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This is the fourth in a six-part educational series for Trader Kingdom readers.
- Trading Bull Traps in E-minis
- 100 Year Review of the Dow Jones Stock Market Rescue Operations and Secular Bear Market Rallies: A Step Back in Time
- Assessing Market Expectations and Anticipating Market Behavior
- Key Reversal Signals to look for in E-mini's and Treasuries
- Trading Steidlmayer's False Auctions and Candlestick Tails
- Behavioral Finance Modeling in E-mini's and Treasuries
This is an adjunct educational article to Part Three: Assessing Market Expectations and Anticipating Market Behavior.
Early this week, we had bullish input from the Asia-Pacific forum over the weekend, a fraudulently bullish retail sales number on Monday along with a speech from Bernanke on Monday that was construed as bullish (it’s all about perception, and perceptions remained glued to the green shoot hypotheses that we come out okay on the other side of this recession. Ok ~ their perception is being bent and distorted by the authorities.) We just have to accept that this distorted cognitive bias has quite a powerful affect on the stock market and use it to our strategic trading and investing advantage.
For the most part, we want to be positioned in the same direction as the distorted biases advancing the green shoots hypothesis, but be quick to shift to a defensive or aggressive posture when their biases will be exposed as not aligned with reality. (Without being too quick, this is a reminder to myself.) Traders and investors alike must respect the strength of the momentum provided by green shoots stimulus. The momentum has created 5 short term rolling tops thus far this year since June. Based on a poor data showing up this week and next, the SP500 is probably forming a 6th rolling top in November as I write.
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No matter the reason for the pullbacks to date, the momentum of the bullishness just keeps “welling up.” There has not been one clean break to the downside. This is a function of the momentum behind the stimulus and it also indicates that the so-called buyers [algos, and HFT systems] are nowhere near done buying this market. They simply have no fear. Still, all my reports this week have been hinting that the reality of the economic data this week and next will not be aligned with the rose-colored green-shoots hypotheses that all economic data must be and will be above average, just like all the kids from Lake Woebegone.
Monday we got a bearish NY Empire survey. The market looked past that because after all, it was at least still moving forward, in a backwards sort of way and it was still getting a boost from the misleading headline retail sales number and the Asia-Pacific forum. Tuesday we got a bearish Oct IP report, suggesting IP is only inching forward or moving forward in a backwards sort of way.
Then, today, we got a report from housing starts that fell more than 10% behind last month’s housing starts. That was an unpleasant surprise too. But still, by end of day the broad market landed on its feet. Here are three reasons why. First, the healthcare bill is to be unveiled tonight by Senator Reid who is both pleased and cautiously optimistic. This explains why Healthcare was up 0.5% and Pharma 1% today, while all the stock sectors were down except financials also up almost 1%.
To wit, from the Daily Kos (a great poli-blog site with timetables we can use even for this weekend):
The CBO score on the merged Senate bill is expected to be released early today, and Harry Reid is reported to be pleased with what he's seen so far. The Senate Democrats will meet today at 5:00, where Reid will unveil the bill to the caucus, most of whom haven't seen the combined bill yet. Brian Beutler reports that "Reid may give the public 72 hours to review the bill before holding a cloture vote on a motion to proceed this weekend, though he may call for that vote slightly earlier." WaPo reports that Reid is "cautiously optimistic" about having his 60 procedural votes.
Secondly, market participants have been conditioned since the summer to enjoy less bad jobless reports (see chart below), even though economists expect 3000 more initial jobless claims than last week.
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Third, economists also expect Philly Fed mfg to improve from 11.5 to 12. Economists will almost certainly get that wrong since they got the NY Empire and the IP wrong this week, economists are an odds on favorite to strike out this week on all their mfg forecasts. This is a tell that their Q4 expectations will generally disappoint if this keeps up.
Thursday should be a down day for the broad markets even if it looks up overnight or at the open as is its usual tendency. However, a day long buyers strike would not surprise by the time Philly Fed comes out. But, the healthcare weekend warrior reformers will be pushing to give Obama a victory vote on healthcare this weekend, and if that were to happen, the initial response might be positive in the market. Remember, it might be bad for small businesses and such, but big business will be richly rewarded, (think Big Pharma and Insurance). Why do you think Pharma was up 1% and MRK nearly 3% today?
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But, though there may be a bit of cheer from the healthcare reformers, all is not going to go pleasantly next week. Economists are even expecting Nov 24 consumer confidence report to improve to 49 next week from 48 in October. It may be a bit of a broken record, but it bears repeating the consumers felt conditions were worse than ever in October. Worse, the November Michigan Sentiment when reported last week also reflected the fact that consumer felt both present conditions and the six month outlook worsened. So, the Nov 24 Consumer Confidence stands little to no chance of upticking on Tuesday. And just how well do you think they will take a 60 bps downward revision in Q3 GDP on Tuesday Nov 24, in part because of the 0.8% downward revision in Sept retail sales.
Looks like consumer confidence peaked in August and Sept, coincident with cash-for-clunkers program ending in August.
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As for the stock market, the Nov 11-18 triangle still looks like the Oct 14-21 Bermuda Triangle. Note the triangles were from Wednesday to Wednesday. Near term it is very tough to think of buying this market ahead of Nov 24-25.
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For more from John Bougearel, visit Structural Logic |
