Minutiae

Another day, another equity rally.   If this continues any longer, the S&P might actually be up on the year!  Yesterday's catalyst was a familiar one, i.e. a Federal Reserve that yet again passed on the chance to demonstrate that they actually do intend to lift rates off of zero this year decade century millennium.

Curiously, the minutes appeared to pooh-pooh the impact of the recent bout of global market volatility; whether the FOMC thinks they're fooling the market, or if they're just fooling themselves, is a question left for the reader to consider.  Nevertheless, they conveniently noticed that inflation (as they measure it) has yet to start approaching its appropriate level (as they define it)...so better wait a little longer, because gosh darn it, the model says inflation should go up eventually!

In an obscure academic at Bo Diddley Tech, such faith in poorly performing models would be touching if a trifle pathetic.  For the so-called best and brightest to continually misunderstand the situation they confront is just plain concerning.  Macro Man has written about all of this before and doesn't feel like digging too deeply into it again.

Suffice to say that even short term inflation expectations show zero signs of becoming unanchored...





...the trimmed mean CPI has trended lower, but is hardly pointing to anything like corrosive deflation....



....while the median CPI has been very steady above 2% for 3 years.  If you're looking for signs of broad-based, corrosive deflation/disinflation, you won't find them here.  Apparently, though, the Fed doesn't distinguish between corrosive deflation and cheaper consumer goods, even though there's a veritable Everest of evidence to suggest that most of what we see is the latter rather than the former.



All the moaning in the world won't help you make money, however.   It seems as if it might be time to implement a "Carney" strategy for the Fed- i.e., whenever they communicate, simply assume that they're either bad economists or lying.  In that vein, the yesterday's minutes would suggest playing for a hawkish outcome.  Conveniently, the SPX has bellied up to the bar at the Last Chance Saloon  for would be shorts, with last month's high offering a clear risk parameter against which to sell.

If we somehow end up making new highs by year with the Fed sitting on its hands, it will be worth questioning who are the bigger pack of fools: the Fed, for leading us on this merry dance, or those of us who followed along like rats behind he Pied Piper?
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Anonymous
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October 9, 2015 at 7:21 AM ×

If the FED were traders, they'd sell the low and buy the highs.

FED says it expects volatility on a rate rise. It gets it in advance having lined up expectations and bottles it as a result.

The decision, presser, subsequent speeches and now the minutes release all suggest different views/outcomes.

We've had our week long rally while China was closed. We can blame China now,and earnings already are. Bit of a distance to go to FOMC highs.

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Anonymous
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October 9, 2015 at 7:24 AM ×

Russia dropping missiles in Iran instead of Syria. Bit of a miss that. Scope for a more dangerous miss.

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Anonymous
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October 9, 2015 at 9:49 AM ×

FT: FED: I think there is no doubt in anyone's mind (except the most die hard anti-conspirationist) that they (try to) fit the research papers, staff projections and narrative manipulations to whatever they WISH to do; remember how, in the run up to the September meeting but before mid-august some fed gouvernors started to pitch the idea of inflation going back to target within the foreseeable future when at the same time everything pointed in the other direction (USD strength / collapsing commodities ...). Remember when they kept lowering the unemployment threshold when they didn't want to hike. Remember the "residual seasonality" concept introduced by none other than the SF Fed to explain away weak Q1 growth when it suited them;
I could go on forever.

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Anonymous
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October 9, 2015 at 10:35 AM ×

"Russia dropping missiles in Iran instead of Syria. Bit of a miss that. Scope for a more dangerous miss."
Wall of worry strikes again.

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Anonymous
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October 9, 2015 at 10:38 AM ×

FT
"I could go on forever".
Then you should join the Fed who look like doing the same.

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Booger
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October 9, 2015 at 12:18 PM ×

Well, I was wrong there about shorting spoos @2000, that W shaped thingo again, doh! Happily I had a long oil to make up for that spoos whipping.

