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This note was originally published at 8am on June 29, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“… part of the Game is the anticipation of how the other players will behave.”

-George Goodman, The Money Game

It’s both fascinating and frightening that central planners will be emboldened by the market’s reaction to their latest plan. Europe is fixed again, and everything is back to being fine until people report their month and quarter end. The duration on that trade = 3 days.

 

Price Stability Update: At 230PM EST yesterday, the SP500 was tanking, down -1.3% on the day to 1314. An hour and a half later, it was +1.1% higher at 1329. This morning it’s trading up another 16 handles higher than that. This is really starting to rhyme with 2008.

This is one of the many reasons why I am in 94% Cash this morning (up from 91% yesterday and down from 100% last week). Part of The Game is understanding that there are times when the game becomes so volatile and arbitrary that it’s best to get out of the way.

Back to the Global Macro Grind

If I haven’t been crystal clear on this since March, let me write it one more time – I am bearish on growth. Doing more of what has not worked is only going to slow economic growth further. Central planners do not get that; markets do.

Yesterday’s rip into the close and this morning’s melt-up in the US equity futures only amplifies my greatest fear about markets that are trading purely on the anticipation of the next Big Government Intervention catalysts – government itself.

If you disagree with me, that’s fine. If you think governments do a good job creating jobs, innovation, and confidence, you’re probably thinking they are going to do a great job running our stock markets too.

That’s the long-term TAIL risk. All long-term investors need to acknowledge this and raise Cash on all rallies to lower-no-volume-highs. Since the March top, you’ve had (and, evidently, will continue to have) plenty of opportunities to get out.

Enough about the long-term implications of this market gong show. Since not many people are allowed to invest or manage risk on that long-term duration anymore, here’s how the immediate-term TRADE setup looks for US Equities:

  1. SP500 closing > 1320 keeps it bullish TRADE (1320 support); bearish TREND (1365 resistance)
  2. Russell2000 closing > 764 keeps it bullish TRADE (764 support); bearish TREND (795 resistance)
  3. US Equity VIX closing < 21.15 keeps it bearish TRADE (21.15 resistance); bullish TREND (18.22 support)

In other words, I’ll cover/buy at 1320 and short/sell at 1365, and let these government people deal with themselves everywhere in between. If 1320 snaps like it did intraday yesterday again, I’ll be recommending prayer.

In Europe, all 3 of our risk management durations (TRADE, TREND, and TAIL) were signaling bearish up until the minute of this morning’s European market open. Now, all immediate-term TRADE lines that were resistance become support:

  1. EuroStoxx50 > 2169 makes it bullish TRADE (2169 support); bearish TREND (2316 resistance)
  2. Germany’s DAX > 6251 makes it bullish TRADE (6251 support); bearish TREND (6669 resistance)
  3. Spain’s IBEX > 6698 makes it bullish TRADE (6698 support); bearish TREND (7289 resistance)

All the while, the Euro (versus the USD) is having one of its biggest short squeeze days of what was an awful Q2. Trading +1.1% this morning to $1.25, it would have to close > $1.26 to recapture its immediate-term TRADE line of support. So watch that closely.

Again, get the EUR/USD right, and you get a lot of other things right. US Dollar down hard this morning is also why everything from the price of Copper (+2.2%) to almost anything that ticks in US Equities is up. Enjoy your 4th of July tax hike at the pump.

Just don’t confuse government sponsored immediate-term TRADEs with long-term economic prosperity. It’s perverse, but what these people are doing is managing their short-term political career risk for the sake of short-term market pops, to lower highs.

Each lower-high in stock and commodity markets is met with lower and lower market volume. That’s Part of The Game. When The People no longer trust it, they just get out of the way too.

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Germany’s DAX, Spain’s IBEX, and the SP500 are now $1537-1586, $88.36-96.89, $82.19-83.08, $1.24-1.26, 6251-6438, 6698-6913, and 1320-1342, respectively.

Best of luck out there today and enjoy your weekend,

KM

Keith R. McCullough
Chief Executive Officer

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