Back To The New Normal

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 |  Includes: DIA, QQQ, SPY
by: TraderMark

After a quite poor showing Friday - selling off on perceived good news from the unemployment report - we're back to (the new) normal; that is responding to rumors, and actual intervention.... of the European kind for now, although it's now a global phenomena. With a week long series of meetings in Europe, culminating in (yet another) bazooka announcement on the 9th, speculators are now placing wagers on the idea that somehow a central bank will get involved, perhaps via a funnel of IMF to avoid having to deal with legalities. The thought process now is as countries get their fiscal house in order, the ECB will be kind and offer monetary largess. Traders look for clues on that end when the ECB meets later this week. Italian bonds are down sharply this morning to the low 6%s, and all is well in the world.

Technicals don't mean as much as they used to in the new intervention era as "risk on" or "risk off" are not just the dominating market ethos, but new ETFs. This increased bipolar action in the 2nd half of the year (180 degree changes in sentiment in weeks, if not days time), along with a rise in correlations of almost all asset classes have created a very difficult environment - probably the most challenging since those 2 months post Lehman (fall 2008). [Big Drop in Hedge Fund Exposure to Market in Q3] To that end, hedge funds have suffered in 2011 ... no surprise as by the time you put on positions to adjust to the new sentiment/technical reality, the market is changing its mind.

  • The average hedge fund has fallen by around 9% this year; the S&P 500 has fallen by just 3.4%.
  • Managers have diligently researched undervalued stocks, only to see markets plunge after yet more bad news from Brussels. When funds instead position themselves more conservatively and short stocks, the markets promptly rally on the merest whiff of better news.
  • An unaccustomed timidity has seized many hedge funds. They have reduced their leverage, which enhances returns but aggravates losses, too. They are shrinking positions and trading less. There is a “conviction to do absolutely nothing” among hedge-fund managers today, says Andy Ash of Monument Securities, a brokerage.
  • Some fund managers privately confess that they wish they could move entirely into cash and sit out the market turmoil. But they feel pressure to continue trading to justify the steep fees they charge for managing investors’ assets.
  • The dilemma of whether to pile in or stay put is perplexing hedge funds. Many remember the sudden rally in 2009 and regret they were not in a position to ride it. “The whole hedge-fund industry is completely terrified of missing a rally now,” says the boss of a London-based fund.

With that said, despite a massive rally last week (the best week since the ultimate bottom in March 2009 for the S&P 500 - which of course followed the worst Thanksgiving week on record - which of course followed the one of the best Octobers in history - which of course followed a bear market in August/September - which of course... well you get the picture) we are not yet overbought on short term indicators. The S&P 500, after gapping up this morning, will be sniffing the 200 day simple moving average up at 1265. Yes we're talking a 100 point gain in a week.

After the market broke out of its triangle to the downside, the intervention portion of the market began. Last week we had the twin tower rallies of Mon (IMF intervention into Italy) and Wednesday (central bank coordination in swaps market). And hence, the triangle breakdown is but a bad dream.

[click to enlarge]

Economic news is slow this week - the only real market mover is today's ISM Non Manufacturing but with spirits giddy and Europe rumors the most important issue, I doubt it has much effect. If/when 1265 breaks to the upside, the October highs around 1290 come into play. When/if that happens it is likely the market would need a rest (especially if it happens in short order) as we should be overbought by that time.

Original article