On the Fed:
My playbook:
Current popular interpretation: no hike December
Tommorrows meme: will popularize the idea that they cannot raise next year due to it being an election year if they have not started raising in Dec, which they won't--> further dollar correction
next weeks meme: But there's been some good data, EM is rallying, they will have to raise in Dec!--> dollar rally

I have my eye on laying on some big positions short aud.usd around 0.74-0.75.

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washedup
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October 9, 2015 at 12:21 PM ×

The Fed minutes were funny - can't believe that the two states of mind people get to choose from in describing the fed are 'panicked and unanimous' and 'confused and incoherent' - I guess it is now back to the former after a temporary flirtation with the latter for the last few days.

Dollar breaking some big LT support here vs EM - its a counter trend reflexive move, but the chorus of '1998 all over again' will be too deafening to argue bearishly against equities, especially in the face of seasonality. I think Mr T has it nailed that we will be in sector rotation mode for a while, and the best move may just be to make a list of whatever was in the body shop for the last few months and take it for a test drive.

Too late for that now? Dunno, counter trend moves can be extremely powerful.

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Anonymous
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October 9, 2015 at 12:45 PM ×

I always thought the Fed made sure the end of year dollar liquidity didn't spoil everyone's xmas. If there is any credence in that at all how could that be squared with a rate hike in the very month where you don't want to see major problems?

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Booger
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October 9, 2015 at 1:18 PM ×

Against a rate hike is that it would be like taking away a Christmas present. Or finance industry bonuses in this case. But, I'm more inclined to think as we near December they will be pooing their pants, particularly if data is not going down the gurgler.

It occurred to me just then like a flash of lightening: they will get panicked about being boxed in if no hike by year end. They know they have left it until too late and may as well not bother, but how can they be sure they will not need to raise next year? The sensible thing would be to raise December, hope there is not a recession soon, otherwise if there is a quarter of good data, they are in more of a pickle to raise rates in an election year and piss off the democrats big time.And by that time recession may be upon us.

So when they meet next they asking each other: should we sit it out for a whole year and do nothing ? Or should we get in early and hope there is 6-12 months before a recession when we can backpedal and have one tiny bullet, eh?

Anyway, one small problem is fed funds futures, so if they are going to have Dec as live, they will have to selectively leak to massage expectations of a December hike to a higher probability. Maybe we will get something from one of their mouthpieces, I mean connected but independent reporters.

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Anonymous
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October 9, 2015 at 2:19 PM ×

FT: we might have gone a bit far a bit quick...I don't change my long term call (i.e. nrw highs next year...) but a little breather would be technically healthy; I would say it shall occur between now and monday's close; I'll try a short punt with small size and tight stops without touching my core long.
On the other hand, October of last year stays in the collective memory

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Anonymous
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October 9, 2015 at 3:19 PM ×

@Wall of worry strikes again.

October 9, 2015 at 10:35 AM

Ignorant comment when you have no idea of posters timeframe.

Where were you when that passenger plane was shot down in Ukraine? I was short Europe. During the Greece debacle in the Summer? I was short Europe. Escalation of some form, some incident, is inevitable. It doesn't end in a simple handshake and division of the spoils.

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Macro Man
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October 9, 2015 at 3:31 PM ×

Man, it's gotten chippy in here, hasn't it? Personally, I find the tropes of "the bulls" and "the bears" to be tired and simplistic. As some have noted, there are a multitude of time horizons, investment styles, mandates, etc., both on this board and in the real world. Moreover, the same individual can wear both strategic and tactical hats, which sometimes say the same thing, and sometimes say different things.

Beating the market can be challenging enough without having to worry about declaring some sort of hollow victory over anonymous posters on a blog message board. I'd much prefer to figure out where we're going rather than try to determine how much someone has made or lost.

