Tectonic Plates Shifting: Time to Short the Market? UPDATED

An interim bulletin EWT today reiterates the 200% short position. I hadn't commented on it, but that position was pulled in an interim bulletin a few days ago, but today everything is now working out as the January 4 EWT predicted: Dollar up, Gold down, and stocks down. He says go back short. Neely also called the top in a special bulletin today. Suttmeier notes we have broken below the lower trendline of the Hope Rally in the Dow, and if it doesn't recover quickly it would signal a change of trend:

 

For you technical analysts, the drop today is deep enough to end the prior wave and start something new. The S&P got to 1115 and bounced, slightly; that is a key level to watch today. If it breaks, likely we have a "bifurcation" off the top and a much longer and deeper drop ahead.

For you skeptical fundamentalists, note how tectonic plates are shifting globally: 

• ECB likely to have to bail out Greece, and the Euro has dropped below a double-cross of moving averages, pointing to a fall to $1.38
• China's vaunted stimulus (pundits said "China sure knows how to stimulate better than the US!") has caused a huge real estate bubble, with ghost cities, empty buildings, and skyrocketing home prices in major cities - oops! China is the new Japan: Japan 1989
• Dollar is taking off, probably now into wave 3 off the bottom, heading from 78 to over 90 in the Dollar Index
• Earnings reports have been disappointing, and even good ones get faded - and when a market sells off decent reports, the Bear has returned
• Unemployment had a weekly spike, throwing cold water on the recovery
• FHA is tightening lending due to horrifically increasing defaults
• Housing may be in a double-dip down
• Obama is *finally* listening to Volcker and in a huge about-face now wants to reinstate Glass-Steagel
• Democrats in disarray as the "Scott heard around the World" seems to put the stake into Obamunism 

Simply put, the assumptions that drove 2009 up are now up in the air, and the market needs to digest the fallout. Meanwhile outside the US the chickens are beginning to come home to roost. 

In 1930 we had an apparent recovery from the crash, and then slowly developing problems; but in 1931 the crisis came back in the form of banking failures in Europe, and overwhelmed the US economy.  Is history repeating, this time with China as part of the potential brewing crisis?  This chart from today's WSJ shows how the Chinese Stimulus has not gone into real production but into hoarding and speculation, just as in the US:

 

Comments

[cloudslicer]

Interesting that KBE is up today. STI and a few other region banks are up while the market is down 4-1.

I noted the strength in small regional banks yesterday and today more of the same.

Could it just be that this space needs to finish off its wave count to join the rest or is this the start of a trend?

Pretty weird. I guess I shouldn't read too much into two days of price action.

[DG]

I went short Monday afternoon after not trading since November from the short side (or any side, really) and am now sitting with a breakeven stop near the high. If this was the top, I will ride this thing all the way down. A rally that fails to make a new high would be good right about now to bolster that scenario.

If this is a "bear slaughter" as one of the bull clowns said this week would be, bring me some more of it, please.

[JT]

How convenient of you to post your short position AFTER THE FACT.

Do us all a favor and take your "paper-trading" somewhere else.

[Greg]

Mr. P is short 200%. Someone pls tell me how the market can go down.

[Leslie]

Greg -
The same way it's down from the 2007 top perhaps?

[Michael]

Market is starting to rally back a bit due to Barney Frank telling CNBC that the "political" aspect of the Banking Reform legislation being created by Paul Volcker will be killed, and that this reform will be a 3-5 year PROCESS and not a mandate that goes into effect "overnight".

[Greg]

Leslie, the same way I predict with 100% confidence that one day you and I will die? Please. I don't blame Mr. P, he is trying to make a living but I do blame all those who listen to him for trading their hard earned $$$.
There are millions of people who were saying since 2005 that real estate bubble will end bad. How many "really" made money in 2008? A - very, very - slim minority.

[Bird]

DG what is your trading vehicle?

[Greg]

DG, thanks God I am not a bull otherwise being called a clown would make me feel really bad. But if I were I would say there is plenty of liquidity at the system, credit markets started working, corporate spreads have tighten dramatically, companies can borrow relatively easily, yield curve is really steep, mortgage rates are relatively low, USD is not a systemic risk anymore etc, etc. I am not saying that I would make money if I had developed a conviction about the market based on the above facts, but please let me why on earth I would be a clown. Any explanation beyond Mr. P's and Mr. Neely's "forecasting" is qualified.

