HedgeFundLIVE.com — While I am not positioned, I do not think I would be buying this market today. I have been shorting futures all day.
Here is the issue: I do not believe we properly tested the technical levels on the S&P futures of 1300 and 1289. Yes, we broke through and bounced off of 1292.5, but we did so on exogenous fear. A fear that should still be out there. Nothing has been resolved in the Middle East, and it will not be for some time to come. As rumours fly around, about the death of Gaddafi, the market rallies. I do believe he will be dead in the near term, and yes, the market might rally. But as I said that is just the beginning of problems in Libya.
The rally today is either pure short covering, or again as I blogged about over the last few weeks, “buyers are delusional”. Keep in mind: we will not see oil back below $90 for some time to come. My greatest fear continues to be Bahrain, as it is a test scenario for Saudi Arabia. Iran and Syria continue to grow stronger by the day.
If support levels have been tested, they certainly have not been confirmed. Retail buyers seem to be ignoring exogenous events, but perhaps they should be looking more closely at our own domestic economic numbers. GDP was disappointing, new home sales were light, and the jobless claims numbers have been volatile. While the jobless claims have been getting better over the last 9 months, I believe we may see a real reversal in these numbers. The consumer is not nearly as strong as people perceive. Keep in mind those earnings beats this season were driven by improving margins, not increasing revenues. This is indicative of a weak consumer.
The S&P futures continue to outpace stocks in general. This has been an odd phenomenon throughout the month of February. Early in the month, I thought it had to do with Quant oriented funds unwinding positions. I look forward to seeing the February returns for some of these funds. As the month progressed it seemed like every day they would rally the futures in the last hour of the day. As hedged players continued to fear the dislocation phenomenon and rushed to cover some of their hedges. This exaggerated the phenomenon thus creating a self-fulfilling prophecy. Wednesday and Thursday market behaviour indicates to me that many shorts have covered. The market is not just overbought, it is leveraged overbought. Most traders can take more pain than pleasure. It is why they cover shorts that have been squeezing them prematurely. The lack of large shorts in the market means that any sell off will be aggressive as there will not be buy protection from the shorts. Funds will look to take profits and the market will crack again.
The next crack will take us down to 1289. I will be holding my short S&P futures through the weekend. My advice to the investment community is watch the Middle East and stop ignoring what are systemic issues within our own borders.
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