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Longs Cash Out- Shorts Looking For A Signal

The warnings had been in place for months via the daily Client Notes, regarding global equity market movement that was able to levitate higher on extremely low participation levels, aided by third-party Treasury market manipulation via QE2, and positive earnings reports that were able to support any intra-day equity reversals. The outlook has been to remain long-equities so long as midterm charts maintained an upwards bias, and price action was unable to break lower and hold.

What took 15 sessions of S&P 500 futures trade, which reflects the momentum in emerged market equity sentiment, to build from the 1295 breakout area has been given back in three sessions of trade. The recent moves have been backed with high participation levels that have been unable to hold the tests of support, unlike the pattern of trade for most of 2011 that has managed to find buyers at any given time.

Traders will now be looking for a period of consolidation on S&P trade at around 1290 to confirm that major institutions are prepared to buy the dip. As equity markets move lower the yield on the 10-year Treasury note has dropped, as the main global Government bond market finds bids on the note values, that are reversing a period of trade that in general had nothing but sellers.

It was noted recently that although Japanese, European, and US equity markets easily held in the green during 2011, the emerging markets have suffered the indignity of holding in the red by an average of 3%. The divergence between global equity markets has been another reason that traders and investors have been advised to bank early and bank often. The next phase of trade may be dominated by a ‘cash is King’ outlook.

These are unique times in regard to social changes and economic challenges, born in part from the Federal Reserve's decision to once again backstop risk via another quantitative easing program. The threat of inflation coming from higher commodity prices, that have been artificially inseminated by a weak-dollar policy, have a massive price to pay in regard to how the global investment and banking market values risk. The cost of doing interbank business has increased, and the spreads on debt have increased, in-line with equity markets that had seen no reason to do anything other than buy the dip on any given day.

In general, the outlook will be very cautious in regard to equity holdings over the near-term, with a move lower on the global benchmark S&P 500 market that is able to break 1275 support likely then to instigate the next round of equity selling. It may be unwise to try to jump too quickly on the short side of equity trade without first of all seeing this week's Friday close. 1275 and 1295 may be harbingers of what is to come next week in regard to sentiment and momentum. Full technical detail will follow in subsequent Client Notes, with signals issued to clients as they develop.

It is obvious from recent trading patterns, that those who have been riding long positions since the beginning of January have cashed out over the course of the last three days. However, the closing of long positions does not look as yet to have developed into the building of new short positions. Time will tell, with the next two sessions of this week likely to reveal a huge amount of detail to work from.