MorningWord 6/15/12: Past Performance Can be an Indication of Future Results

by Dan June 15, 2012 9:09 am • Commentary

MorningWord 6/15/12:  Yesterday’s price action in U.S. equities, took many (moi included) by surprise. At 3pm it really felt as if we were going to roll over as bonds had just ticked green on the day and the risks heading into an expiration Friday prior to Sunday’s elections in Greece should have been fraught with fear.   As was painfully obvious for those short the market  (moi still included), it didn’t take much to cause the SPX to spike to new highs and close not far off of them.

SPX june 14th 2012 from Bloomberg


Here we are, now less than 3 hours to the European equity close, and our futures are basically flat after what can only be called a fairly disturbing Empire Manufacturing number than came in a t 2.29 vs the survey of 12.50 and the prior print of 17.09…….this is important because this data, albeit just for New York, signals the slowest pace of manufacturing in 7 months.  

My View

I guess the main point that I would make, here is that whether it is Greece, Spain, or Italy, whether it is China’s growth slowing, whether it is our own impending “fiscal cliff”, the U.S. maybe the safest playground in a bad neighborhood, but we will not “de-couple” from the woes of the rest of the world.  A global recession can be the only result of austerity and de-leveraging, we know that from our recent past.

We will have fits and starts over the coming months, but a perceived favorable outcome this weekend may cause a short covering rally, but will likely be a re-entry point for shorts heading into the summer months.  There is no silver bullet for the debt crisis ailing Europe, but the realization that U.S. corporate earnings estimates for the balance of the year are too high, coupled with the Feds apparent resistance to full on QE for the time being are likely to cause a swoon at some point in July/Aug not too dissimilar to last year in my humble opinion.

Our Positioning

As we have been detailing daily in the site, we had been pretty short, covered most a couple weeks ago when we felt as a whole the sentiment shift came too far too fast and that we were a tad oversold. In the last week or so we have laid out a lot of shorts, but I think we have been clear to state on numerous occasions we are doing in small size, with defined risk.  We clearly recognize the potential for a short covering relief rally as a result of a little crisis fatigue.  WE ARE NOT PLAYING FOR A CRASH RIGHT NOW.  BUT WE DO THINK RALLIES SHOULD BE SOLD.

The chart below shows the move gyrations of the SPX last spring into summer….with amazing similarities to this spring and what I believe could happen this summer.

[caption id="attachment_13229" align="aligncenter" width="589" caption="SPX April 1, 2011 to Oct 30, 2011 from Bloomberg"][/caption]


Last year we topped out in early May, only to have an ~8% sell off as a result of fears relating to Europe’s Sovereign debt crisis, only to see those losses recaptured by early July as it appeared the situation with Greece had cooled.  We could be in that phase right now…….But the disaster scenario for our markets came when investors realized that the uncertainty in Europe was having an affect on consumer and corporate behavior….economic activity slowed dramatically and 2nd half 2011 growth estimates were just way too high.

Past Performance Can be an Indication of Future Results