[DG]

How convenient of you to post your short position AFTER THE FACT.

Do us all a favor and take your "paper-trading" somewhere else.

Although my blog is behind a firewall and is for Neely subscribers only, since I go into major detail using his service as my starting point, I assure you this is not an "after the fact" call. Any number of posters who read this blog and my blog can attest to that, including Yelnick, should he so choose. It would be pretty stupid of me to claim something so easily disproven.

I've posted a bunch of real-time trades on my blog over the past week and all of them have been profitable.

The key is something I figured out during my downtime when I wasn't trading.

I'd explain it, but since you guys don't think wave theory works for trading, what's the point?

Bird,

I trade mostly ETFs.

[DG]

Greg,

"News is always best at the top", no?

I was actually more taking a jab at the other guy who was so sure that bears would get "slaughtered" this week. I think if you put yourself out there with that kind of language and what you forecast doesn't come to pass, you should expect a potshot or two to come your way.

BTW, I'm not saying "the top" is in.

[DG]

I noted the strength in small regional banks yesterday and today more of the same.

Could it just be that this space needs to finish off its wave count to join the rest or is this the start of a trend?

Pretty weird. I guess I shouldn't read too much into two days of price action.

Posted by: cloudslicer | Thursday, January 21, 2010 at 10:45 AM

Could be that those banks are now takeover targets for bigger banks, if proprietary trading goes away and takes a big chunk of profits with it.

[Thor's Hammer]

The waves are practically screaming "Bottom!" here. Get long before the close. Tomorrow begins gap up 3 of III.

[Michael]

FYI: Only 10% of Goldman's revenues come from proprietary trading.

[DG]

Michael,

I doubt that the senior executives at Goldman would be so sanguine about losing 10% of their revenues (and probably a higher % of their profits), should these regulations come to pass.

I also wouldn't think of Goldman when I thought of banks who might look to acquire regional banks.

[Thor's Hammer]

Thor you ignorant turd. You positively make me sick with your dumbass 3 of III garbage you don't even know what you're taking about!!! Do us all a favor and stick your rear up it's own -ss and pull your insides out backwards you snakesh-t smelling cockraoch-scarfing masturbating dipstick loser.

[Bird]

And the rest comes from theft.

[joe]

It did hold the 50day MA on the close - by a hair.

[Mamma Boom Boom]

I said, "By mid afternoon a rally starts." So, do I get an A+ for that? Well, if you look at the Transports or the Naz, yes. Ok, I'll settle for a C+.

[Wakeupsid]

Bunch of buckle head calling TOP again, lol

[upstart]

So...we're in a diagonal aftermath, which means a fairly quick return to at least where it began at 10263.90. Then the rally resumes. That's my guess.

[rr]

Too much technical damage today. I'm in the camp that says 1080 to 1090 is Little Bighorn. Good recap Yelnick!

[Michael]

"I doubt that the senior executives at Goldman would be so sanguine about losing 10% of their revenues (and probably a higher % of their profits), should these regulations come to pass." ---DG

First off, Obama showed his true NARCISSTIC colors today when he wound up getting on his populist podium and painting a picture of banking reform, which incidentally Barney Frank has only been working on for the past year... that provided absolutely very little detail. Moreover, his statements on bank policy did not demonstrate a clear understanding of the causes of the credit crisis.

Conveniently, Obama ignored talking about how the Fed was asleep at the wheel, not too mention did he even care to mention Fannie, Freddie, and how the Fed guaranteed all of the "counter-party" trades of AIG.

Obama did speak of banks no longer having the ability to use FDIC insured deposits to finance proprietary trading. He also mentioned that Banks can no longer own hedge-funds, yet I can only think of ONE SINGLE bank that owns a hedge-fund. That would be BofA and their ownership of Blackrock via their acquisition of Merrill.

Let's face it...
Proprietary Trading did not cause the credit crisis.

Obama's speech was pure political rhetoric. And so much so that Barney Frank had to come on a couple of hours later on CNBC to try and calm everyone down and tell the markets that there would be no "overnight" mandate of such banking reform, but rather a 3-5 year process. Barney Frank made it clear that he was in charge of the legislation, and not Obama or Volker.

