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Investment Strategists Finally Capitulating

Bloomberg article today is titled "Global Strategists Abandoning Bearish Views." A bit late, in my Dec 22 e-mail below I wrote "Draghi preventing a bank funding crisis and perhaps slowing bank deleveraging is a big deal," bold in original, "I would not be surprised to see SPX hit that level in a Santa Claus rally through early Jan, with new ECB President Mario Draghi playing the role of Santa Claus."

My distribution list e-mail titled "draghi as euro santa claus a big deal" was sent the morning after the Dec 21 ECB's 489 billion euro LTRO. I hardly ever use bold-face in my writing, I did so three times in that e-mail because LTRO was a "big deal." I do not use caps for typing speed in my e-mails, hence no spell checks.

Obviously a key issue now is whether these investment strategists belated capitulation might be a bearish indicator. I post daily market updates in "Summary" on my LinkedIn profile. Left click on updated chart below to enlarge.

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i've highlighted the key lines on the attached chart. the two light blue lines form a rising channel. i've been emphasizing the triangle that is formed by the descending orange and rising light blue line. spx is once again close to breaking through the top of that triangle. if it does so, then that rising channel is the obvious pattern to watch on the chart. that rising channel intersects the oct 27 high of 1292.

i would not be surprised to see spx hit that level in a santa claus rally through early jan, with new ecb president mario draghi playing the role of santa claus. yesterday it was announced that the ecb's ltro (long-term refinancing operation) handed out nearly 500 billion euros of 1% 3-year money (with loose collateral) to european banks. that is a big deal.

as i've said a couple of times, following the 50 point spx rally on the central banks dollar swap announcement before the u.s. market opened on nov 30 (big green candlestck, i fill up days, reversing convention), i was quite surprised when the market did not have another big jump on dec 8, the day that the ecb announced the extension of ltro to 3 years of "free money."

spx hit 1260 that day, testing the orange downtrend line for the fourth day in a row, i thought it might go through, instead it reversed down to close at 1234, as the market chose focus on what it viewed as yet another mediocre summit the following day. it was only this tue, when spx rose around 35 points, that it got excited about ltro, as yearend rally time approached.

one can quibble about the ltro. "only" around 200 billion of the nearly 500 billion euros was new refinancing, the rest rolling over from a shorter-term program. and ltro certainly doesn't "solve" the soverign debt issues. but whether or not it is a "game changer" or "backdoor qe," even the quibblers freely and readily admit that draghi seems to have taken a "lehman moment" off the table for the time being, and probably bought a few more months with his massive liquidity injections into european banks.

clearly draghi is not trichet. again that is big deal. whether or not he is a bernanke who will somehow do a qe when the 700-plus billion euros of sovereign debt and bank financing hit in just q1 alone is the big debate right now, with the bulls believeing that draghi could use the good 'ol impaired "monetary transmission mechanism" in "deflation" excuse to get around the legal prohibition on the ecb financing sovereign debt.

the other big debate is whether the banks will take their 1% free money and play a carry trade buying sovereign debt, with the banks griping about the eba european banking authorities forcing them to mark-to-market their huge sovereign debt holdings, which they've been unloading in huge amounts.

but right at the moment, european sovereign debt bond auctions are getting done at much lower rates then just a few weeks ago it's certainly not the end of the crisis, nor perhaps even the beginning of the end. but draghi preventing a bank funding crisis and perhaps slowing bank deleveraging is a big deal.

again, this is all very fluid, and markets are extremely thin right now. no one has can predict what might happen tomorrow, or the day after that, e.g. a downgrade of france soon.

that's why i've said several times that when vix comes down and options get cheaper, the simplest thing to do is buy calls, which have been much cheaper than comparable puts. if you are long equities, then you can use those lower vix opportunities to cut the cost of buying puts to hedge against tail risk. jf