Technical Update - Thursday, October 31

KRUGER INSIGHTS THURSDAY OCTOBER 31, 2013

PLEASANT SURPRISE - It was certainly refreshing to see the Fed keep its cool on Wednesday and not overreact with an overly dovish statement in light of some concerning developments over the past several weeks. Overall, the tone of the Fed was much less dovish than the markets had been looking for, with no mention of any distress over the debt ceiling fiasco, and the elimination of a key phrase from the previous statement. “The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.” The elimination of the “tightening of financial conditions” portion of the statement suggests that a Fed taper might not be as far out as the markets had been hoping for. It’s actually funny when you think about it. The stock market rallies to fresh record highs on news that the government shut-down and debt ceiling uncertainty has been resolved, and also wants to continue to rally on the hope that there is still a lot of uncertainty surrounding these issues that would deter the Fed from tapering any time soon. Quite the paradox I’d say.  

HAVE IT OR EAT IT – Bottom line – You can’t have your cake and eat it too. Somethings gotta give. In my view, stocks have run way too far way too fast, and the equity market is severely disconnected from reality at this point. We need to see a major correction here to allow for normalization and I believe this correction could be as much as 20%. As I have said in recent commentary, a profit is never a profit until it is realized, and all those market participants long the market over the past several months, will only benefit from these longs if they sell out of their positions. I think the materialization of this fact, along with the actual pricing in of a Fed taper will be what really starts to open a major liquidation in the equity markets in the days and weeks ahead. This in turn should weigh on correlated risk assets like the commodity bloc currencies and emerging markets. Elsewhere, in light of the above, I am still not convinced that USD/JPY is really ready to break out just yet, and we still could see some weakness there, Meanwhile, keep your eyes on the EUR/CHF cross rate as an additional barometer for risk appetite. Should this cross come back under pressure, we could see additional strain on risk assets. It is the final day of trade for October, so watch out for those end of month flows. 

Technical Update - Wednesday, October 30

KRUGER INSIGHTS WEDNESDAY, OCTOBER 30, 2013

By: Joel Kruger 

Unhealthy Momentum - Wow! This rally in US equities has just been amazing. As I write this piece, ahead of the European open, we are still pressing fresh record highs. Simply unreal that despite the major event risk due later in the form of the Fed, the market is completely content on retaining its unwavering bid tone. This has been a notable theme in recent weeks, with the stock market easily dismissing any event risk in favor of fresh buy opportunities. And all of this now culminating with today's Fed decision. Though it seems as though as much dovishness that could be priced into the market has already been priced in, apparently this is not the case and we are still seeing demand on the expectation that the Fed will somehow come out even more dovish than forecast. There have been those on the Fed expressing serious concern with the asset bubble that has been created, but the combination of the debt ceiling uncertainty and latest employment data have forced even these hawks to loosen up. Still, at the end of the day, the story is the same. The stock market is rallying because things are NOT GOOD. The stock market is trading at fresh record highs because the central bank needs to still maintain aggressive emergency monetary policy measures over 5 years after the crisis began.





Wait For The Break - To me, there is nothing sensible about buying at current levels, and while I commend those that have profited from the moves, as a contrarian, this type of trade simply isn't in my bones. I took my shot on the short side of the market earlier this year and paid the price, but this will not discourage me from taking another shot when I feel the opportunity presents. Technically, hourly, daily, weekly and monthly studies are all overbought, and this type of confluence is highly unusual and extremely bearish. Still, the only responsible strategy right now is to wait for confirmation and sell on a downside break. I have revised my short recommendation, raising the entry level from 1740 to 1755. I have an S&P sell order in place at 1755 and will happily take another shot on a break to this level. Should this trade trigger, my stop-loss will be only to exit the trade on a daily close above whatever Wednesday's high ends up being. I will leave my objective open. Currency markets remain far less interesting at the moment, though I suspect once volatility picks up in equities, this will change. I have however been delighted with the retreat in the New Zealand Dollar and at least risk correlated currencies have started to fall back into line. Good luck out there today.