Make no mistake, this was a "Dog and Pony" show by Obama to distract public attention away from the fact that his Healthcare legislation is for all intent and purposes, DOA.

That's really the reality of today's events.

As Bill Clinton once said back in 1992..."It's the ECONOMY stupid!"

Unfortunately, Obama is tone-death and he just doesn't get it!

As for Goldman, they can always go back to being an investment bank if bank holding companies are no longer permitted to trade on their own accounts.

[Michael]

The bottomline:

All of Obama's political rhetoric about banking reform will die a "still-born" death in the House of Representatives by the Chairman of the Financial Services Committee... Barney Frank who has 50 times the intellgence when it comes to Main Street and Wall Street.

One of these days, Obama will learn that the two are one in the SAME.

[DG]

I agree that proprietary trading was not the cause of the credit crisis. I'm pretty much appalled at all of the so-called "leaders" in the Western world right now, frankly.

Good article on the profitability of proprietary trading at BofA.

http://www.zerohedge.com/article/did-obama-just-kill-bank-america-prop-responsible-45-goldmans-bottom-line

[joe]

There was a flurry of block trades on SPY after the close and futures really did not drop very much from the closing levels.

I think attempting to short here is dangerous and premature - that is - I do expect it to bounce back up one more time. Just IMO.

Joe

[Michael]

DG,

I must admit that I am rather "wary" of some of Tyler Durden's articles, and his current analysis of BofA and their prop trading. It's downright puzzling why he thinks that he could ZERO out the revenue contribution, but doesn't apply the same logic to zero-ing out the costs as well.

[DG]

Michael,

It's a thought experiment, not a full analysis. Point being to show that, if you simply make the not unreasonable assumption that trading has a higher profit margin than the bank's other activities, every dollar of trading revenue you remove from the bank's income statement has a disproportionate impact on their EPS. When you think of a bank's product mix, the rationale for that assumption is quite sound. He certainly isn't saying that trading is costless, just that per dollar of revenue, it costs less than BofA's other revenue-generating activities.

[Hank Wernicki]

Friday January 22nd
9:30 am

30m paired bottom for the SPY / OEX

child is 11/30

today at the close was the parent

IF it holds ( confirmation ) on the Open it's a Long Entry

[EN]

The market should bottom at the end of the month when a cyclical low is due, then rocket to 1300 by mid-year, then down in the later half of the year.

We can go long with impunity when it crosses 1150 again.

I did go short with Neely (Hourly trade) as I think he is right to be short, at least for the short-term with trailing stops.

DG: I am interested in your blog. What is proceedure to join it?

Great trading to all you lovers and haters out there in cyberspace! (Such venom . . . where is Dow Predator?)

[cloudslicer]

Looks like President O is about to embark on a witch hunt to blame reckless bankers for all the worlds ills.

I hear those 'Mars the bringer of war' drums now as a look at the S&P 500 in the distance.

[j]

All Obama is doing is getting his money by shorting the market. Watch it rally at 1100 after he collects his shorts and goes long to 1150. jajaja your all being RIPPED!!!!

[joe]

The market should bottom at the end of the month when a cyclical low is due... We can go long with impunity when it crosses 1150 again.

Its funny EN, cause I would say exactly the opposite.

Joe

[wakeupsid]

The market should bottom at the end of the month when a cyclical low is due... We can go long with impunity when it crosses 1150 again.

Its funny EN, cause I would say exactly the opposite.

I think its doubly funny Joe, as I would do exactly the opposite too :)

[Hockthefarm]

"Obama's speech was pure political rhetoric. And so much so that Barney Frank had to come on a couple of hours later on CNBC to try and calm everyone down and tell the markets that there would be no "overnight" mandate of such banking reform, but rather a 3-5 year process. Barney Frank made it clear that he was in charge of the legislation, and not Obama or Volker."

Is this the same Barney Fuck-up Frank that assured the American public that Fannie was a financially sound, great American institution just 4 days before it was taken over by the government? Bagdad Bob has nothing on this clown.

Thanks for letting me know Mr Fife is in charge.

Hock

[Hockthefarm]

Peter Brimelow

Jan. 21, 2010,

Crash of 2008 winner says bear market is back
Commentary: Elliott Wave theorist compares short-lived rebound to 1929:

I wrote my first MarketWatch column on Robert Prechter and his family of investment letters devoted to the esoteric Elliott Wave theory. ( See April 26, 2002 column.)

