Put up or shut up

We are swiftly tilting towards "put up or shut up" time for Macro Man's W-shaped risk asset price forecast, and indeed for those expecting a lambda as well. The next week will give us Beige Book and ADP today, ECB and BOE (who this morning took minor action to ease the liquidity squeeze) tomorrow, payrolls and services ISM on Friday, and then Lehman and Bear Stearns earnings early next week. If bad news is going to shake things up a bit, it shoud happen soon.

Risk asset shorts must be pulling their hair out (if they haven't lost it all.) The recent levitation of the S&P 500 has occurred on pretty thin volume, as the SPY chart below indicates. Any technician will tell you that such a rally is not to be trusted.....and yet it keeps drifting higher. Firm bank lending data suggests that distress in the CP market has not disrupted the credit mechanism for non-turd-buying enterprises.

Technically, meanwhile, the SPX is entering territory where it needs to start faltering if the W is gonna happen. The chart below overlays the 2007 price action (in red) with that of spring 2006 (blue.) While the day-for-day overlay has broken down over the last several weeks, the overall shape of the lines remain very, very similar. In early July 2006, the SPX attemtped to breach the 55 day moving average, but ultimately failed. This proved to be the (technical) catalyst for the buyable dip.
Yesterday, the SPX closed above the 55 day moving average for the first time since the crisis started. If the index doesn't get back below in a hurry, it will appear that the W has indeed morphed into the least popular forecast from the recent poll, the V.
For now, though, the jury's still out, and fortune may favour the brave. The risk/reward of selling stocks near current levels is excellent. Macro Man will therefore look to sell 400 ESU7 at 1490 with a stop loss at 1515, above the Wave B high. The future's currently down in early trade this morning, but would you rule out another early-session low-volume rally?


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Quarrel
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September 5, 2007 at 3:13 PM ×

So far today this is looking like a very well timed post and trade (once again - your Dax puts were I think entered on the first day of the last big fall!).

While generalisations can be bad, do you tend to enter these trades with a specific target in mind? (The obvious for me being a retest of the August low). Obviously trades need to be revisited as the situation unfolds, but do you tend to do that versus an initial benchmark?


--Q

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Macro Man
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September 5, 2007 at 3:19 PM ×

Sadly, I wasn;t filled (see forthcoming post). In these types of trades, though, I generally have a firm max loss in mind, but the profit target is generally a lot hazier because things can change.

But in this case, 1400 or so is the level I have in mind....

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Anonymous
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September 5, 2007 at 4:48 PM ×

where are the risk assets heading MM ? EM equities in particular.

We shorted them ..lost money and covered...we went long now... we are worried :-(

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Macro Man
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September 5, 2007 at 5:15 PM ×

Well, I tend to think they go lower, underperforming developed markets on the next (an d final) leg down.

The problem with these markets is that noise is trumping signal, and it's all too easy to get sucked in to doing something on the basis of price, which is why I've been fairly inactive in trading since I got back from holidays.

Of course, my opinion is just that...an opinion. The only piece of advice I would be willing to offer is that in a noisy market with plenty of important datapoints to come, it's probably better to be under-risked going in than over-risked....

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