Technical Update Tuesday, October 29

KRUGER INSIGHTS TUESDAY, OCTOBER 29, 2013

By: Joel Kruger 

At The Core - So many of you might be wondering why I have spent so much time talking US equities and not enough time talking currencies. The simple answer is that the US equity market is all that matters right now. Given the entire market is fixated on the Fed, and given the Fed has used the equity market as the vehicle to help stimulate recovery, everything then comes down to the direction in the US stock market. This fact has become ever more apparent in recent days, with the US equity market seemingly unwilling to pull back from record highs in any way, despite no other clear catalyst for an offerless market other than expectations for continued ultra accommodation from the Fed. The most fascinating thing to me over the past few weeks has been the stock market's inability to even soften on profit taking ahead of event risk. Whether it is concerns over the debt ceiling outcome or nerves ahead of the monthly US employment report, it doesn't seem to matter. The notion of repositioning ahead of event risk has gone out the window, and instead of profit taking, the market has resorted to a pre-event risk consolidation by record highs. Again I stress that this type of price action is highly abnormal, although one would expect highly abnormal price action in response to highly abnormal Fed monetary policy.

Nothing Changes- Yet I do believe in the cyclicality of markets and do not subscribe to "the world has changed and things are different now theory." If the price action looks abnormal and seems well overdone, then it stands to reason that the market is actually overdone and will indeed undergo some form of major correction. The S&P has now exceeded its average monthly range by just under 1.5x, and longer-term technical studies continue to warn of a major top. While I can not say that this top will be today or tomorrow, I am sure as I am about anything, that there will be a serious liquidation soon enough. My recommendation is to keep a close watch on the S&P and wait to see if the market breaks back below 1740. This level in my view is the key level to watch, and could act as the technical catalyst for the start to something real big. On the currency front, the Euro could stall out soon enough, but will probably need to test major falling trend-line resistance around 1.4000 before it does. Meanwhile, I suspect that the anticipated liquidation in risk assets will have a favorable short-term influence on the Yen, and I am looking for one more sharp intraday pullback in USD/JPY into the 95.00's before looking to establish a meaningful long position in this market. Elsewhere, look for commodity bloc and emerging market currencies to start to come back under pressure following this latest multi-day rally.

Technical Update Monday, October 28

KRUGER INSIGHTS MONDAY, OCTOBER 28, 2013

By: Joel Kruger 

Same Old Story - If it wasn't already more than clear over the past several years, months and weeks, price action over the past several days has certainly sealed the deal. There is absolutely nothing else driving the US equity market and risk assets other than Fed policy. In fact, the direction in the entire global financial markets is contingent on Fed action or inaction. In recent sessions, we have barely seen any pullback at all, and the market continues to push to fresh record highs. Though there have been many headlines in September and October that could easily be weighing more significantly on US equities, the market has easily shrugged off each one of these risk negative stories on the expectation that this only means the Fed will do nothing in the way of reversing policy.

Wait For The Break - Last week, I had highlighted 1740 as the key level to watch below in the S&P, and yet, even though the level was a stone's throw away, it was never breached and we continued right into the end of the week to test fresh record highs. Yet, this price action is now more unhealthy than ever, and it almost feels like it is all about to unravel. I am really not sure how much more can be priced in at this point, with the markets now fully prepared for the Fed to stay on hold well into 2014. So with this fact behind us and no other fundamentals truly supportive of risk assets, how much more can we run before bulls smell the end of the line and decide to head for the exit? Surely it can't be much longer. Still, selling the rally has not proven to be an effective strategy, and instead, I prefer looking to sell into a downside break. S&P 1740 is that key level to watch this week, and should we manage a break, I would then recommend taking another shot. Until then, keep that cash on the sidelines.

Technical Update Friday, October 25

KRUGER INSIGHTS FRIDAY, OCTOBER 25, 2013

By: Joel Kruger 

ONLY THE FED – I’m not sure where things will be when you are reading this piece, but at the time of writing, markets are making sense to me. US equity futures are off a bit, the Franc and Yen are outperforming, while Kiwi and Aussie are lagging. But overall, nothing has really changed and risk assets continue to be very well supported on Fed policy expectations. Proponents of major equity weakness have all but given up trying to pick a top, and there is a growing consensus that the stock market will never pull back again. After all, there have been plenty of fundamental justifications for a very well deserved reversal in US equities, and yet all of these justifications have been dismissed without hesitation in recent weeks. It doesn’t matter that there is now a disturbing divergence between the real economy and financial markets, all that matters is that the Fed will forever be there to incentivize additional upside in stocks. The most amazing development has come from the bullish camp, where you don’t even hear any “attractive valuation” or “favorable growth prospect” talk any more. Even bulls have conceded they are in this trade now purely because the Fed is telling them to be there and they will not exit until the message changes. Nothing else matters. Only the Fed.

