Friday OpEx Fireworks - BEING UPDATED

Well that was fun.

Ok, some more charts. Why the hell not?



Note that 1540 level that we bounced off.

How come?

Well I just saw a post on one of the boards saying that "Technical analysis is useless".

Oh really?

So let's see..... back a few days ago I said that if the S&P didn't penetrate the 50, that we were setting up for one of two scenarios (the other was in play if we did.) That's technical analysis. We didn't penetrate, and we did get a rally back towards the previous high.

Worthless? By who's measure? What a load of crap. I hope it kept you from shorting into the close yesterday, or if you did, that you did so with every intention of holding on and didn't get scared out today!

I also said we had a nice channel established in the 10, which had broken the previous (many-year) channel to the upside. And, that the run early in the week was totally overdone - parabolic, in fact, with a nasty gap or two in there as well.



Well, we pulled back and filled that gap didn't we? Are we done? TA says the trend is still up, and until that channel is broken to the downside, it remains that way. How do we know "its over"? When that channel is broken. Is there a possibility that it will break that way? Maybe - the DMI showed a momentum change (a first) and the MACD may be rolling over, but Stochastics doesn't confirm. Yet. The gap is now filled, so the next move is likely to tell us what's up. In other words, we have a sideways (indecision) signal on bonds right now. Not a good time to short, not a good time to go long. Sit on your hands if you're playing the bond market until this resolves!

But more importantly - does it matter for equities? No. The indicator is over 480. Still.

What do we need to see to "buy into the rally"? Here we go - we need GDP to head north and we need to see oil get tamed. Right now oil isn't behaving at all, and there's this little thing called a "hurricane" that can show up any time in the next few months. Oh, and the Russell hasn't yet broken that H&S pattern.

On the fundamentals that CPI number wasn't all that good. The headline was hot and what's worse is that we've got a fourth month (out of five) with declines in inflation-adjusted wages.

Now let's remember something here - Chucky (the consumer) is 70% of the GDP - the economy.

So let's review, quickly, one more time:

• Rates have moved upward, and the next question is where do bonds go from here? We should know the answer to that within days. Watch that channel on the 10; the gap is filled, so we've now satisfied that. The technical indicators are sideways.
• Personal incomes are falling. This means that the consumer is spending money they don't have. But more debt gives us more debt service, and interest compounds against you just as investment returns compound for you.
• We have higher oil prices and no reason to believe that this will materially change. Are we ever going to see $2/gallon gasoline again? Probably not. Is the $3 level permanent? It may be conservative, especially if we get a hurricane in the Gulf.
• The entire cheap financing system appears to be coming apart. Washington is trying to tax LBO firms, the ABX got even worse today for the BBB bonds (not better; no stabilization there!) and the junk CMBX spread (BB) is going parabolic. Whoever was trying to lay off risk with all that shorting of bonds this week did not accomplish their goals. Better watch out here - that's a really, really loud warning horn sounding over there...... remember, credit market dislocations produce equity market crashes, not little corrections!

So where's our upside trigger on the S&P? The all-time intraday high, not necessarily the recent closing high, although a decisive break above it will convince me that, at least in the short term, I want to play the long side of the broader markets.

On homebuilders there is not a thing to like. My shorts remain open, remain profitable, and I'm considering adding a couple more. I've got a technical indicator or two I want to see flip on those specific stocks before I enter a short on them, and until I do, I'm going to wait. But we're close on those.

As for "Subprime is contained", go run that line of crap somewhere else. The credit market indices say its not only not contained but is spreading to the commercial real estate sector, with potentially disasterous results. While - so far - that has stayed in the junkier bond grades (BB), there's no reason to believe that is likely to remain so.

Never mind that Lennar got a warning today from Moody's. Is that good? Ratings downgrades on debt eh? I thought Goldilocks was eating the Bears?

Are you sure you got the Diner and Dinner in the correct order?

You won't hear this on CNBS and you most certainly won't hear it from Kudlow - but you will hear it here.

