Stoned

“If you don’t have time to do it right, when will you have time to do it over?”

John Wooden would ask his players that, and I often ask myself and my team the same. After a melt up day like yesterday, you’d think a lot of hedge fund PM’s might too, but they don’t. Some of them point fingers instead.

You may or may not be surprised that the cadence of my inbox picked up into the market’s rally yesterday. It’s kind of sad really – like I need to be blamed for people being squeezed. I actually had to point people to the July 15th time stamp of 10:59AM where I wrote plainly on the portal “that was likely a short term trading bottom for US stocks”. I guess that if you were busy IM’ing your buddy about what his best short idea was (at the bottom), you missed my call to get longer.

If you don’t prepare and don’t have a risk management process, you’re going to get whipped around this summer. If you’re not a trader – don’t trade. If you’re a “long term” guy or gal though, just don’t sell capitulation lows and buy hopeful highs. Selling psychological capitulation levels like that which we saw at my VIX target of 31, and S&P 500 print of 1201, is certainly not going to differentiate your returns.

So where to from here? Well, the market is a lot smarter than most people these days, and the bottom we’re looking back at from 48 hours ago has plenty of characteristics that make me less bearish. Volume hit its highest point, literally, at the bottom. Volatility peaked at the same point. Breadth was as negatively lopsided as it’s been year to date. Do not ignore these facts.

Fundamentally, two of the main components of my 9 month old “NOT BEARISH ENOUGH” thesis saw their cards turned face up for the consensus players to read – Inflation Up; Growth Slowing = Stagflation. On Tuesday, Bernanke threw in the towel, defining his outlook as stagflationary. On Wednesday, we saw the highest consumer price inflation number in the US since 1991. Today, we’re seeing China print its economic growth slowdown, with Q2 GDP coming in at +10.1% year over year (slowest growth since 2005). All of the river cards are face up. Stocks don’t trade on trailing expectations.

Was the crowd “BEARISH ENOUGH”? Well, if you’re into the “it’s global this time” theme, you might call authorities closing the Karachi stock Exchange in Pakistan overnight due to “investors STONING the stock exchange”, somewhat bearish. If you’re more into the “local thing”, trading against 25,000 hedge funds here in the US, you might call the biggest up day ever in the Financials yesterday at +12%, somewhat of a short squeeze.

Why is the squeeze going to continue? I think this answer is simple – the timing of the fade inflation trade is finally right. My models rang short term trading alarm bells on the commodity fade side of the “Trade” yesterday. The Commodities Index (CRB) broke my short term momentum level of 454, down -3.7% for the week to date at 444; and Oil broke my critical short term momentum level of $138.14, having its 3rd consecutive down day, moving lower this morning to $134. While the “Trend” in inflation remains higher, the “Trade” is lower, for now.

Timing in this business is everything. No, I do not have to trade this tape hostage to a long term view. No, I don’t have to clear my short term strategy call with the powers that be at Goldman Sachs. All I have to do is change as the facts do.

As a result of Bernanke agreeing with us that stagflation is here, the US Dollar stopped going down, short term interest rates are pushing higher, and the bond market is selling off as those who sold the bottom in stocks are being walked back from the ledge. Don’t manage money on a ledge. Stick with the Research Edge (nice ring to that!).

If the S&P 500 can close above 1246, and commodities not close above my aforementioned levels, I think the immediate “Trade” here is going to take the S&P 500 to at least test 1297. The “Trend” remains bearish. The “Trade” looks like you should be long those liabilities of short sellers who began to be “STONED” by the madness of crowds yesterday.

Good luck out there today,
KM











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