Santa Claus Mugged

In our weekend summary we mentioned the bulls still had a sliver of hope based on technicals (if you squinted really hard and tapped your shoes): if you used simple moving averages rather than exponential (I use the latter). But today's action has violated support even in the former situation.

As we've been saying now for a long time S&P 850 to 920 is our "white noise range" - it's a wide range but what happens in between does not really concern me that much - we were stuck in that area for almost all of December. We've been able to make many successful trades in this area. But at some point we will leave this zone and break up or break down (obviously sense would say the latter). The other thing the bulls had going for them was a series of HIGHER lows which is in danger of failing. That said, generally markets do not slice through support like butter (except for insane panic periods like Sep-Nov 2008) so even if this begins a new leg down I'd expect some defense of the "line in the sand" area of S&P 850-860. By defense, I mean at least a cursory bounce. In time I believe this support level will fail but it would be atypical for it to fail the first time we go there. Just going off probabilities. (as I type this we are getting some bounce...)

Series of lower highs risks being violated; trend line since November lows now broken (I excluded the two outlier panic days in November for the series)


Most of the stocks we own at the top of the portfolio ex-Obama infrastructure held up quite well today; but the danger that lies ahead is panic versus orderly sell off.

For now, we have an orderly sell off - the better stocks will brush much of that off. In panic there is no safe zone as we all saw this fall - so no amount of homework helps you. In that situation we go back to the situation we faced a handful of times in 2008 where asset allocation means everything and stock selection means nothing. Below S&P 850 we'll become more aggressively short, and since the market appears to be rolling over we want to even be buying short exposure on rallies as opposed to sitting on the sidelines with short positions as we have the last 6-7 weeks. So our mindset is incrementally changing, and on (a) a break below S&P 850 or (b) a rally to the top side of this range - we'll now be much more inclined to begin creating more short exposure to balance the long side (while keeping loads of cash)

When we turned the calendar for the year, that week we put on a 6% rally and you could feel the Kool Aid in the air. Investment managers, having performance anxiety did not want to be "left behind" and started chasing back into names they would not touch 30-50% lower (7 weeks earlier).... we were selling stock to them and instead headed for the hills. (cash!) Then last week happened and the market lost 4.5%. Today, the market tacked on another 2%+ of losses and your Santa Claus mirage rally is kaput - it took 4 sessions to erase Santa. The adults have come back from holiday and as wrote last Tuesday the police were circling the house to break up the party, once those commodities went ballistic for no good reason. [Back to the Future - Commodities Rule Again] The ping pong continues between "hope" and "reality" (as it shall all year) and all those who waved the flag of hope the past few weeks have seemingly slunk back into their corners.

But don't worry - they'll be back on the next rally singing about market bottoms and "it's all priced in". They remind me of the Greek mythological sirens; except our sirens offer you Kool Aid, "Obama will save you" "it's great that our entire economy now sits on the Federal Reserve's shoulders" along with tales of "2nd half recoveries". Avoid sirens at all cost - they will destroy your capital.

The SIRENS, they say, had maidens' features, but from the thighs down they had the forms of birds. One of them played the lyre, another sang, and another played the flute. By these means, and by clever, knavish, and deceitful words, they persuaded passing mariners to linger, thus causing their destruction. That is why the island where they lived was full of the bones of those who had perished.