Sunday, November 29, 2015

Holiday Blues . . .

Major markets flatlined this week as Thanksgiving Day in the US apparently even shut down the computers resulting in little change.

As mentioned before, I was anticipating the three week test of the high on Friday so I for one was paying attention.  Throughout the week, SPY approached the 210 level but each time was repelled.  So while I can shrug off the possible test as a non-event due to lack of market participation, I did see the test and until the very end of the trading day on Friday, was watching to see if the machines levitated prices through the 210 level.  It did not happen.

Now, the weekly line chart looks like a setup for a three week test of the low!

Anything could happen in this crazy "data-dependent" market.  Friday's main even will be the Employment Report, the final report prior to the Fed's meeting later in the month of December.  The Fed has strongly hinted that it would raise rates in 2015 and are on track to do so at the December meeting, IF the inflation numbers are job numbers cooperate.

Rates hardly seemed convinced of the pending rate hike.  This chart is the TNX or the ten year rate on a daily basis.  Rates, after quite a rally, have been easing off for the past two or three weeks.

Do rates really matter?  Past market action shows that markets generally continue to rise even after an interest rate hike or two.  The Fed has made clear that even if they do raise rates, it would not be the start of a trend.

The Fed is truly between a rock and a hard place though as their ZIRP (zero interest rate policy) has distorted market prices in nearly every asset class.  In the old days, risk was priced based on the risk free asset, government bonds.  But no longer are government bonds priced through market interaction but based on Federal Reserve policy.  Quantitative Easing (QE) throughout the world has resulted in central banks printing money and buy up assets, resulting in higher bond prices and lower interest rates.  It appears that central banks are also buy up stocks to boost the stock markets.  This has been seen in Japan as well as Switzerland.  I read not too long ago that the Swiss Central Bank had bought more than a billion dollars worth of Apple stock. 

So it's evident that central banks will print more money, if necessary, to defend the market prices of bonds and stocks lest their balance sheets turn to dust. 

I'm sure that I'm not the only one who sees this.  Can the big firms with tons of resources available to research the markets not also see this and be lightening up on risk?  Who is absorbing all of the stocks and bonds that countries and firms are dumping?

Can you imagine why the Federal Reserve would fight to the death not to be audited?  I can.  The game would quickly be revealed.

It's interesting to see that the SPY weekly standard deviation chart has remained in its downward sloping channel.

Whether this past week's market action was an anomaly based on the holiday, is yet to be seen but the three week test of the high on price and standard deviation is a SELL for me.

Just as the weekly chart is a good setup for a three week test of the low, the monthly chart also reflects the same setup with September's closing low marking at 191.

Keep in mind that anything can happen in between December 1 and December 30 and price can still wind up testing the low on December 31 (or do we have again the holiday conundrum?).

For now, this is my tradable setup.  While a breakout to the upside above 210 would bring me in on the call side, I've gone ahead and bought some December 31 puts to play this opportunity.  While some sites I look at are looking at the current market move as a fifth wave of the six year bull market and expect SPY to run from 220 to 250, I have been skeptical from the start.  While I did call the three week test of the low and successfully exploited the signal, I was expecting a move down to 170 or even 150 before we resumed the move to higher highs. 

A move down in December would be great.  If we held up at the 191 level, I would be ringing the bell for a big move up to new highs.  Should we break down below 190, perhaps there would be much further to fall.  I try to be flexible in any case and usually have a protective position going the other way just in case I'm dead wrong in a big way. 

I think that if you are a long term stock holder, then you need to look at your assets just as you would your home, your business or other major assets.  You have some form of insurance on all.  Same thing with stocks.  If you want to stay long, you've got to figure out your "deductible" and then buy protective puts below the market. 

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