Escalation Not Reconciliation Prevails

Includes: DIA, QQQ, SPY
by: Gene Inger


Global turmoil remains on the ascent.

Financial disintermediation looming.

Risk-averse strategies remain advisable.

Escalation, not reconciliation - increasingly seems the response to global financial and geopolitical turmoil. Too many scenarios to expect control or realistic containment of these issues by mere mortals or Central Bank monetary policy stances. The underpinnings of the global flows (especially of liquidity) have gradually become unstable. All along we've pointed-out these changing fund flows.

To the majority, flight capital and other manifestations of turmoil contributed to a ridiculously extended equity market, but they didn't consider its nature, as a temporary expedient or exogenous influence of market price levels. It was unrealistic to expect such injected capital to levitate stocks for this long; and divergences both in markets and economic activities (including housing and average household income failing to keep pace) were among obvious signs.

What analysts mostly missed is the risk from those very problems that drove the money into the markets. Whether it relates to Ukraine and ever-persistent Russian expansionism (not to mention further crackdowns on freedoms within their borders); the threat posed of a unified Islamic extremist entity created by ISIS (and not seriously being challenged by anyone yet); the Israel/Gaza conflict, which pales by comparison to the regional instability risk ISIS brings; possible 'pandemics' out-of-Africa from Ebola; or even for that matter threat of 'war' between Japan and China (which Beijing seemingly ponders, and for sure is more concerning than anything North Korea has screamed about for so many years); to economic stagnation and potential dis-internationalization of currency flows, due to BRIC countries plodding along to de-Dollarize lots of trading (just today, Turkey shipped another tanker of Kurdish oil; clearly defying US and Iraqi wishes, and again sort of undermining oil prices as this sale and discounting, clearly circumvents OPEC price levels (some will hail that) ... all are examples of the global disintermediation of a sort. Sunday's 'glitch' shutting down online and ATMs of the world's 2nd largest bank (China Construction) may be a one-off; or more.

Simplifying the foregoing; even if the market were not at ludicrous levels as we entered July (still up there from a macro perspective), uncertainty of course should have been disconcerting to all who so recently saw the market as in some sort of 'sweet-spot'. It was not then; and is not now. As forewarned: caveat emptor both short-term and from a longer-term macro perspective.

A week ago; we observed what was a 180 degree shift by Goldman Sachs, who after just increasing upside S&P goals amidst lower rate calls for 10-year Treasuries. I was aghast at that absurdity, given the then-existing 3.0% annual GDP call, as it was in the 'have your cake and eat it too' menu of delicious but impossible dishes to digest. We said so; and within a few days Goldman had reversed policy entirely; lowered their GDP call (it's still higher than we envision, as we think 2.0 will be more or less what result occurs, especially at-risk should international fundamentals deteriorate; not just domestic conditions).

The significance of that was last week's conclusion; that with momentum having ended in the Spring; a called for feeble struggle up into early July; indexes like the Russell 2000 and Advance/Decline Line already well on in decline; it was insanity for the majority of the Street to embrace optimism. So with Goldman finally recanting and even reversing to 'allow' correction; I concluded 'this would be it'; as so many firms on the Street essentially tend to follow their lead, even as they take pride on their own proprietary work.

Appropriately reaching that conclusion, and in-harmony with our July call for up initially, then a 'rocky road' of erosion; leading to the second half weaker for the S&P too; we got what we targeted. That has allowed retaining a key 'position-posture' short-sale from E-mini Sept. S&P 1985; and the still 'live' daily-basis short-sale this past week (still live) from Sept. E-mini S&P 1975.

This weekend, many we questioned for failing to recognize what was staring them in face, suddenly see it all. I'm not sure if it took the S&P's downside breakaway to yield an epiphany in their analysis; but the market has been telegraphing this for weeks. My forecasts were not mere opinions; but based in part on 'messages of the market'; analytically they were facts. That is opposed to 'hopium' based on delusion interpretations of Fed policy or similar. An example is even Friday; when hours were spent by a panels of erudite economists and analysts, debating the degree of monetary policy adjustments that would occur because of the Jobs report.

My suggestion before and after the numbers was straight-forward: none. That's because we believe Fed policy is now set-in-motion; it would be in-stone, other than variables one can debate.

The current market posture is appropriate; the trend is down; the bull market 'may' have ended not now; but back in the Spring internally; for the broader market at the start of July, represented by the Russell or even NY Comp.; as the S&P hung-in and provided cover for distribution as we outlined all July. For traders we'll play declines and rebounds likely resulting in the lower price levels postulated to daily readers; for investors there is no urgency to buy at all; every reason to be thankful if you agreed and held your cash.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.