It got a lot of very angry email. Prechter's superbearishness was very unpopular, and that time very unprofitable. I judiciously pointed out that Prechter was trying to spot junctures, the hardest of all market tricks, and noted "the prize for calling one of these epochal shifts is enormous, as it was in the early 1980s" -- when Prechter had been an early bull.

It took a long time. But it happened during the Crash of 2008, during which the Elliott Wave Financial Forecast was one of the very few letters to make money. ( See Dec. 18, 2008 column.)

For a while, it looked as if the Elliott Wave was on a roll (if waves can be on rolls). EWFF was one of the first letters to call for a stock market rebound. ( See March 4, 2009 column.) In mid-summer, it argued that the Dow could reach 10,000 -- but that the bear market would then resume, ending in devastating deflation. ( See June 29, 2009 column.)

Well, the Dow did reach 10,000. What now?

EWFF didn't benefit fully from its prescience because it bailed out too soon. ( See Aug. 31, 2009 column.) Over the past 12 months, EWFF is down 5.05% by Hulbert Financial Digest count, versus a 28.3% gain for the dividend-reinvested Wilshire 5000 Total Stock Market Index.

Note, though, that over the past three years, the letter is up 3.8% annualized versus a negative 5.25% annualized loss for the total return Wilshire 5000. And over the past ten years, the letter is up an annualized 1.39%, versus negative 0.27% annualized for the total return Wilshire 5000. Many more popular letters have done much worse.

What happens now could hardly be worse, according to EWFF. It says: "2010 is the year when the bear market in stocks returns in full force." It compares the situation to the short-lived rebound after the initial break in 1929, and says that "a meaningful close" below 10,489 should see a similar collapse to new bear market lows.

EWFF also expects the spread between high and low-grade bonds to experience "a record widening" and thinks gold will fall "below $680." It does expect a rally in the dollar, but that is merely an aspect of deflationary forces getting out of control. Prechter argues, referring readers to his recent book "Conquer The Crash," that the yield on Treasury bills might actually become negative and for that reason advocates holding greenbacks.

It's difficult to summarize quite why all this is going to happen because Prechter and his colleagues explain it in terms of their complex cycle theory -- which, however, is subject to readjustments and reinterpretation. This is one reason that Elliott Wavers are so roundly disliked by so many investors.

Some good news, though: Prechter says his cycle work suggests that stocks and gold will finally bottom in nominal terms in 2014. After that, gold will outperform stocks. This, he writes, "may indicate a political decision, to be made at that time, to force inflation through currency printing."

Elliott Wavers place a lot of faith in parallel social developments. EWFF writes that gold, which it describes as "a bull market sport," is going into decline although those involved don't realize it:
//
H

[tony]

DG- "The key is something I figured out during my downtime when I wasn't trading."

Hi DG,
there are alot of readers of this blog like me who don't often post but genuinely respect and appreciate your insights. Could you expand on the above?

[EN]

"Its funny EN, cause I would say exactly the opposite.

I think its doubly funny Joe, as I would do exactly the opposite too :)"

Each to his own but I don't know of any serious trader who would short the market as the SPX breaks out above 1150 for a new 52 week high. There is no logical place for a stop loss on such a trade.

[DG]

There is no logical place for a stop loss on such a trade.
--------------------------------------------------------
It's funny you mention this because this is EXACTLY what I've been working on.

So, while I agree with you that there has never been a logical place for a stop loss in the past, I think I have figured it out.

[DG]

Hi DG,
there are alot of readers of this blog like me who don't often post but genuinely respect and appreciate your insights. Could you expand on the above?
---------------------------------------------------------
Tony,

During my downtime, I was able to aggregate data on all of Neely's trades for the past 3.5 years. When I looked at it as a whole, a certain pattern of fluctuation in success rates became clear. In a certain type of market, Neely has about 60-70% winning trades, which I consider excellent, especially with his ratio of the size of winners vs. the size of losers during those periods of about 1.5 to 1, but in another type of market, it goes down as low as 30%, which is actually worse than the proverbial coin flip. Since over the past three and a half years we've spent more time in a "bad" market for Neely's methods, his overall success rate is about 50%. This fluctuation has always been something Neely has been up-front about, so it came as no surprise, although quantifying it really made it concrete just how large it was. Obviously, one of the major reasons for becoming disillusioned with wave theory is exactly this fluctuation in success rates.

