Naufal Sanaullah's  Instablog

Given the recent upsurge in government intervention in the economy (and financial markets), as well as the collusion between banks and government in response to the financial crisis (AIG CDS undwinds, NY Fed's Goldman shares ahead of BHC announcement, etc. etc.), following "smart money" has now come to mean following those in-the-know of future government actions, or at least those with high predictability or involvement.

Back in June 2008, the Treasury's Exchange Stabilization Fund's Euro reserves dropped dramatically, to the tune of about ﾬ 6 billion, as reported by the Treasury's weekly releases on international reserve positions. This large supply of Euros presumably was used to finance demand for dollar derivatives, allowing the Treasury to pull a large of USD out of the market. Indeed, the ESF's actions correlate very well with the collapse of the commodity bubble and the beginning of the Dollar bull, as is evident in the image below, courtesy of Now and Futures:

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Confused about the market? Caught short this summer? Confused when to lock in recent gains after seeing your IRA get cut in half? Why not follow the big boys who were right both on the way down and back up?

Charles Nenner, former Goldman Sachs market timing analyst, uses cycles, technical analysis, and a macro approach to time myriad markets. He called for a 2007 market top at around Dow 14,300. In 2008, he warned of a 30%+ decline in equities and in February of this year, he called for a large rally to take us to S&P 1000.

Robert Prechter, founder of Elliott Wave International, uses Elliott Wave Principles, cycle theory, and investor sentiment to gauge market turning points. In summer 2007, less than three months before the all-time stock market top, Prechter issued a short recommendation and didn’t cover until February 23 of this year, days before the March lows, as he predicted a large bear bounce to S&P 950ish.

Bob Janjuah, RBS chief credit strategist, issued a “stock crash alert” in June of last year, predicting a market crash and credit event in September 2008. He then predicted a large “relief rally” early this summer.

So what do all these people have in common? Besides their past predictions?

Their current predictions.

Charles Nenner believes we have topped out and will be retesting lows. Prechter prognosticates a market top in August, beginning the next wave down of this bear market that he believes will cause the S&P to end up below 400. Janjuah predicts a sharp move down starting late August, possibly culminating in an S&P under 600.

Called the massive equities decline in 2008? Check.
Called the bear bounce in spring-summer 2009? Check.
Calling for another massive move down this fall? Check.

I called July 4 of last year the top of crude oil, May 20 a short trigger in equities, September 15 a crash trigger, and January 5 of this year a short trigger. I called for a bounce at Dow 6500, expecting a large sell off in mid-late April to continue the decline. I missed most of this rally, besides a few long positions here and there, so I don’t have the track record as the bears above. But you can bet their analysis provides confluence to mine. I called early August around 1015 to be the top. We will see how that plays out.

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Co-written by Qasim Khan & Tyler DeBoer

Since March lows, the S&P 500 is up over 51%, while myriad media outlets have propagated the idea of the return of economic growth to the United States and the end of its recession. Political figures and pundits offering observations of "green shoots" and sentiments of optimism and recovery are intertwined in this new bull market hysteria sweeping the financial world. Meanwhile, troubled banks and insurers who just months ago were saved from complete implosion by the taxpayer have been reporting record earnings and record compensation to go with them.

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A look at the 2-year chart of the S&P 500 shows that the market is headed toward a triple influx of resistance, which could provide major supply in volume entering this highly illiquid market:

1. trendline resistance from the primary bear market’s trendline and secondary Aug 07-Oct 08 market support-turned-resistance (orange line)
2. trendline resistance from the upper-bound trendline for the bear market rally, as defined by a rising wedge
3. horizontal price resistance around 1010 (which is also the 38.2% Fibonacci retracement level from Oct 07 highs to Mar 09 lows, to add confluence) 
    

Zooming in to a 30-day timeframe shows where these important trendlines all connect: Thursday, August 6, around 3PM. Now of course using long-term trendlines on such short-term timeframes is insanity, but it gives a good idea for at least why not to go long this market and at the very least why to take profits. Such as by selling those IRAs and 401Ks, preventing exposure from the next crash, etc etc. For what it’s worth, I went net-short this market yesterday (Wednesday) and plan to get heavily short if we start trending down/reversing.























So I’m calling it now, for novelty’s sake, I’m calling the top of this stock market at S&P 1010 on August 6. I called July 4 as oil’s top last year and May 20 for the S&P’s top after it failed to hold its 200DMA last year. I was only off by a few days and a few dollars. Let’s see how right (or horribly wrong) this call ends up being.