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washedup
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October 9, 2015 at 3:33 PM ×

MM - is there a way for u to enforce that bloggers are not allowed to post anonymously? I am a big believer that a) not having a voluntarily chosen name encourages rampant feces flinging and b) a poster who is hell bent on levitating aforementioned material would also likely be the kind too lazy to choose new names for every post.

If nothing else, it would be an interesting social experiment - ur call, sir.

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Anonymous
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October 9, 2015 at 3:55 PM ×

Only gets going when markets rally after sharps sell off. FM or one of his troll gets to work, thinking everyone is still short or trading the same thesis.

Thinking of event risk is hardly a wall of worry. Not when there's multiple factions engaged in striking various targets on a NATO border. Blind faith in any one way of trading is just that, blind.

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Anonymous
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October 9, 2015 at 5:20 PM ×

So in last 20 hours , we have seen Williams , then Lockhart and now Dudley all discuss NIRP .... 3 Fed govs in 20hrs .... its on the table

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Anonymous
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October 9, 2015 at 6:16 PM ×

@5:20pm
Per MM, see Carney.

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Anonymous
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October 9, 2015 at 7:09 PM ×

Rolling over?

https://research.stlouisfed.org/fred2/graph/?g=263S

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Anonymous
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October 9, 2015 at 7:25 PM ×

To the couple pf other Anons above;
At any given moment IF you want to find them there any number of reasons to engage the mindset that is the 'wall of worry'. That some may indeed become a reality doesn't unfortunately help very much ,because if you react to them has being 'real' then all that happens is you get shaken out of position time after time after laborious time. Hence, my comment was not 'ignorant' nor 'blind'. I simply pointed out that if you assume the worst that may happen in everyone of these situations that face us over the years then frankly I'd recommend leaving the marketplace altogether has the best option.

Washedup, I think I am insulted. My birth certificate clearly states 'Ouz zis'.

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Polemic
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October 9, 2015 at 7:40 PM ×

So as not to annoy anyone I am now a declared agnostic. The bounce has bounced and I am taking my ftse longs off the table as all the inputs for me believing it would rally have been achieved. Namely first wave Chinese uberpanic settling into long term concern but not instant death. Patient moved from scute to chronic ward. Fed rate stuff. Gunna be a hikd well there wasnt and probably wont bd for a bit. Commodity ovrrsold by fivd min macro.. bounce all squeezed out. Well somd at least. And finally just news flow. As demonstrated by yhe comments column tge balance bear to bull has gone more 50.50 (and the shouting apply demonstrates the split).

So I m backing out. Taking my cash and retreating to the peanut gallery until I see something else tweak my fancy. No point in calling it if I no longer see it.

Pol

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Polemic
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October 9, 2015 at 7:42 PM ×

And sry for typos.. written on phone with v cold and shaley hands after a hike across a moor. Thinking of starting an extreme dealing club. Selling individual stocks from behind a rock on a mountain tor is a start.
Pol

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bill
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October 9, 2015 at 9:16 PM ×

pol - you need some measure of combined trade/location extremeness. is buying some aapl shares in a blizzard at everest basecamp somehow equivalent to buying a 3x7 zar swaption but while just enjoying a nice autumn walk across dartmoor?

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Anonymous
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October 9, 2015 at 9:20 PM ×

FT: considering dvegadvol recently it looks like kurtosis (as usual) is consistently underpriced
A low was reached in 2006/2007 and was revisited ealier this year; I believe this dobble bottom is here to stay across asset classes be it CCY, equities or commodities (I wouldn't rush into fixed income yet but eventually it will pay off)
I think we are entering a new volatility regime and long dvegadvol will pay off overtime...especially in CCY in teh short term.
Good week end to all

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Polemic
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October 9, 2015 at 9:50 PM ×

Bill. Good point. Yes extreme of both to count. Because mine was indeed on Dartmoor today we'll rank it a low first bid.