A PROFIT IS NEVER A PROFIT UNTIL… – But a profit is never a profit until it is realized, and investors that have taken advantage of Fed policy through the stock market, will not appreciate this advantage until they actually book profit. If this is true, it stands to reason that with Fed policy arguably fully extended and stocks at record levels heading into the final weeks of the year, it could be a good time to start to think about actually realizing these profits. Throw in the fact that evidence of the outperformance in stocks translating into stimulus for the real economy has been lacking, and it could be argued that now would probably be a great time to be heading for the exits. The whole idea of zero interest rates and easy policy was to inspire a rally in risk assets that would then trickle down into the real economy. And yet, the only thing that has been realized to this point are the dangers of liquidity traps. Though money is now free, these benefits have only manifest by way of the stock market, and haven’t really worked into the real economy. Those that have been able to take advantage have done so and those that need to take advantage have been mostly shut out.

LOOKING IN THE WRONG PLACE – What it all boils down to is that everyone is trying to figure out what that big catalyst will be that ultimately disrupts this goliath rally in equity markets. But maybe we are thinking too hard about this one. Maybe we are looking in the wrong places. It could be this catalyst won’t present in the form of a specific fundamental trigger, rather it will come in the form of something as simple as profit taking. After all, there was no fundamental trigger to incentivize the rally to this point (just Fed policy), so why then won’t it be something as simple as bulls deciding to close up shop, cash in their lottery tickets and head for the exit. Everybody has been so fixated on the impacts of a Fed exit on the global economy, and yet, perhaps we should be more worried about the impact of a stock market exit on the the global economy. If the Fed’s strategy for recovery has been to inflate the stock market, what happens when the stock market is no longer inflated? The money that was supposed to trickle down is trickling down even less, and those that were struggling to get by with free money, will only struggle more as longer-term fears of inflation start to finally become shorter-term realities. Right now, S&P 1740 is the kel level to watch. With the market so sensitive to even the slightest of pullbacks at this point, the short-term level of 1740 becomes critical. I would even go as far as to say that a break and close below this level could very well be that catalyst which opens the profit taking flood gates. Until then, stand aside. 

Technical Update - Thursday, October 24

KRUGER INSIGHTS THURSDAY OCTOBER 24, 2013

By: Joel Kruger 

TOO OBVIOUS – So yesterday, we finally got a bearish close in the S&P, with the market also ending a sequence of 9 consecutive daily higher lows. On the surface, this is clearly a bearish development. However, more often than not, we need to be careful with glaringly obvious bearish reversal days, as the markets are quite capable of negating such patterns. Still, the price action was bearish, and has potentially set up the next great short trade. The critical level to watch right now is yesterday’s low just ahead of 1740. Should the market take out this level, I would expect this to trigger a more significant bout of profit taking and accelerate declines. Until then, best to stay sidelined and wait for this confirmation, as attempts to sell rallies in this relentless bull market have proven to be nothing short of an exercise in futility. Still, so long as your risk management is sound, there is nothing wrong with taking more shots on the short side.  

KEEP SHOOTING – When I was younger, I was a basketball player and loved to shoot the ball. Some games my shot would be off and wouldn’t feel right. When that happened, I knew that the best thing to do was to try and get the ball in my teammates hands. But most of the time, my shot felt good, and even if the ball wasn’t dropping through the hoop, I would keep on  shooting until eventually the ball did go down. It didn’t matter to me whether the ball went in the hoop or not, all that mattered was that it felt right. I apply the same principles to my trading. I do my analysis and if it feels right and makes sense, I take my shots. Right now there is no clear shot. But if we manage to take out Wednesday’s low, I will let it fly. At this point, most bulls have conceded that it less about the fundamentals and all about the Fed. But these bulls will tell ya…”hey man I hear ya…but ya can’t fight the Fed.” This is certainly true, but at current levels, I also wonder how much fight the Fed has left?  

THE RECOVERY OF 18 – Again, the Fed has exhausted all of its resources, and the only tool left in its bag is time. The markets know this and have been pricing this in over the past few weeks. If markets are truly forward looking, it stands to reason that once the reality of a further out taper is fully priced in, there should be nothing left to support the equity market. Or maybe I am just dead wrong with my vision assessment and the market can see all the way out beyond the Fed exit and is already pricing in the great recovery of 2018!! I guess I need to disclose right not that I am not an Optometrist. As I write this piece ahead of the Thursday European open, I am noticing one rather compelling development with the intraday price action and it will be interesting to see how things play out. Generally speaking, it isn’t until later in the day when the US session gets underway that markets push in one direction or another. I have found this to be the case particularly when markets have extended into untested waters. So I find it a bit precarious to see Asian and early European market participants committing back into risk so easily. But remember, do nothing until Wednesday’s S&P low is taken out. A break of that low will be a defining moment. 

