Sitting Tight

“The market does not beat them.  They beat themselves because, though they have brains, they cannot sit tight.”

-Jesse Livermore

 

Waiting and watching for my SP500 level of 1076 last week wasn’t easy. Shorting Slowly into a bear market bounce never is, but I made 6 moves into Friday afternoon’s low-volume strength: 5 short sales (including shorting the SPY) and 1 sale on the long side (Baxter - BAX).

 

Five and ten years ago, I wouldn’t have been able to sit tight. I would have started shorting the SP500 on Wednesday and averaged up the entire way. The best way to learn how to manage risk is by doing it with live ammo.

 

There are 3 ways that I generally look at a market: Bullish, Bearish, or Not Enough of one or the other. Last week’s price action in the US reminded me that institutional investors are not yet Bearish Enough. Plenty of bulls still have the same catalyst – “earnings”. They are going to be “great”, allegedly…

 

Despite the SP500 rallying to where it should have, we have to give credit where credit is due. The bulls just realized their first 4-day rally since early April. From the YTD closing low established on July 2nd at 1022, the SP500 went up +5.4% in a straight line.

 

That’s bullish on a 4-day basis, but that doesn’t mean that anything has changed from a risk management perspective when you look out past 3 weeks toward our 3 core investment durations (TRADE, TREND, and TAIL). As of Friday’s close, here are my refreshed lines of resistance for the SP500:

 

1.       TRADE = 1078

2.       TREND = 1144

3.       TAIL = 1094

 

So the way I look at my risk in being short the SP500 is that a closing price greater than 1078 will continue to put pressure on me to sit tight and wait for the more influential line of resistance up at 1094. If the SP500 cannot close above 1078 and the bulls are forced to sell into week 1 of their “earnings” catalyst, the step downs in the SP500 are real. First line of support is down at 1048, then there is no support until 1005 (-6.7% downside from here).

 

We’re just past the half way mark of this 2010 game and I see no reason why I wouldn’t sit tight here. With the SP500 down -11.5% from its April 23rd high and down -3.4% YTD, the better benefit of the doubt remains in the bear camp. The question I ask myself every morning isn’t whether I should be bullish, but whether or not I am Bearish Enough?

 

This morning’s run of global macro news reminds me of three things:

 

1.       Sovereign Debt issues are here to stay

2.       American Austerity is on the way

3.       Global growth is going to continue to slow

 

On the sovereign debt side:

 

1.       Japan’s latest Prime Minister, Naoto Kan, has already lost the Upper House. Apparently the Japanese don’t like tax hikes and austerity.

2.       Spain’s stock market is less impressed with the country’s definition of a “stress test” than it is their World Cup win, trading down this morning.

3.       Russia is looking to start selling Eurobonds!

 

In terms of American Austerity:

 

1.       The US Dollar closed down for the 5th consecutive week last week and is starting to look a lot like the Euro did in December of 2009. Ominous.

2.       US Bond yields on the short end of the curve remain at record lows, reminding us that reflation by devaluing a currency isn’t economic growth.

3.       Washington Post story by Dan Balz today: “Co-chairmen of President Obama's debt and deficit commission offered an ominous assessment of the nation's fiscal future here Sunday, calling current budgetary trends a cancer "that will destroy the country from within" unless checked…”

 

Finally, from a global growth perspective, the intermediate term TREND lines on our Bear Market Macro model continue to hold above current prices:

 

1.       China’s Shanghai Composite Index TREND line of resistance = 2798

2.       WTIC Oil’s intermediate term TREND line of resistance = $78.71/barrel

3.       Dr. Copper’s intermediate term TREND line of resistance = $3.21/lb

 

From India to China this morning you are seeing more of the same – both year-over-year prices and growth continue to slow. India’s industrial production growth for the month of May slid to +11.5% versus +16.5% in April. At the same time, China’s white hot real estate market continued to cool for the 2nd straight month. Property prices have now dropped to +11.4% y/y (June) versus the April peak of +12.8% y/y price growth.

 

There is plenty of fresh data in this interconnected global macro world to absorb. There is also plenty of time for the bears to keep Sitting Tight.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Sitting Tight - bmark


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