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Anonymous
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October 9, 2015 at 10:54 PM ×

Going to a bit of macro, German export data at -5.2% yoy, VW , DB ... Shall we see a bit of a soft patch for core Europe , that feeds through east Europe ( so far a darling of EM as the balance sheet cleaning happened in 2010 already ) ? Cee rates has been one of the best trade around and it s the present that keeps on giving until it stretches too far (czk, huf) ?

Good week end all,

travis

Rest of EM was due for a bounce for sure . Brazil is In trouble but not in mega trouble . Just self inflicted . The Clean up after a good decade has to keep going through for a couple of years max.

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Booger
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October 10, 2015 at 12:51 PM ×

Anon, 5:20pm - nirp, I raised it before, but if spoos keep rallying, there is no need to.

MM, or anyone who has an hypothesis on these 2015 macro puzzles I have been pondering:

1. Is there a NAIRU in japan ? If so, where is it ? Recently, the unemployment rate was 3.5%, the lowest in decades, but there has been no sign of inflation. In the 70's, when unemployment was below 3.5%, this tended to ignite inflation. Puzzling eh?
2. If GDP=C+G+I+X-M , what is causing such resilience in the Australian economy ? net exports has been negative in the last year, G has not been very stimulatory. It's a bit odd.

Two opportunities that I thought had passed which look to be re-emerging with the recent EM rally are short aud.usd around 0.75 and short aud.cad around 0.95

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Leftback
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October 10, 2015 at 1:52 PM ×

LB is in Pennsylvania. Having been slagged off recently here after another of MM's posts, I wanted to defend a statement that I made earlier. I had pointed out that certain people need to sharpen their pattern recognition skills. Immediately Anons jumped all over me, even though I hadn't specified the pattern (Double Bottom, Head And Shoulders, Three Houses and a Domed Roof, Crouching Polemic, Downward Dog, Bending Shorties etc..).

In general we subscribe neither to the view that technical trading is voodoo mumbo-jumbo, nor do we think it is all-powerful. As someone once explained, "Mate, if enough people believe in it and TRADE on it, then it becomes real. Innit", and we agree.

There is an obscure technical factor that we have become quite fond of here. During the last 5 years, post-crisis, we have noticed that large market corrections like the one in 2012 and 2015 are accompanied by unusually large or outright scary honking™ spikes in the VIX, above 30 or even 50. The spike is later followed by some oscillations in VIX between 20-30, that form a right-hand shoulder in the VIX chart, and that's the pattern that we have become fixated on. Of course these don't come along very often, b/c it takes a lot of fear and negative energy to create the huge volatility spikes. Once or twice a year?

To us, it seems clearly true that if you begin to buy equities at the very peak of the brief volatility spike (maximal panic) you can usually make some money, but the best time to get maximally long is during the secondary panic signaled by one of the aftershocks forming the right-hand shoulder in VIX chart. Although the timing is rarely perfect and intestinal discomfort can result, this indicator has not failed us to this point. Once VIX < 25 again, vol sellers dominate and the underlying asset bleeds up which is what we have been watching, or in our case, enjoying. [Note that in 2008-9, the deleveraging that took place over months rendered the indicator ineffective]. At VIX < 15, the risk/reward ratio changes again and we would look to de-risk.

Right, you can all slag me off again now, or start an orgy of back-testing, or whatever. :-)

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Gus
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October 10, 2015 at 4:36 PM ×

Another classic post, LB. My morning cup of joe almost exited thru me nose when I came to "Crouching Polemic"! Thanks again, and thanks again to MM for hosting this wonderful site.

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October 10, 2015 at 6:49 PM ×

Interesting take MM. During my read of the minutes, I similarly noted the comments on accepting volatility, and saw the "this type of volatility is ok because valuations are/were/are again high as noteworthy. To me this lessens the value of the Yellen Put, somewhat, because the Fed will continue to pretend to want to hike rates, thus pressuring the market, of course only after it explodes higher...