Technical Video Wednesday, October 23

KRUGER INSIGHTS WEDNESDAY, OCTOBER 23, 2013

By: Joel Kruger 

AT WHAT POINT? – Supporters of the latest rally in asset prices will tell you that so long as monetary policy remains super accommodative, the only place for these asset prices to go is up. They would tell you that it really doesn’t matter where the fundamentals are. But does this really make sense? At what point does the correlation break down? At what point is the artificial support from the Fed completely priced in? And once we get to that point, what then is left to keep these asset prices propped up? I would argue that once we get there (and we could very well be there now), the fundamentals will come screaming back into play, triggering a massive capitulation trade. The ascendancy of US equities to record highs on the back of a weaker NFP report, only highlights just how disturbing this relationship between asset prices and bad news has been.

CHARTS FOR THOUGHT – Despite all of the geopolitical, structural and cyclical risk to the economy, the equity market has managed to easily dismiss these risks on the actions of the Fed. But this just doesn’t feel right, and if it doesn’t feel right, it probably aint. I keep thinking about life in comparison to the stock market. If I were to personify the stock market, I would liken it to an ungrateful homeless person rescued from the depths of despair and offered salvation by way of food, fresh clothing, warm food and shelter. The homeless person can not appreciate how lucky he is to have been saved and only looks to see how he can take as much advantage of the situation as possible. There is simply no fundamental justification for the rally in risk assets to current levels, and monetary policy is the only driver of this madness. Zerohedge put up a great post to illustrate this fact and I think it is worth a good look.

TALE OF THE TAPE - Technically speaking, monthly studies are overbought on the S&P, we have finally taken out stops above the previous record high at 1735, and have managed to clear psychological barriers at 1750. Some rising trend-line resistance from the May peak has also been easily breached, and all of this begs for a healthy corrective retreat. On the daily chart, we have put in 9 consecutive higher lows, and heading into Wednesday, 9 out of the last 10 days have been up-days. A break back below 1740 on Wednesday would negate this bullish sequence and perhaps act as the necessary catalyst to get this market moving in a more sensible direction. The US equity market is the most important market to watch at the moment, as this is a market in the one asset class that has failed to react to any concerning fundamentals in recent months and even years. On the currency front, the market seems to be falling into line, and things are definitely making some sense on Wednesday. At the time of publication, the Yen is the strongest major currency on the day, while the higher yielding commodity currencies are getting hit the hardest. This is a welcome development. The weakness in the New Zealand Dollar is quite welcome, and I have been building back into my short trade. I am also looking for one more sharp pullback in USD/JPY so I can take advantage of the longer-term bullish outlook and buy into a dip. Ideally, it would be great to pick this up somewhere in the 95.00′s. Elsewhere, keep a very close eye on EUR/CHF. A pick up in uncertainty and broad risk liquidation could very well pressure the rate back into uncomfortable territory around the well publicized 1.2000 SNB figure. 

SIMPLICITY IS GENIUS - I have always tried to keep things simple and do not appreciate those who try to teach and explain over my head. There is nothing that can’t be easily explained if it is taught by someone who truly understands what they are talking about. If I do not understand something, I will ask someone to explain it to me like I am a 4 year old. It is amazing how much clearer it all gets when explained like this. Ray Dalio over at Bridgewater, one of the world’s premier hedge funds, took the time to break things down and explain just “How The Economic Machine Works.” It is a wonderful video and I would recommend that all of you take the time to watch. 