The S&P 500 ETF (SPY) traded a whopping (new 2009 low) 117M shares today, while AIG (AIG) traded a record 134.7M shares on its way to an over 50% gain, in the face of imminent bankruptcy (CIT Group (CIT) had similar luck), on no news at all. If this market isn’t being gunned, then I really must quit trading for good. And as should everyone else who called last year’s crash.

The Treasury is issuing $75B more in securities this month, bringing the total to over $300B just in July and August alone. If it wants a bid for the Tsys without bringing mortgage rates to 10% on supply offered in reaction to more Fed monetization (remember the last QE attempt?), its gonna need big, organic bond demand, and that money has to come from somewhere and for some reason.

Money market funds have declined about $400B since March lows, on risk appetite. However, this does not even come close to the $2.7T added in equities’ market capitalizations during the rally. Of course, Fed-originating fractional reserve-leveraged QE and liquidity swap subsidies to banks made up the difference. Throw in some dark pool-originating IOI-gunning flash order from HFTs to execute the engineered rally, stealing liquidity from the market and getting paid to do it. And what you end up with is a recipe for a market crash (ask 1990s Nikkei Index for precedence.)

But also recipe for organic inflows into bonds, as well, as risk aversion commences, bringing home the rate-suppression brigade and finalizing the bagholder hot potato game of passing asset depreciation from the balance sheet of a bank/insurer/REIT/finance arm to the taxpayer through equity depreciation, executed through equity and debt issuances (record secondaries Q2 2009).

As the Joker said, “it’s all part of the plan.”

Speaking of derisking, however, CDS have been tightening in every market subset, to the tune of over $550B net derisking. Whoever is selling this protection should meet their demise a la AIG during the next crunch of liquidity, coming to a 401k near you this fall.

The percentage of stocks 2 or more sigmas over their 200DMAs reached a record today. Even in a 1990s debt-financed ZIRP bull market, a 130x+ P/E in unison with this type of holistic strength against moving averages has to be considered ridiculously overbought. But in the credit crunch of all credit crunches? Factor in another $2.5T+ of bank writedowns to go, a soaring unemployment rate, record delinquencies, an imminent implosion in commercial real estate, a sovereign default or two likely in the next few months, and Peter Pan-esque deluded Q1 and Q2 earnings that will eventually catch up with reality once writedowns occur (Enron anyone?) and you got yourself signs of a bubble ready for bursting. We are now leaving Neverland, home of green shoots and birthplace of CNBC reporters selling toxic and fatal doses of Obama’s optimism (the H middle initial is actually for Hope, according to recently recovered birth records)…

I’d offer a 50/50 probability on the market crashing while Jay-Z’s finale is released this September 11 (poll question of the day: this 9/11 will more Americans be talking about planes crashing into WTC or the market crashing into the debt-financed ground?)





























Disclaimer: short SPY

The S&P 500 ETF (SPY) chart shows three major resistances:

a. long-term downtrend line extending from May of 200
b. horizontal resistance/June highs
c. underside of channel support defining current bear rally off March lows.

On top of that, we have a parabolic move with tremendously overbought conditions. I will be in awe if we can break out of this pattern; at that point, technicals would be completely broken, I'd be going long on margin until 1010 and essentially betting on a crash from that level.  

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After several weeks in California, I am back in Michigan and ready to post again.

The head and shoulders pattern I called for almost a month ago seems to be developing and on the verge of completing. Earnings season is coming up so look for big moves. Banks won’t have an extra $1-2B on their trading profits for Q2 from AIG like they did in Q1, so it will be interesting to see how that affects earnings in financials. There were a large number of equity offerings and the banks that underwrote all of those issuances (mainly Goldman and Merril) are sure to see some good i-banking profits from that (although, again, these are unsustainable in nature– the market can’t stage a 40% rally to sell equity into every quarter). Also, as Meredith Whitney pointed out today to send markets surging, Goldman Sachs (GS) may be set for huge earnings tomorrow, as lack of trading competition (Bear, Lehman, etc gone), issuance underwriting, and lack of government intervention in its operations (paid back TARP) lead to big revenues offsetting asset depreciation.

Though Goldman may be ready for a big quarter (and it definitely may not, an upgrade ahead of earnings isn’t usually the best signal; not to mention 35% of Whitney’s predicted move up already happened today), don’t expect every financial to follow suit, especially Bank of America (BAC), JP Morgan Chase (JPM), Wells Fargo (WFC), and Citigroup (C), who still have huge writedowns to face, trillions in off-balance sheet assets, big exposure to Option ARMs (which have finally started cracking), and a huge void in loss provisions after last quarter’s accounting shenanigans in bank earnings. Also, it is important to mention interest rates have risen dramatically since their December lows and very dramatically since April, as risk aversion gave way for risk appetite and equity and commodity inflows (S&P 500 40% rally anyone?)

 

 

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