Once More Unto the Breach . . .
*Once more unto the breach, dear friends, once more.”
In yesterday’s early AM comments (The Battle of Bull vs Bear), I noted that “opening indications and actual closing prices are two very different animals.” And indeed, despite ugly futures and negative newsflows, markets managed to climb back to flat by the end of the day.
Regardless of what you attribute this to — excess liquidity, improving fundamentals, or as my pal Doug Kass states, sheer madness — it may be helpful to consider how these Futures vs Closes (AM/PM) divergences play out.
It is a war of attrition, and eventually, one side or the other will become exhausted.
The negative AM futures in the US reflect negative bets for a variety of reasons: Arbitraging selling in overseas bourses; bearish bets that selling momentum over there will pressure equity prices over here; general doubts about any global economic expansion. Or simple a bet that the doubling of US equity prices since March 2009 has run is course.
Regardless of the reasons, there are only so many dollars allocated to this trade. If it doesn’t pay off after a certain time period or magnitude of loss, traders move on to something else.
So too, with the opposite side of the bet: There is only so many billions allocated to countering the early morning weakness every single day, and buying that dip. Eventually, that pool of ammo will get exhausted.
I would be lying if I told you I know which side’s cash becomes exhausted first — I have no idea how this ends, but I have my inklings — hence, the 53%c cash position we have as evidence of that. But we are not all cash and we are not short (a small QID slug is our only hedge).
And as we have noted several times (here, here and here) watch the Hang Seng index — it is the canary in the coal mine . . .
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*Cry God for Harry, England, and Saint George!’ speech, Shakespeare’s Henry V, Act III, 1598
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February 11th, 2011 at 6:39 am
Hi Barry,
Thanks for putting the concept of an ongoing “Bull vs. Bear” struggle in terms of cash.
IMHO, you are hitting the nail on the head…There are all of these different market theories, fundamental, technical, what the close is, what the open is, what another market did, what was said on the news, a government economic report…blah, blah, blah.
It all comes down to whether there are more buyers or more sellers…and the twist of when traditional buyers become sellers and vice versa.
Most of this action today is controlled by automated trading…which means that if you want to know what’s coming next, you can look at Order Flow.
Does the following make sense? If changes in price are a function of changes in Supply & Demand, and changes in Supply & Demand are a function of changes in Order Flow, then by monitoring Order Flow, you can peak under the hood of the market and know which way the wind is about to blow.
We publish Order Flow momentum for some of the major futures contracts like the S&P 500 and Crude for free, and in real-time at http://www.AlgoFutures.com
It’s pretty cool and will give you an indication which way the cash is being spent.
February 11th, 2011 at 6:48 am
Good post BR-
the big picture indeed
February 11th, 2011 at 7:09 am
also- BR- a slightly smaller picture and off topic (so feel free to delete) but what do you think of the Nokia/Microsoft software alliance? I know you are not a big MSFT fan, however, Windows 7 has been well received and this gives Microsoft a large platform to deliver their software . . .
Regarding Nokia, it reminds me of the Motorola a move a couple years ago to ditch their own operating system and hitch their wagon to Android-
Maybe we’ll end up with 3 big players . . .with Apple the most likely to get squeezed . . .
February 11th, 2011 at 7:43 am
“I would be lying if I told you I know which side’s cash becomes exhausted first. . .”
___________
The side the Fed is on will never run out of cash — they make it out of thin air and decide by what channel and to whom it is distributed.
February 11th, 2011 at 7:45 am
Hang Seng is the only major market up today as of now–and over the 22,600 level you were watching. So we have at least one test of your theory today. If I understand your point, the Hang Seng being up suggests that the S&P will end higher today despite its apparent weaker opening. Of course, one day doesn’t make or break a theory–it’s the overall pattern that matters. Still should be an interesting day today, especially given that Fridays can be dramatic.
February 11th, 2011 at 8:15 am
Valentine’s Day is Monday..
will ‘Mr. Market’, really?, send John E home, to the missus, w/o a “G.I. Joe w/ the Kung-Fu grip” ?
wonder what the “Trader’s Almanac” has to say about the Trading Day before ‘the 14th’ ?
February 11th, 2011 at 8:17 am
past that, the ‘Bulls’ are getting a little ‘long in the tooth’..
http://idioms.thefreedictionary.com/long+in+the+tooth
February 11th, 2011 at 8:30 am
Sabre tooth bulls.
February 11th, 2011 at 9:16 am
Have you looked at EWM, EWS, in the past couple days EWT, EWY, EWJ and, for the past few weeks, INP, THD, TUR, EPU, EWZ? Pretty much around the globe, other than the US and perhaps EWG, there is a bearish trend. Where is that money going? A few months ago perhaps buying Treasuries. Now buying equities in the US and Germany (and perhaps EWL and EWN.) I don’t see it much in GLD yet.
Is this a flight to safety? What is unsafe about India (INP) or Malasia (EWM)? Are commodity price problems + inflation + unemployment/unrest + slowdown/constraining interest rates in these developing countries beginning to cause problems/instability that are much more profound than we understand here and are of concern to the residents there?
I submit that in the discussion about what liquidity is fueling the ongoing bull march here we need to consider where that liquidity is coming from and the “quality” of that liquidity.
February 11th, 2011 at 9:20 am
how can the side that plays policeman* for the tundra and the courtroom win in the end?
* on their/our/mine Dime (in a politically correct world – that is)
February 11th, 2011 at 10:06 am
Even though I’m a self admitted zombie bear, I think this rally is mostly based on fundamentals. I just think the fundamentals are going to turn faster than we think. In my opinion, that was the experience of Japan in the 1990s and the U.S. during the 1930s.
The Keynsians and Monatarists will tell you that the policy response wasn’t aggressive enough. Maybe the public will never tollerate a policy response strong enough to avoid an inevitable debt deflation.
February 11th, 2011 at 10:54 am
“here is only so many billions allocated to countering the early morning weakness every single day, and buying that dip. Eventually, that pool of ammo will get exhausted.” – ain’t gonna happen any time soon…. what can force Bernanke to stop printing if current commodity prices have not done so?
February 12th, 2011 at 1:28 pm
Barry,
If “the markets” have already discounted a weak chinese economy, they should be discounting a weak US economy, assuming efficiency.(GAG!)
I have been watching the Brent/WTI price spread. One of the explanations is that the Canadian oil coming into the US is the cause. If that is the case, then the US will enjoy a “comparatative advantage” over the rest of the world. Even as China slows, Brent is over $100. If this holds the US should go into high gear.
As we devalue, imports become more costly at the same time input costs here stay RELATIVELY low. Could it be possible that jobs may return to this country by this mechanism? The banks are re-capitalized, waiting for favorable conditions for business lending, cheap energy (relatively speaking) makes productivity go up, making loans easier to pay back, etc…..
There is a reason for the melt-up. Traders hate low volume, and it is mostly traders that are making all the warnings. Investors buy and then hold. Holding equities takes volume out of the market. And it does seem that the sharp selloffs have been met with volume buying for quite some time. Not only eager shorts that need to cover, but perhaps large investor buying. They need/want volume also.
Just some thoughts.
gh