Dodging Responsibility

"It is easy to dodge our responsibilities, but we cannot dodge the consequences of dodging our responsibilities."-  Sir Josiah Stamp

After watching the SP500 hold my 954 line and close there for two days, yesterday Mr. Market blew it right out of the water. That makes me wrong.
 
I could dance around the math, make excuses, and hide - but I will not. That's what losers do. My vision of creating this real-time research firm is shaped by a profound belief that we need to re-establish that there is responsibility in recommendation on Wall Street again.
 
Importantly, yesterday's critical US market breakout was confirmed by volume. With US market volumes in structural decline, the best I can do right now is measure the market volumetrically on a day-over-day and month-over-month basis. Yesterday's volume spiked +28% versus Wednesday's volume. That matters - big time.
 
I have a lot of macro models. One simple three factor model that I use studies price/volume/volatility. As of now, we have the confluence of these three quantitative factors signaling very bullish outputs. With the Volatility Index (VIX) absolutely crushing the Depressionistas who look at every 1% down move as the signal of the next "crash", this should be no surprise. The VIX remains broken across all 3 of my durations (TRADE, TREND, and TAIL) and continues to make a series of lower lows.
 
As volume accelerates into higher stock market highs, no matter where you go this morning, there you are. I, for one, didn't wake up hoping for the futures to be down because "Microsoft and Amazon missed." Hope is not an investment process.
 
So what is the refreshed immediate term TRADE setup for the US stock market from here?
 
1.      SP500 support 939, resistance 984

2.      Nasdaq support 1883, resistance 1993

3.      Dow support 8719, resistance 9188

 
My macro models update every 90 minutes of marked-to-market trading. No, I don't have a "side pocket" or "level 3" accounting plug in my models. As prices and other dynamic market factors change, I do. That's not new. The only thing that is new is my waking up to being wrong on my SP500 levels ahead of this morning's open.
 
I don't intend on being wrong for Monday's US market open, so I will continue to keep proactively moving exposures in both the Asset Allocation Model and our virtual hedge fund portfolio (www.researchedgellc.com <http://www.researchedgellc.com> ). I currently have 17 longs and 15 shorts (including short MCD, which Howard Penney nailed yesterday).
 
While the top side of my Range Rover SP500 level missed the mark, that doesn't mean I was short that line. I simply missed the beta of associated with a big +2.3% US market move. In so far as I wasn't interested in chasing the 200-day Moving Monkeys over the cliff on July 10th's Q3 closing low of 879, I am not looking to clang symbols and clamor for levered long bananas here at 976.
 
The New Reality is this: a lot of people missed the -57% crash in the US stock market and now a lot of people are missing the +44% REFLATION from the March 9th low. Until Wall Street changes, career risk is at stake for those who don't freak out at bottoms and chase tops. That's the constrained US Financial System that this country has built.
 
What's the number one driver of the top end of this rally? That's simple - a US Government sponsored Burning of The Buck. As Bernanke provided Washington/Wall Street with another "Misguided" outlook, those who understand carry trading are sucking the last gasps of air that free moneys will give them. As they rightly should.
 
The dollar is down on the week, again, and has lost -13% of it's value since March. By the time Q4 hits, this won't be about DEFLATION anymore. INFLATION, inspired by US Dollar DEVALUATION, will be coming off my fingertips in t-minus 3 months. Prepare your risk management setup and portfolios accordingly.
 
History is not written on a one-day or one-year duration. Ask Alan Greenspan about that. The ex-Limitless Credit Creation Chairman himself recently stated that "there was a flaw in the model that I perceived as the critical functioning structure that defines how the world works."
 
Amen, Mr. Greenspan. Amen. Please forward your memo to Chairman Bernanke because "we cannot dodge the consequences of dodging our responsibilities."
 
Best of luck out there today. Have a wonderful weekend with your families,
KM
 

LONG ETFS

CYB - WisdomTree Dreyfus Chinese Yuan - The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

COW - iPath Livestock - This ETN tracks an index comprised of two thirds Live Cattle futures, one third Lean Hogs futures. We initially began looking at these commodities because of recession inspired capacity reductions combined with seasonal inflections. A series of macro factors including the swine flu scare, a major dairy cattle cull in response to collapsing milk prices and the collapse of the Argentine agricultural complex due to misguided policy provided us with additional supporting fundamental data points for the quantitative set up in price action.  

TIP- iShares TIPS - The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%. We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

GLD - SPDR Gold - Buying back the GLD that we sold higher earlier in June on 6/30. In an equity market that is losing its bullish momentum, we expect the masses to rotate back to Gold.  We also think the glittery metal will benefit in the intermediate term as inflation concerns accelerate into Q4.


SHORT ETFS
 
XLI - SPDR Industrials - We don't want to be long financial leverage, which is baked into Industrials.

EWI - iShares Italy - Italian Prime Minister Silvio Berlusconi has made headlines for his private escapades, and not for his leadership in turning around the struggling economy. Like its European peers, Italian unemployment is on the rise and despite improved confidence indices, industrial production is depressed and there are faint signs, at best, that the consumer is spending. From a quantitative set-up, the Italian ETF holds a substantial amount of Financials (43.10%), leverage we don't want to be long of.

DIA  - Diamonds Trust- We shorted the financial geared Dow on 7/10, which is breaking down across durations.

EWJ - iShares Japan -We're short the Japanese equity market via EWJ on 5/20. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

XLY - SPDR Consumer Discretionary - As Reflation morphs into inflation, the US Consumer Discretionary rally will run out of its short squeeze steam. We shorted XLY on 7/9 and again on 7/22.

SHY- iShares 1-3 Year Treasury Bonds- If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.