Morning Word 11/09/12: No More Crutches

by Enis November 9, 2012 9:09 am • Commentary

Morning Word 11/09/12:  Dan’s out this morning helping his wife deliver much-needed supplies to areas in Staten Island hard-hit by hurricane Sandy.  I’m the cold-hearted trader at RiskReversal, so I’m subbing on the MorningWord today.

First, a look at the SPX over the last 3 years:



I’ve drawn a horizontal red line at 1375.  The wavy small black line is the 200 day moving average.  We closed below the 200 day for the second time this year.  The first time was a huge head fake in June, from where the market promptly bounced.  But this time feels a bit different, for several reasons:  

  1. The market has no more policy crutches.  Both the Fed and the ECB used (perhaps mistakenly) their most valuable weapons, unlimited QE and outright sovereign bond purchases, respectively.
  2. I’ve documented the relative weakness of the Nasdaq and the IWM over the last month as indicating the Sept high of 1474.51 as a long-term top (see hereand here).
  3. Earnings have been weak for 2 straight quarters, and revenue weakness and subsequent guidance resembles recessionary data (see this Macro Wrap post)
  4. As a result, the market’s rise from 1275 to 1475 was almost entirely multiple expansion rather than better corporate results.  Here is Bespoke’s chart from yesterday to illustrate:


So with the market at 1375, I think there are strong arguments that 1400 will be stout resistance going forward.  However, we are entering a very congested zone of 1325 to 1375 where a lot of trading has taken place in the last 2 years.  So our game plan for the next week is to lighten up on existing short exposure, and look for some short-term bounce plays.  But the long-term uptrend break seems clear to me.