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Field Notes

Field Notes

As a trader who relies on the qualitative art-form that is appraising market psychology - I have been collecting some interesting anecdotes and observations from the field. Specifically, traders seem to be ignoring some of the more readily apparent hazard signals the market has been throwing off in the past month.

  • I have repeatedly heard and read to the same effect, "the market is hanging in there, considering...(xyz)." While that is certainly the case broadly speaking, the market has a way of distracting your attention from where it should be focused most. The rampant attention and bipolar swings in investor sentiment surveys appear to be the illusion of choice in declaring the waters safe for the return of risk. I believe there is some utility in knowing where the sentiment vane is pointing over the very short term - however, the market's technical structure typically trumps sentiment (unless it is at a statistical extreme such as in March 2009) over time. If anything, the fact that the market is "hanging in there" on a relative basis could actually portend to a more serious underlying condition indicative of distribution. Distribution by institutional participants can create broadening top formations in the indices and erratic sentiment surveys by the swinging price action.
  • A major momentum darling has crashed and burned with silver. Silver's historic decline - coupled with a very shallow bounce is bearish towards risk returning to the same degree of indiscrimination it represented before it broke down. You could even speculate that the tepid action in stocks like Apple over the past six months was a precursor to the diminishing influence on the risk/momentum continuum.
  • The indices all broke their respective 50 day moving averages this week. Today's action should be interesting, considering they are all siting directly beneath them after retracing the break.
  • Ignoring the symmetry and historical context in the two charts below would be pollyannish at best - irresponsible to risk at worst. Furthermore, knowing what we now know about the developments in Europe and the risks they have going forward - specifically over the next few weeks in Spain and Greece - their respective influences to the commodity and equity markets could be strongly reinforcing.

Euro & US Dollar Monthly Performance Chart
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  • The government bond market continues to confuse even the King's wishes. The chart below shows the relative disconnect over the past year. This chart should be qualified, in that yields have been in a downtrend relative to the SPX for almost three decades. With that said, the degree of yield erosion - relative to the SPX over the past two months should not be ignored or passed off as insignificant.

SPX & 10 Year Yield Price Structure Chart
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  • Weekly economic data surveys have taken a turn negative. Whether revealed in the most recent weekly unemployment trends or decelerating GDP - the market is facing an ever more hostile headline risk environment. I typically shy away from incorporating economic data survey's into my short term calculus, because their correlations are erratic at best. But considering the backdrop - it can pay off with timing. Next week will provide the important ISM manufacturing index. Below is a chart of the Empire, Philly & Richmond surveys overlaid on the ISM survey. As the correlations have shown, the already received EPR surveys indicate the ISM will likely be quite weak. The degree of which could be a catalyst (both positive or negative) in the market.

ISM vs Emprie Philly & Richmond Surveys
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  • The market has respected my monthly meridian chart to the tick. If May continues to follow course away from the meridian at 1363 - the summer months could see an acceleration to the downside.

SPX Monthly
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Overall, I'm skeptical to hanging onto long positions for anything more than a bounce here and feel more comfortable on the short side of the market. That could all change in an instant - and I try to never limit myself from trading the flip side as revealed by my agnostic trading approach.

Remember, these are just my notes - I trade what I see in the tape.


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