Next week the option machinations are all gone - except for the VIX, which goes out mid next-week. Bet on volatility being back and, if oil continues to move up or the bond guys decide that they might not be done selling, all hell is going to break loose.

Late nite - Oh My GOD..

You want to talk about "massaging the news cycle"? Well shit, here it comes! You know that ABX I've been talking about? Well now you know what's going on - they're starting to eat their own. Just a few hours after option expiration eh? How do you think the market would have looked if this had come out during the trading day?

"Concerned that an internal hedge fund at Bear Stearns Cos. wouldn't be able to meet a margin call, Merrill Lynch & Co., one of the fund's biggest lenders, seized $400 million of its assets and is preparing to auction them off.

The auction, in the coming week, could trigger the fund's dissolution -- the second blowup in recent months of a hedge fund that made dicey bets on the market for risky home loans, known as subprime mortgages."

That's called "you be screwed".

Was today it? Quite possibly. This is no small potatoes and it is not confined to subprime. Something similar is happening in the CMBX indices - I just don't know who to - yet.

If the commercial mortgage world gets nailed along with the residential, then its Katie Bar The Door.

I was chatting with some contacts I have in the bond world a couple of days ago and they were mutting about some "three sigma events" that had been contained. (That's three standard deviations out from what are expected; in other words, REALLY extraordinary stuff.) They wouldn't be specific and I'm not sure they knew what they were in detail - but the mutterings are starting, and so are the rumors, which are starting to be reflected in the spreads.

I might have been off by a few days, but it sure as hell looks like I also may have been right.

Watch out guys and gals, this has a really good shot at getting real, real ugly.

More as I dig around on this.....

By the way, from the chatter I'm seeing on some of the Internet message boards, let me be clear on how I view this, so nobody makes a huge (and potentially expensive) mistake!

While this event may indeed set off a chain reaction it is by no means guaranteed to happen in this particular instance.

That is, whether this cascade of events at Bear causes a re-pricing of risk is not known at the present time. As such attempting to short into this before the situation becomes clear is an extremely high-risk move and one I am not going to do - nor can I recommend it to others.

But - clarity should come to the forefront here quickly. Watch the treasury action to see if the rapid rise in rates resumes, indicating selling and/or shorting, and also pay close attention to the ABX and CMBX indices. If we see more precipitous actions in these indicators starting Monday it means that the market is repricing risk upwards and this is very likely to spill over into the equity markets.

If not, then the blast barriers have held - for now.

Note that I most certainly do not expect those barriers to hold for a lot longer. But there are folks out there chattering about shorting heavily Friday and/or going after the market Monday. Be careful trying to catch the exact top of this run; while it sounds like a real good idea in terms of profitability the fact remains that this has proven to be a losing strategy over the last year, as I and many others can attest. If you're going to chase this, do it with small amounts of money until the trend is confirmed and make very sure you have a tight leash on those trades!

The risk here is enormous. If risk starts to be repriced upwards we will likely see a near-immediate shutdown of the LBO and Private Equity debt financing market. Since this is all that has been powering the price of stocks over the last three months or so, such an event will immediately hit equities, forcing them back to the February lows at minimum. While such a "correction" would be deemed "healthy" by the media, there is a risk that this touches off technical triggers, because the counter-trend pieces that have worked so far - LBO guys coming in and "saving the day" by announcing deals - would not happen this time around.

Summary: For the start of next week, the key indicators to watch are bond yields on the 10 and the ABX/CMBX indices, along with any news stories that pop up on the Bear/Merrill auction. If you see a precipitous spike in the 10's yield and/or continued deterioration in the ABX/CMBX, especially if both occur, watch out - it means that the Containment Field is collapsing and a "Warp Core Breach" may be imminent. No matter which way to choose to trade this (if you do), remain fleet-footed and exit any move against your position - this is not a market in which you can trade on technicals or fundamentals alone, as the risk of a "rogue wave" event is now way, way out of the normal probability range.