KRUGER INSIGHTS TUESDAY, OCTOBER 22, 2013

By: Joel Kruger

UP IN THE AIR – A very stacked economic calendar on Tuesday, and as such, probably not the best day to be establishing any meaningful positions. Clearly the postponed monthly US NFP number will be at the center of everything, and we could see a surge in volatility on the back of the print. The US Dollar has now reached a point where it must decide whether it wants to mount a comeback, or really let go and depreciate further. EUR/USD is testing some major falling trend-line resistance off of the record highs from 2008, and a push towards 1.4000 over the coming days would compromise the integrity of this longer-term downtrend. It is still unclear in my view whether this latest slide in the buck is a risk positive or risk negative reaction. It could easily be argued both ways. On the one side, one could argue that the ability for the US government to come out with a resolution on the debt ceiling, has inspired a fresh wave of confidence and market participants are rotating back into risk assets. On the other side, it could also be argued that this has been a risk negative reaction, with the issues in the US not really being put to rest and only kicked down the road to be dealt with again in a few months. On this rational, market participants have fled from the US Dollar as uncertainty over the fate of the currency escalates.  A bearish reversal day in NZD/USD after the market poked above 0.8500, could be offering a warning sign that the buck is in fact poised for broad recovery on risk off themes, but it is too early to tell.  

CONSIDER THIS – Of course, US equities remain a central focus, with this market showing no signs of let up. The S&P has been recording record highs on a daily basis, and there doesn’t appear to be anything that can stop the momentum. I am on the side that argues the fundamentals are not supportive of such an aggressive move, and the only thing keeping this market elevated is the expectation that Fed policy will remain ultra accommodative well into 2014 without any move towards a taper. So the only way I see real risk to equities pulling back sharply today is (ironically) if the NFP number comes in much better than expected. One interesting scenario would be one in which the employment data is really strong and the US Dollar sells off. This would be even more equity bearish as it would tell the Fed that their key indicator of unemployment is improving, while at the same time, the risks to elevated inflation are on the rise. This would force the Fed into being a little more aggressive with its taper timeline. Of course, this scenario is only one of many that could play out, and the reality is that it would be difficult to see a situation where the number is as expected or worse and the market doesn’t stay well supported on the easy money play. I do however believe that the stock market is due for a major bearish reversal in the days ahead, and am just wondering what catalyst will ultimately fuel this very necessary healthy corrective pullback. Sometimes these catalysts come from the least expected places. Only time will tell. 

KRUGER INSIGHTS MONDAY, OCTOBER 21, 2013

By: Joel Kruger 

THE MARKET GIVETH AND THE MARKET TAKETH AWAY – I am on the road today, so apologies in advance for getting right to the point and keeping it quick. Just remarkable how risk assets have been so well supported in recent weeks despite some unnerving headwinds. Unfortunately, I have been forced to cut most of my losses and reduce exposure both in my Kiwi and S&P shorts. The past few months have been challenging to say the least, and I have done a good job eating into a chunk of profits. Still, this is the way markets go, and overall, it has been a good year. The best part is, the year is still not over and I believe there will be some great opportunities in the final weeks. 

STACKED CALENDAR – I am still looking to re-establish some meaningful short risk asset exposure, but at a very minimum, we will need to see a break and close back below NZD/USD 0.8440 and S&P 1730 to encourage these prospects even a little bit. I am also looking to reestablish a meaningful long USD/JPY position, but would like to see one more short-term pullback to buy into. USD/JPY has been in a contracting range over the past few months that has resulted in a triangle formation. When this thing finally breaks, the market should easily surge back above the yearly high at 103.75 and towards 110.00 over the coming months. Looking ahead, the economic calendar is stacked this week courtesy of the recent US government shutdown. I would be on the lookout for this economic data risk to potentially act as a catalyst for a surge in volatility. 

KRUGER INSIGHTS FRIDAY, OCTOBER 18, 2013

By: Joel Kruger 

MAJOR RESISTANCE AHEAD – We are finally starting to see a bit of movement in the major currencies, with the Euro breaking out of a multi-day consolidation against the buck and pushing to fresh multi-week highs beyond 1.3650. The market now has its sights set on the establishment above the yearly high from back in February at 1.3710. Technically, things will get even more interesting if the Euro actually manages to hold above 1.3710, as the longer-term dynamics come into play. If we look back at EUR/USD from the 2008 record highs to present, it is quite clear the the market has been locked in a downtrend, putting in a series of key lower tops. The downtrend resistance line off of that move now comes in around 1.4000, suggesting that we could see another topside failure around the major psychological barrier. So even if we do establish back over 1.3710, there is a real possibility that any additional upside from there will be limited to the 1.4000 area. As such, the best play right now is to stand aside and wait to see if this market can race towards 1.4000 over the coming sessions. At that point, interday studies will most likely be tracking in overbought territory, with the market also testing major longer-term trend-line resistance. This will be the best time to take a shot at fading the strength. The key level to watch below comes in all the way down at 1.3460, and only a break back under this support would alleviate immediate topside pressures.

