Sage Weekly Letter – 5/13/2012

Last week we learned that indeed anyone can lose money in the markets and that even people who we once thought were perfect can make mistakes and be “dead wrong” at times. The market has been confronted with a panoply of negative news flow over the past two weeks, however, even with key names such as $CSCO and $JPM being taken to the proverbial woodshed the S&P 500 (ES_F $SPY $SPX) has held above major support (1338-1344).

This combination of negative news flow and a deteriorating, albeit resilient, equity market environment leaves market participants with a difficult and at times confusing situation across markets – does one buy equities that are “on sale” after the recent pullback? Or is it better to stay away given the numerous bearish divergences and warning signs present throughout the various key charts?

Let’s review some charts and then I will offer my thoughts on the current situation across markets:

Click to enlarge (notes on charts)

SPX Weekly


S&P 500 futures daily ($ES_F)


Dow Transports ($IYT $TRAN)


$XLF Weekly


$JPM Weekly




US Dollar Index Daily ($DX_F $UUP)

And perhaps the most important chart out there right now – the CRB Index:


While the technical market picture offers a strong signal of caution, if performing well in financial markets were as easy as buying charts that looked great and selling charts that looked ugly we could all retire to a 150-foot yacht in the Caymans. I am a strong believer in technical analysis, however, I also believe in incorporating fundamental analysis while placing the technical picture in the context of the fundamental macro-market backdrop. After all, without context a picture can be quite misleading.

Given the significant number of downside surprises in the last two weeks I believe the fact that the major equity indices ($IWM $SPY) held major support levels is at least as significant as the bearish divergences and breakdowns which occurred in several major markets last week ($EURUSD, $GLD, $UUP, etc.). Moreover, given the increasingly bearish/cautious sentiment it is almost certainly too late to bet on an aggressive move lower in the near term.

This weekend’s news flow from China & Europe is in stark contrast to the dour series of downside surprises markets have been treated to over the last few weeks – the People’s Bank of China lowered bank reserve requirements and Europe is showing strong indications of shunning austerity and turning toward a more growth oriented focus (“German voters reject austerity”, “Austerity pushing European Union toward economic ruin”, “Growth Needed More Than Austerity”).

With the PBOC firmly set on a policy easing course and European leaders finally coming to the realization that they need to turn away from their current disastrous course before it is too late, I can make a convincingly bullish case for equities and increasing risk exposure across the board. However, the market’s interpretation of the weekend’s news over the next 48-72 hours will be hugely important – if the positive news is sold and rallies fail then the gap fill back to SPX 1325 will be an optimistic downside target and the probability of a move down to the 1290s will greatly increase. Meanwhile, if the SPX can quickly regain the 1370 level shorts will be forced to quickly cover and sold-out former bulls will scurry to jump back into the market.

 Best Ideas:

  • Crude oil ($CL_F $USO) June bull put spreads
  • Long mega-cap integrated oil names $CVX $XOM in front of major long term support
  • Bear call spreads and/or put spreads on $TLT
  • Long select energy names $PXD $UPL
  • Long coal and miners for an oversold bounce following China RRR cut ($GDX $KOL)
  • Sell $AUDUSD on rallies

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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