More on minutes

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Polemic
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October 10, 2015 at 7:02 PM ×

The crouching Polemic is hereby verified as a very important signal. We had one recently. I ll be back with the chart

Pol

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Polemic
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October 10, 2015 at 8:19 PM ×

http://polemics-pains.blogspot.co.uk/2015/10/the-crouching-polemic.html

Here you go .. the Crouching Polemic

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Anonymous
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October 10, 2015 at 11:42 PM ×

@LB - Good post and well done on your recent trades.

Ignore the derogatory comments, they are from people who can't trade, and so have to resort to asinine comments to cover up their fragile egos.

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Booger
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October 11, 2015 at 7:57 AM ×

LB, congrats on the long. Yes, you and MM, Polemic and others were correct about timing. However despite the poor timing, I still have my short on the spoos, although it did come within a pubic hair of reaching the 2020 stoploss I have. It does look like being stopped out next week but we will see.

MM, I think the bull/bear tropes are useful, but obviously people can take it too seriously. It does seem like it is a titanic struggle between the two at points like recently. But when you are trading, you are not actually playing chess with anyone in particular or smacking down someone, and perhaps the analogy should be more like surfing than boxing. Although if you are badly positioned with size, then it is like being punched in the face so maybe it is like boxing and surfing.

I fell for being too bearish too early and from too low levels, but I think the bullish arguments are still weak. What I forgot in my bearish excitement was that in 2008, we did rally again with terrible fundamentals. So perhaps there is rollover but the market can keep rallying back despite this for a bit. And although the fundamentals are deteriorating, it is nowhere as bad as in 2008 so anything can happen and the market can rally on truly crap data.

I still reckon, and I could be very wrong, although the bulls have won the last round, the rally is likely to be to nowhere and we will find ourselves stuck in a range. Anyone bearish and still alive might talk about going in big with shorts but to be still alive, they must either be willing to let go of that relatively quickly or be using small size. Probably sizing and risk control are important as getting directionality correct in trading. If you have the directionality right though, you can get away with having terrible sizing and risk control until you get it wrong.

Perhaps we go to higher highs. That would be an interesting place to look to short from also I reckon. I plan to be probing with shorts with 0.2R risk if the bearish side is attractive in the future. In the interim, if October is a strong month for risk, I will be looking to reload EM and commodity shorts again, mainly aud FX crosses. That is something I am salivating about, AU short from 0.75. I'm thinking about what could go wrong there before I get too excited and determine appropriate sizing.

I really like your blog and appreciate the thoughts of the regulars, LB, Polemic, Abee, CV, Nico etc.

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Anonymous
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October 11, 2015 at 9:14 AM ×

Lb,
"LB is in Pennsylvania. Having been slagged off recently here after another of MM's posts"
I was the person who posted regarding patterns. I reread the post and indeed the reply to it. Whilst my grasp of English may lack a certain polish I completely fail to see where any derogatory remarks alluding to 'slagging off' were made. I hope your trading execution is done with rather more precision than your post analysis.
I dare say you may now have been 'slagged off' in a certain way. I try to please.

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October 11, 2015 at 2:37 PM ×

And Stanley Fischer, just made a TOP story on Bloomberg this morning, highlighting, similar to the way he did at Jackson Hole, that we may be ready for liftoff later this year.

Is it more the Fed's fault for this horrible, horrible, speak your own mind, whether it means something or not, communication strategy.

Or is it the market's fault for paying any attention to nonsense.

Irrespective, hawkish TALK posses a risk to the risk-on trade from these levels go forward...

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Nico G
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October 11, 2015 at 5:55 PM ×

1) readers of Stefan Zweig now have a buy signal !

A "Breadth Thrust" occurs when, during a 10-day period, the Breadth Thrust indicator rises from below 40% to above 61.5%. A "Thrust" indicates that the stock market has rapidly changed from an oversold condition to one of strength, but has not yet become overbought. According to Dr. Zweig, there have only been fourteen Breadth Thrusts since 1945

how about that for voodoo mumbo jumbo?