HOW TO RECONCILE? - Fundamentally, it has been difficult to reconcile the recent price action. Is the US Dollar in decline because market participants are feeling better about taking risk now that the US government resolution is behind us and Fed policy is likely to remain as is into 2014, or is the US Dollar under pressure because the markets realize that the US government resolution was only a temporary fix and that the structural issues associated with a ballooning debt crisis, elevated unemployment, and stretched to the max Fed, do not make a good recipe for wanting to be anywhere near the US Dollar? While the reaction in the US equity market on Thursday might suggest that it is the former, I would also not rule out the latter. Price action in the equity market has not served as a good barometer for what is really going on. We all know that stocks have been driving higher on Fed support, and nothing else matters. So long as monetary policy stays as is, stocks will be inclined to push higher and higher as ridiculous as this sounds.

A RELIABLE INDICATOR – I would however suggest that the price action in one currency market could actually offer some perspective on Thursday’s price action. If we look at the price action in EUR/CHF yesterday, we can see that this risk sensitive cross rate, was actually lower on the day. Given the broad sell-off in the buck and rally in stock prices, it would have been logical to assume that EUR/CHF would be tracking a good deal higher on the day with the risk on correlations. And yet, this was not the case. EUR/CHF was at one point down a good amount on the day, and though recovering from the lows, still managed to close lower. My point with all of this is that we should not be thinking that we are necessarily back in risk on territory. To the contrary, it is quite possible that we are in the final panic rally in stock markets before everything comes crashing down. As for the US Dollar, I would not count it out just yet. Though we may very well see additional USD weakness in the sessions ahead, when US equity markets finally relent (and they will), I suspect this will send ripples into the global economy that fuel more risk liquidation abroad inspiring a flight to safety mentality. This should ultimately still end up benefiting the buck.  

KRUGER INSIGHTS THURSDAY OCTOBER 17, 2013

By: Joel Kruger 

WHAT LIES BEYOND THE IRRATIONAL? – So now it is all behind us…well at least for a few months that is. That’s right. All of these issues which forced the government shutdown and debate over the debt ceiling, will be resurfacing in early 2014. But the market is only concerned with the right now, and right now everything is amazing. Let us all rejoice in the “let’s push it off and it will all go away strategy.” US equities have charged back near record highs and are not bothered by any of this. As remarkable as it is, it has become disturbingly apparent that stock market participants will not stop buying until reality actually slams them in the face. So for now, the US economy has avoided the threat of default and will be accumulating a federal debt of around $17 trillion. I guess why wouldn’t the stock market be at record highs? Silly me. We have now officially transitioned from the world of irrational and it will be interesting to see what lies beyond. I wonder what Keynesian economics would have to say about the relationship between the “super irrational” and solvency? 

GUN TO THE HEAD TEST – The key level to watch in the S&P right now is 1695. A break and close back under this level would be required to alleviate immediate topside pressure and restore a sense of credibility back into the market. Until then, take a step back and wait for clarity. Sometimes when looking for clarity, I like to relax, chill out, and then take the gun to the head test. What exactly is the gun to the head test? Well…I pick two levels that are equally far apart in opposite directions from the current market price, and I choose which level would be hit first if a gun were pointed at my head and I was forced into making such a decision. This is of course a lot more fun than pricing it out through actual *probability analysis. So I ask you all…if someone were pointing a gun at your head and said pick which level you think will be hit first…S&P 1800 or S&P 1640..what would you choose? I am of course in the ridiculous camp of 1640. But at least if I am literally dead wrong, the stock market will be at fresh record highs and everything will be amazing!! An interesting hedge to say the least. 

A TOP CLASS MOVE – There is no debating the fact that I have been infected with a severe case of cynicism. It is a terrible disease and I wish it on no one. Life is so much darker now and I can feel the side effect of madness digging in deeper with each passing day. I did however come to realize one obvious error in my ways over the past several days. It has become clear that if you see an overextended market and establish a contrarian view, the best way to establish this view is to not really establish the view at all. What do I mean? I have noticed that a lot of the big hitters in the market get credit for calling tops and bottoms without actually taking on the risk of being openly exposed at the top or bottom. The secret is that when you think a market has topped out, you need to get on television and say that you are reducing your long exposure. Similarly, when a market is crashing and you are getting long, you need to come out and say that you are reducing your short exposure. What a brilliant move! This way, you always look great without having to really put your neck on the line. Of course, don’t listen to anything I am saying today because I am riddled with infection. 

