by Macro Story
We are in for a wild ride for sure starting this evening when futures open followed by Asia. Europe will add to volatility come Monday and then with the pending FOMC meeting on Tuesday the party should really get started. We have leverage and emotion and as I have said countless times that is one dangerous combination.
Now is not the time to be greedy nor a hero and regardless if you are bear or bull please temper emotions. One thing I learned early in my trading career is when I did not temper emotions I missed out on some great opportunities. I stayed short when I thought markets would move lower or stayed long when I thought they would move higher only to watch profits turn into losses. Be open to volatility and remember markets right now are more about psychology and less about macro and or technicals.
Just because a market is due for a bounce doesn’t mean it must bounce. Just because you believe the bear is back doesn’t mean this market must continue the slide.
Looking at charts, reading trader comments over the weekend I suspect we open lower either testing or slightly taking out Friday’s low only to close higher on the day Monday. With an FOMC meeting on Tuesday the pressure on shorts to cover some very healthy profits ahead of any hints of QE will be very strong. Longs waiting for entry points will view the risk reward as favorable as well ahead of the meeting.
I imagine a lot of margin calls have worked through the system. The big question is mutual fund redemptions. How nervous are retail investors? How “convincing” were fund managers in telling people all is well and to stay fully invested (talk about a travesty but that’s a post for another day). At some point retail will want out as the pain of 2008 still fresh in their minds will be too strong.
One thing becoming clear is the timeline of a major market crash is accelerating. Problems in the banking system and government capital raises are growing while solutions are shrinking. The global economy is deteriorating faster than anticipated while investor fear is growing. The result is a negative feedback loop. A self fulfilling prophecy.
Below are the 2007 and 2011 comparisons. For now they still work and Friday’s candlestick pattern was too eerily similar to the 2007 pattern to not put credit on the next candle and that is why I am leaning towards such a move on Monday. The FOMC meeting further supports that belief in my mind.
Looking at the IV skew as shown below (short term and long term chart) implies more selling is at hand though. This is where I may soon venture away from the 2007 comp. In 2007 there was a deteriorating macro picture and the threat of Bear Stearns but the threat of Italy blocked from the capital markets or Bank Of America headed for a breakup or worse a downgrade of US debt was not in the picture. Today it is, along with a host of other issues.
I suspect the Fed on Tuesday announces little other than extending the words “extended period.” Any sense that the Fed is either powerless or unwilling at this point will rattle markets and cause reality back into investment planning.
I wish I was more definitive but remaining open, fluid and ready to act on multiple plans is important this coming week and months. As witnessed on Friday profits will turn into losses in nanoseconds so don’t be greedy. Don’t lose sight of long term plans but if trading intraday and you have a profit, take it!
Buckle up and be prepared.
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