Meet the Teflon Market

Pound away at this market all you want, and it just refuses to go down. In recent weeks we have received a torrent of bad news from Europe, including the fall of governments in Greece and Italy, and the S&P 500 index keeps migrating back to the 1,260 level, as if attracted by some supernatural, magnetic force. It is no coincidence that this is where the closely followed big cap index is dead unchanged on the year.



At this stage, both traders and markets are worn out by the contentious and eye popping moves of the past four months, so we might expect volatility to decline going into the yearend holidays. But watch out for the upside surprise. Expectations are very low here, so the slightest positive development could break the market through resistance at the 200 day moving average. Think of it as the errant child you expect an “F” from, and he brings home a very strong “C-“.

The November-December time frame is historically the second most profitable part of the calendar, rising 70% of the time. Only March-April are better. We have a nice year end liquidity push setting up. Every momentum indicator I follow has markets healthy until mid-December. Think of the index as a coiling spring, building up energy for one last blast to the upside.



Crude oil is also suggesting that the “RISK ON” trade is alive and well, with $100 a barrel clearly in its sites, and after that $110. This has nothing to do with supply/demand fundamentals, or the rising consumption in China. This is purely the hedge funds and high frequency traders at work, getting a small assist from new nuclear worries over Iran and delayed production recovery in Libya. Keep relying on Texas tea for your risk direction.



Of course, you didn’t know that your job description was changed overnight to that of ‘Head Italian Sovereign Debt Trader.” That is effectively what we have all become, with yield spikes for their ten year paper triggering asset fire sales in the US, only to see falling Italian interest rates send prices here soaring the next day. I think I liked Italy more when it was better known for great pasta, fine opera, and beautiful women. Keep using every Euro induced puke out to scale into long positions in American risk assets.



Ditto also for the Euro, which has become the currency everyone loves to hate. Forecasts for an end 2011 decline go all the way down to $1.29. That’s probably why it is bleeding so slowly. Any good news from Europe is prompting the European currency to rally back up to the top of a negatively sloping channel. Take these as the gifts that they are and increase shorts on the Euro through buying puts on the (FXE), or buying outright the inverse ETF (EUO). If the two charts below aren’t showing a head and shoulders downward move, then I deserve a trip to the guillotine.




If any of my three black swans decide to alight, it could be off to the races. Those include another surprise cut in European interest rates, a midnight deal by the Super committee, a sudden cut in Chinese interest rates, or all of the above.

I don’t want to confuse you here. I have not turned into a hyper bull. I just think we could get one last gasp to the top end of a multiyear range that could take us as high as 1,325 or 1,350 in the (SPX). The bill for this move won’t be due until next year. Haven’t we gotten good at kicking the can down the road? As my old friend and mentor, Barton Biggs, used to say, “Always leave the last 10% of a move to the next guy.”