The sky has been falling for some time yet it hasn't.
IMO what finally BREAKS this back will come out of left field so everyone will be wringing their hands saying, "WE NEVER SAW THAT COMING"
I'm going to watch WAKING NED DEVINE which always puts me in a good mood. Stay safe, Mammoth. Sounds like a good day to cuddle up with blankets by the fire.
Mammoth in out business we always jokes "Drive fast and take chances." LOL
Given that the Greek one-year bond pays 400%, I think can can say it's priced in.
My own 'guess' is that the US market rallies far more than we think it can - perhaps up to around May and perhps near all-time highs- and then we get some sort of left-field thing, as CL says, and it gets absolutely shellacked.
I just can't see the market getting out of the woods without some sort of 2nd crash. The number of left field events is so huge but includes grinding recessin in europe thanks to austerity measures, japan not being able to sell bond, inflation getting out of control in china, etc.
However, for the moment I'm long but think we could get a bit of a correction soon which I'll buy further into. That's the plan until the charts and breadth indicators say otherwise.
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