From there, I figured out what it was about the market that changed when Neely's success rates changed. Then, I developed a NeoWave-based logic to enable successful trading in those environments. It's early, but the backtesting (I used the April 2009 to now time period as my backtest data, because that's been a period of low success for Neely, as most on this board will know) indicates that I can now be as successful during Neely's low-success rate periods as he is during his high-success rate periods, although this logic requires more trading and a more intense focus on intraday moves than is normal for Neely, because there are more trades triggered and the nature of this type of market requires utilizing more short-term oriented trade management. If true, it will smooth out the fluctuations in trading success, so that across both "good" and "bad" markets for NeoWave, traders using it can get 60-70% winning trades, with very favorable ratios in the size of winning vs. losing trades.

If "the top" is in, which I don't know if it is or isn't, we'd now be re-entering a period when "traditional" NeoWave would work again, in which case simply following Neely's suggested trades will be the best idea.

So, the irony might be that I was finally able, through a refusal to just accept the "fact" that NeoWave was bound to be successful in some markets and not in others, to "crack the code" of the market, but only after the market is getting ready to leave one of those "bad" periods and enter a "good" one. It's OK, though, because the market will re-enter a bad period soon enough and while it's in a good period, Neely is more than capable of recognizing the signs that a trade entry is warranted.

Like many of my posts, this one got a bit longer than you probably would have liked, but I wanted to explain the process, without going into specific details on the mechanics of it.

[Michael]

"It's a thought experiment, not a full analysis. Point being to show that, if you simply make the not unreasonable assumption that trading has a higher profit margin than the bank's other activities, every dollar of trading revenue you remove from the bank's income statement has a disproportionate impact on their EPS. When you think of a bank's product mix, the rationale for that assumption is quite sound. He certainly isn't saying that trading is costless, just that per dollar of revenue, it costs less than BofA's other revenue-generating activities."

I disagree with Durden's analysis.
And I've seen research this morning that shows BofA's earnings taking a mere 3% hit for 2012 if proprietary trading is scaled back to 5%.

By the way, it's not the first time that I have seen him try and "quantify" a situation given a "thought experiment"... yet be completely wrong because he doesn't fully understand how to use the data correctly.

[Michael]

Am buying ACI, BTU, and CNX here.

[Michael]

By the way, 13 days left in Bernanke's term.
A chairman pro-tem might have to take over if he is not reappointed. More uncertainty for the markets.

[DG]

And I've seen research this morning that shows BofA's earnings taking a mere 3% hit for 2012 if proprietary trading is scaled back to 5%.

By the way, it's not the first time that I have seen him try and "quantify" a situation given a "thought experiment"... yet be completely wrong because he doesn't fully understand how to use the data correctly.
-------------------------------------------------------
This article doesn't mention BofA specifically, but gives some more background on the potential for lost profits.

http://www.bloomberg.com/apps/news?pid=20601087&sid=atSX4wqeddVg

I'm not privy to the research you cite, so I have no idea whether it's good or bad. Nor am I going to fully-defend "Tyler's" conclusions, in this case or in any other, without checking his work myself. That said, anyone who's ever done a sum of the parts analysis on a multi-business unit corporation will know that the operating and net profit margins can vary widely among the business units. In the case of proprietary trading, I can certainly see how that would be more profitable than the more commoditized lines of business at BofA or any bank. That you disagree with that as an initial hypothesis makes me wonder if you've ever done analysis at that granular a level. Certainly you wouldn't "zero out the costs" of a business unit to derive an estimate of its impact on profitability. You'd actually form a defensible hypothesis, e.g. "proprietary trading is more profitable than any other line of business at BofA", then find a line of business where they did report revenue and costs more fully, and use that line of business' margins as a floor for proprietary trading, plus whatever information you could get from "pure plays" in proprietary trading and their margins. I have done this sort of analysis many, many times and I suspect "Tyler" has too.

