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Vikram Saxena
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Vikram is an electrical engineer by training and has held a variety of roles spanning multiple industries. He started his career in the semiconductor industry in the Silicon Valley, before moving to a proprietary trading desk at a bulge bracket investment bank in New York. Vikram has also... More
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  • Monday Roundup: Little Kim no Match for American Consumers 0 comments
    May 26, 2009 6:06 PM | about stocks: IWM, SPY, TLT, TBT, FXE, QQQ

    The equity markets reversed course today in another dramatic session. North Korea shocked the world (at least according to the head-lines) by testing a nuclear device which actually worked. This lead a flight to safety in the overnight market with the US Dollar getting a strong bid and with the EUR-USD trading as low as 1.386 down from its close above 1.4. The equity markets gapped-down open but continued to rally up from the open.

    Consumer Confidence Lights a Fire

    The initial rally in the equity markets was not unexpected. The markets had sold off hard into the close Friday as traders did not feel comfortable holding long positions over the long weekend. The gap-down open gave traders an opportunity to re-initiate the long positions.

    However what lit the spark was the biggest gain consumer confidence since 2003; it came in at 59.4, well above the consensus of 42.6. The market ignored the worse than expected Case-Shiller Home Price Index numbers, and of course Kim Jong-Il’s nuclear test.

    Underneath the Consumer Confidence Numbers

    The consumer confidence was led up by its future expectation’s component, with the expectation measure rising to 72.3, the highest since December 2007, while the gauge for current conditions was at 28.9, higher from last month’s reading of 25.5, but a far cry from future expectations.

    The divergence between the two components of the consumer confidence number, mirror the equity markets very well. Though current conditions are nothing to write home about, the expectations for the future are driving the market higher. However, the risk to these green shoots remains high.

    The yields on long term treasuries continued to rise today. The reduction in mortgage payments is a key pillar of the Fed’s strategy for recapitalizing the American consumer. The expectations are that lower mortgage servicing burden, will allow the consumer to spend even under times of reduced credit availability. However, that experiment is likely to fail if yields continue to rise, since mortgage spreads are near historic lows and any rise in treasury yields will affect the mortgage rates.

    Risk Tolerance Returns

    The equity markets were led by the small cap Russell2000 and the technology heavy Nasdaq100. The longer dated treasuries were sold, while the US Dollar lost most of its earlier gains, closing almost unchanged.

    This was in a sharp contrast from last week, when equities were being sold, even when the US Dollar was collapsing against. The positive correlation between the Euro and US Equity market returned today, perhaps indicating a more subtle approach to selling US based assets, compared to the indiscriminate selling of the previous week.

    My Portfolio

    I continued to stay primarily in cash and day-trade. I was able to close out my short Euro positions at a profit, while I continue to hold the bearish put spread on the TBT, perhaps in the vain hope that the long bond yields will pull back to allow the green shoots to grow.

    Tomorrow’s Outlook: 200 Day Moving Average

    The holiday shortened weeks typically have a bullish bias. The market was oversold coming into the open today and was bought right from the get-go. Typically, the day after a strong trend-up day also has a bullish bias, especially at the open. This is primarily due to trapped shorts that capitulate the day after the trend-up day has shredded their position.

    I do not expect another ripping day either after such a strong rise. We are likely to remain range-bound tomorrow, unless of course the existing home sales data surprises to trigger another rally.

    The other big factor affecting the market is the looming presence of the 200 Day Moving Average of the SPX at 934.36, well in the striking distance from today’s close of 910.33. A positive catalyst will send the SPX to this critical level.

    What happens at that level is going to be an important factor in determining where this market goes. If we break through this level on a convincing basis, it is likely that the SPX will hit 1000 or even higher. There is also the chance that the market will sell-off after it hits the 200 Day SMA, and start the long awaited, but still nowhere to be seen, correction.

    Themes: Equity, Bonds, Currency, Outlook, Roundup Stocks: IWM, SPY, TLT, TBT, FXE, QQQ
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