Wait. Zweig was so bearish on Europe he committed suicide right here, in his Brazilian house. This is so confusing.

2) For those of you following current Brazilian politics (Abee) there was quite the coup de théatre yesterday: the Judas of ruling coalition, Señor Cunha, has seen a generous serving of 'rampant feces flinging' in his general direction. Accused of getting bribed too within the Petrobras 'M5' system (Maravilhoso Mickey Mouse Money Machine). Cunha is (was?) THE man able to have Rousseff impeached. Politics at its dirtiest... stay tuned

3) As per markets/position bombastic performance of Spoos coupled with notable underperformance in Europe. I am not sure why some folks worried about 20/30 handle heat on one's position when almost 200 points are targeted. But never mind, the attention is appreciated. In this game you are either short too early or not short at all. Thank you Nick for the support, it almost felt as i was writing behind your identity. Good luck everyone!

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winginit
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October 11, 2015 at 7:20 PM ×

I couldn’t resist to go short on Friday. I can’t help it but I cannot seem to be positive European stock market. I see trouble, VW, DB and the fact that we’re currently overwhelmed by immigration to the extent that borders are closed within Schengen. Let’s pray it ends well. (and to be perfectly clear this is not to be interpreted as racist in any way shape or form)

Anyway, thanks Nico G for the nice summary “..either short too early or not short at all”. Got me to remember, “In bear markets prices move up or sideways most of time”. Reminiscences of stock operator, an interesting little book I read many years ago.
Cheers

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Anonymous
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October 11, 2015 at 7:21 PM ×

re nico 5:55
nico while i have not agreed with you over the last couple of weeks( trying to catch bounce), have to say i am with you on sell bounce and have been scale seller from 2000 with intention to layer all the way to 2060..trick is to position size correctly . on the same vein long europe but book has been leaning net short from spx 2000. at this moment have some p&l to play with so will see how this pans out but valuation wise spy looks a good risk reward on short side here( better than on may all time highs i think)
markets still having a pavlovian response to these bounces ( v shaped all time high) and LB being a derivs guys for the better part of 20 years amuses me to see people apply "technical" tells to vix!but to each his own...whatever works i guess
nothing turns sentiment as much as price

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rp
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October 11, 2015 at 7:46 PM ×

wrt 'crouching polemic' I have always thought of these as splayed fannies. They are really common for the start of good moves, I think we had some around this time in 2005. Hardly ever see just a v-shape reversal on a longer term time frame.

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JohnL
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October 11, 2015 at 8:14 PM ×

Here is an interesting analysis on the Zweigy thrust, for a lazy Sunday afternoon read.

Zweigy

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washedup
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October 11, 2015 at 9:49 PM ×

anon 7:21:

yes I agree with the scale in sell to 2060-70 strategy, and the risk reward to soon turn better than the may highs - its not always about the price.

So the 'crouching polemic' right behind the 'laughing bear' pattern resulted in a 'howling volcano' formation - its a 1850-2050 range and in the end everyone will look back and say, wow for a year where the market didn't really go anywhere much, it sure lost a lot of people a lot of money - no need to get too excited either way for now - next year may be a different story.

Interesting to me the long bond hasn't really reacted much to the move - can't shake off the feeling there is a shoe to drop there, but maybe LB is right with the nowhere this year idea.

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Anonymous
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October 11, 2015 at 11:55 PM ×

G30 meeting of Central Banks concludes that: central bank policy measures cannot produce sustainable economic growth.

Further, central banks agree that monetary policy must be normalized or risk another crisis.

Finally, they agree that should economic growth remain low, or financial markets overshoot, the world faces debt deflation, leading to hyperinflation.

Have a nice week.

(Source: Group of Thirty, Washington DC, Oct 2015)

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Polemic
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October 12, 2015 at 12:25 PM ×

Well done LB , the Crouching Polemic is now official- Referenced in FT Alphaville

http://ftalphaville.ft.com/2015/10/12/2141963/further-reading-1864/

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