*According to actual probability analysis courtesy of @BradUrias (using ThinkorSwim), I might not be so crazy after all. Go figure. “Check out the big brain on Brad.”  

KRUGER INSIGHTS WEDNESDAY, OCTOBER 16, 2013

By: Joel Kruger 

KICKING THE CAN – Ian Bremmer had it right on Tuesday when he tweeted “if there’s still hours before a default, I’m not worrying about it. Call me when we’re down to seconds.” The whole melodrama is nothing more than a pathetic and embarrassing charade, and undoubtedly, there will be a resolution before time expires, so that the US government can once again swoop down and save us all from yet another unnecessary short-term crisis. The government gave us Syria and saved us from Syria, gave us a taper and saved us from taper, gave us Larry Summers and saved us from Larry Summers, and has now given us the threat of default and will save us from default. In Jay Carney’s most recent press conference, a reporter asked “when does the clock run out, just so I can be ready? Is it at the stroke of midnight on Wednesday or the stroke of midnight Thursday?” All of this has turned into a big joke, but has done the good job of diverting attention away from some legitimately threatening medium and longer term structural imbalances. Clearly, this has been yet another example of once again kicking some of the real issues down the road, so that we can avoid dealing with necessary realities and deceive ourselves into being satisfied with a short-term fix.

LET’S CALL A SPADE A SPADE – There are actually some very good reasons to question current strategies, and the Republicans that have been holding out should not be vilified as they have been (though they are not entirely innocent either). Both sides are responsible for what is going on. There are some legitimate uncertainties associated with the impact of Obamacare and another raising of the debt ceiling that should not be so easily dismissed. When the President says to the Republicans in the House “don’t hold the government hostage, do your job, re-open the government and raise the debt ceiling so that we can pay our bills, and then we can talk” his appeals should not be mistaken as someone without an agenda, acting purely on behalf of the best interests of the American people. While I am not saying he doesn’t have sincere motivation, it also is quite obvious that he is a superb tactician. In other words, let me get done what I need to get done, and then once you have zero leverage, we will sit down and talk. That doesn’t sound entirely fair either. So both sides are not innocent in this game, and we need to call a spade a spade.

WHAT KEEPS JANET YELLEN UP AT NIGHT? – The facts are that the US and global economy are facing a major debt crisis that has only been exacerbated through extraordinary monetary easing measures and government stimulus efforts over the past 5 years. And now that the debt ceiling is about to be raised yet again, and monetary policy and government stimulus efforts are fully extended, who will be there to keep us propped up this time around? The combination of excessively burdening debt and overextended Fed policy should not make for a pretty outcome, and the strategies employed to rescue the economy back in 2008 are now quickly losing influence. The thought of rising inflation and a still elevated unemployment rate is something that should be keeping Janet Yellen up at night, and I fear that she will be in for one of the toughest terms a Fed Chair has ever endured.

THE UNSOPHISTICATED OUTLIER – All of this tension has been presenting in various asset classes, with currency, fixed income  and commodity markets reacting in some way or another to these very real threats. Yet, the US equity market has been the one major outlier. It wouldn’t be a stretch to say that of all the asset classes mentioned, US equities are probably the least sophisticated. And so, we have seen this market on a one way track to heaven over the past five years, with all of the price action driven by a government and Fed policy response that has forced market participants into this asset class on incentive rather than actual underlying value. In an effort to save the economy from a massive bubble back in 2008, the government and Fed have only delayed the crisis and have perpetuated yet another crisis in the form of an asset bubble.  

A WHOLE LOTTA BULL - As sure as I was that the Yen would collapse back in 2012, is as sure as I am right now that the stock market is on the verge of a serious corrective adjustment. There is simply nothing left in the tank in the way of artificial support and without this support, I believe “a hard rain is a gonna fall.” Now I know there are many of you out there who would say betting for the end of the world has been a failed bet since the beginning of time. But let’s be very clear. I am not betting for the end of the world, and simply believe that the type of price action we have seen in US equity markets is well overdone, and that we need to see some healthy liquidation so that the market can normalize. If anything, I am bearish stocks so that I can be optimistic and bullish with the prospects for the global economy. I would go even further to say that encouraging the stock market at current levels is a reckless and irresponsible strategy that will only get us into deeper trouble going forward. Again I remind, we are living in a world where we are talking about a potential US default, unemployment at highly elevated levels, the housing market still far from recovered, interest rates are at zero, and the central bank fully extended. In the face of all of that I ask….Does it really make sense that US equities should sit by record highs?