I've read thousands of investment bank reports over the years and they are just starting points for thinking through the issues driving P&Ls. To say that there are instances where those drivers are "opaque" is putting it lightly. Companies are loathe to release too much information to the public, especially when it comes to how exactly they make their money. Release the minimum for SEC compliance and a few nuggets on how the latest strategies are working out and that's it.

If you want to believe that losing the revenue and profit streams from proprietary trading is no big deal, though, go right ahead. Frankly, it's not a big issue for me as I don't trade bank stocks and I only trade based on charts, not news. I just think it's funny that you believe no one else in the world knows how to "use data correctly". Every post of yours has some variation on that accusation and, honestly, if you were that good at "using data correctly", you'd BE Paul Tudor Jones, not WORK FOR Paul Tudor Jones. Give the self-admiration a rest already.

[Mamma Boom Boom]

"By mid afternoon a rally starts."

Looks like I was a couple hours early on that one. Market showing tremendous weakness.

[Michael]

"If you want to believe that losing the revenue and profit streams from proprietary trading is no big deal, though, go right ahead. Frankly, it's not a big issue for me as I don't trade bank stocks and I only trade based on charts, not news. I just think it's funny that you believe no one else in the world knows how to "use data correctly". Every post of yours has some variation on that accusation and, honestly, if you were that good at "using data correctly", you'd BE Paul Tudor Jones, not WORK FOR Paul Tudor Jones. Give the self-admiration a rest already."

DG,

I really don't have time for your frail EGO given that I actually TRADE for a living. The fact that you respond with your typical 12 PARAGRAPH defensive rant anytime anyone disagrees with an undocumented premise that you throw up on this blog speaks volumes.

Had you spent your time much more constructively you'd be making money this morning like I am trading ACI, BTU, and CNX from the long side.

Instead, your frail EGO once again gets the best of you. I think that it's pretty clear to everyone here that you seek a lot of attention, otherwise you'd confine yourself to your blog. Instead, you keep posting on Planet Yelnick with the oh-so-predictable "Look at ME! Look at ME! Look at ME!"

I couldn't care less.
You are now on ignore.

[DG]

Michael,

Please go back and count the number of posts by you and the number by me over the past two months, then tell me who is "seeking attention".

FYI, those "12 paragraph rants" take about 3 minutes to write. When you know what you are talking about, writing it isn't very time-consuming. Duh.

[Dave B.]

Citicorp analyst Keith Horowitz says that the removal of proprietary trading "would have a limited 2% impact on normalized EPS from assuming forced divestiture of private equity," for JPMorgan.

http://www.thestreet.com/_yahoo/story/10665660/1/jpmorgan-unmoved-by-upgrade.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA

Given the above, I get the feeling that Tyler Durden's assumptions and analysis regarding the hit that BofA takes from removing "proprietary trading" is incorrect as well.

[Canadian Money]

I note that so far, the rally off the March 2009 bear low, for the Canadian TSX Composite Index, has retraced 0.598 of the bear market drop from the bull high point of 15,155 (2008). This is close to Elliott's normal 0.61 retracement.

This is an EW milestone/red flag alerting us that the downturn we are now witnessing could well turn out to be a very important market turning point, at least for the Canadian markets.

In comparison, SP500, 1563 high to 667 low, then retracing back up to 1151, 484/896 = 0.54 somewhat less.

[Michael]

Dave,

I think that a lot of people get themselves into trouble when it comes to DEFINING what "proprietary trading" actually is.

Firms like Goldman, Morgan Stanley, and Deutsche Bank do a lot of what is called "customer-facilitation" trading which is taking the other side of the customer's order. It is a trade that is conducted by the investment bank in Principle, as opposed to as an "Agency".

Customer "facilitation" trading comes under the category of "proprietary trading". The firm essentially plays "hot-potatoe" with the other side of the customer's order once they assume it. They usually unwind these "facilitory" trades within minutes of the initial execution from the customer.

But the pure walled-off proprietary businesses at shops like Goldman Sachs that utilize all sorts of HFT and arbitrage strategies and that does not include the customer, only accounts for 10% of what Goldman reaps, according to their CFO David Viniar.

If Goldman wanted to reduce the impact of proposed "prop-trading" limits ( depending on how they are defined by the Administration ), they could simply do so by letting trader's set up hedge funds. Those vehicles could then raise money from OUTSIDE investors and the operation could be moved into Goldman's asset-management business.

No big deal, really.