KRUGER INSIGHTS TUESDAY, OCTOBER 15, 2013

By: Joel Kruger

BUY THE RUMOUR; BUY THE FACT? – What to say? Not a whole lot. You all know how I feel about this crazy equity rally, and it is only a matter of time before the monster comes tumbling down. The strategy of creating a crisis and then saving us from it has worked well for the US administration, and up until this point, there are no signs that things will be any different over the coming sessions. At this rate, once an agreement is reached, the government reopens and the debt ceiling is raised, we could see yet another surge in stocks as it appears the new mantra is “buy the rumor, buy the fact.” It doesn’t matter that larger structural problems are being completely ignored and that we have only just pushed off dealing with yet another crisis a few weeks down the road. All the matters is right now and that right now a manufactured crisis has been averted which means stocks and risk assets can go higher on artificial market momentum from ultra accommodative Fed policy that is still in place because things are not good. The whole thing is completely absurd.

KEY LEVELS TO WATCH – For what it’s worth, the S&P has stalled out for now around the 1715 area which represents the 78.6% fib retrace off of the September record high to October low move. Still, I would now like to see a break back below 1680 to encourage topping prospects and open the door for a bearish reversal. I have been focused more on the S&P and less on currencies of late because I believe that US equity markets are at the center of everything. The fate of US equities will dictate the fate of correlated assets. When US equities finally come under pressure, it should put a lot of pressure on risk correlated currencies. I suspect emerging market and commodity bloc FX will be quite exposed, and I will be looking for good downside follow through on my NZD/USD short. I also think the Yen can still find bids in risk off trade, and will be looking for one more sharp drop in USD/JPY so that I can establish a meaningful long position. I am projecting a USD/JPY move through 103.75 and towards 110.00 into early 2014. 

KRUGER INSIGHTS MONDAY, OCTOBER 14, 2013

By: Joel Kruger

THE PERMANENT CRUTCH – Market participants have come to rely on the fact that no matter how dire any situation may be, governments will now always be there to make sure that there is a fix. We live in a new world where there is no such thing as setbacks with any meaningful impact, and no such thing as consequences with material harm. At the onset of the global crisis back in 2008, it was clear that there would need to be some form of exceptional response from governments and central banks in order to avert catastrophe. Yet, somehow, this exceptional response has become the norm, and investors have grown to not only rely on this fact but demand it. Case in point  - Friday’s close in the US stock market. Though there was no resolution in Washington heading into a long weekend, stocks still managed to close out the day at the highs and also at the highest levels over the past several days.

MISSING THE POINT – The primary explanation for this price action was the very clear expectation from markets that a deal would be done over the weekend. Another explanation could very well be attributed to the round of dovish Fed speak into the end of the week, with various Fed officials confirming the right decision in holding back from tapering at the latest Fed meeting. But there is something so fundamentally backwards with both of these explanations. The first is backwards because it is simply unacceptable at this point in time that the market should be so certain of the outcome in Washington. There are some very deep issues being debated at the moment, and to expect that everything will be ok because that is they way things have been is unpalatable. The second is backwards because dovish Fed speak is dovish for a reason, and that reason is not a good thing. So for risk assets to rally because the economy still needs historic monetary policy accommodation 5 years after the crisis is also mind boggling. While it is true that Fed policy has incentivized and fueled this artificial rally to record highs in US equities, it is also now true that Fed policy is finally fully extended.

DON’T DISMISS THE BUCK – So with nothing left in the tank and the US economy still not back in tip top shape, what now? Well, I believe certain realties are finally about to set in, and these realities should translate into a serious bout of liquidation in risk assets. I have been positioned this way over the past few months, and during this time, we have largely seen a sideways market. But I understand that reversals like these can take time to play out, and I sit back and wait patiently with my short risk portfolio. A word of caution – Lately we have been seeing USD weakness on negative developments in Washington. The market seems to be interpreting any risks associated with a prolonged US government shutdown or US default as a risk on the US Dollar. I do not believe this is a correlation that will hold up over the medium-term, and instead would favor buying the buck on such an escalation due to the Greenback’s status as the world’s reserve currency and preeminent flight to safety play. Bad news in the US means worse news abroad, and if we in fact did see any extended government shutdown or threat of US default, I wouldn’t want to have my money anywhere else but in the US Dollar.