An october to remember

After  my forecast target area of 1065 in ES was reached, the next day, on October 5th, when i sent out an email  titled "Red October turning green?", i expected green, but not a 20% gain, within a 3 weeks !! As you can see from the headlines, this is the best October, since 1974. About 10 days ago, i started a poll for members of my blog titled "Does this market remind you of 2009 bottom?" To my surprise, all the votes that came in said "NO".  If you are wondering who was that one person who said "YES" in that poll....that was me ! Even though this is a small sample of general sentiment of the public, this is not far from truth. I have looked at various market sentiments and polls conducted within the past 2 weeks.

The consumer's assessment of current conditions is at its lowest point since December while consumer expectations are at their lowest point since 2009. From a long term perspective, NFIB small business optimism index is lowest since 2009. Meanwhile, the weekly  AAII sentiment index shows a jump up of 7% in number of bulls, which probably increased by friday's close. Still the number of bulls is way below the 75% bulls that was seen at market top in 2011.  NAAIM survey of money managers showed that over 50% of them were still bearish, as of last week.

These sentiment readings confirm my long term assessment of market. Market will continue its bull run into early 2012, until an extreme value on these sentiment indicators are reached, with minor corrections along the way. The fundamentals are in place to support this view, as listed below.

• European leaders have stalled the debt crisis, with various tools, and bought at least 6 more months, if not more, before we see another episode of this debt crisis continuation from PIGS of Europe;
• Fed in the US has initiated policy measures that help stability with a bond re balancing program that has been equated to 0.5% interest rate reduction (this on top of the assurance that interest rates wont be changed until 2013); 
• US is working on programs for job creation as well as debt reduction (although i don't expect much from the divided government);
• China is not showing any serious slowdown or housing problems, like many pundits were predicting for past 1 year;
• Earnings are coming in better than expected again, in fact better than past 3 quarters.
• And, best of all, the latest GDP number in US came in at 2.5%, easing the fears of  many (including me) who were expecting a slowdown to continue from Q2 into Q3.

So,  while i maintain my long term forecast of  increased probability for recession in US/europe in 2012, the intermediate term looks good for at least 6 months more. I notice that the revenue figures are in fact down during this earnings season, even though companies have beat expectations handily.

Considering all these factors, my kudos to those of you who bought long term holdings at my forecast bottom of 1065 area; you can be very proud of yourself for being brave. Now, after 4 weeks, it is pretty much clear to all technical analysts where the market is heading.  My Q4 targets have already been surpassed, and in a private email i indicated next target of 1300 area. We are close to it, all within 1 week.  I am increasing my long term target to 1350 area now. Also, I expecting this number to be surpassed by the end of Q1 2012. As indicated in my chartwork (comparing 2008 to 2011), the highs will probably be set 42 trading days from Oct. 4th, which takes us to end of November.  So, with minor corrections along the way, i am expecting this long term run to complete its first leg by early December.

Last week's  analysis (and comparison to 2010) forecast 3 days of down days last week, but we got 2 days of lower lows, and then  broke out higher on the news from Europe.  This week's  chart  is directly linked to the poll i started 10 days ago to see how many of you catch the dimension of this bullish move.  This chart adds to the probability and forecast shown in prior chartwork, that gains will continue into end of  November;  but the time to be aggressively buying is gone, so think about money management and buy points (which i may address in my next blog, during the week).

End of euro crisis 2011

Tonight, during the euro leaders summit, all issues seem to have be resolved, so that the politicians have bought more time, to get into next elections safe.  As, pointed out in my weekend blog, 50% losses is to be absorbed by the banks. I made an error in weekend analysis that 50%  of greek debt (340B euro), is all on the banks.  Thanks to david, who pointed out that 1/3 of greek debt is on  ECB/IMF  and another 1/3rd is by  greek  banks.  So,  only 1/3 of the  greek debt is being shouldered by the big banks of europe, outside greece, and this would amount to about 113B  euros.   Notice that this number is pretty close to the  bank recapitalization that has been announced during tonight's   summit.  They have given european banks 6 months more to recharge 106B euros, which will bring the liquidity problem of the banks  non-critical, buying more time for this drawn out process.  EFSF  has been leveraged about 2 times, from current 440B to 1T euros, which again, buys some more time, to deal with soverign bond purchases.   Much of this news was already available on wednesday's  trading session, except for the bank recapitalization news.  So, that sums up the rally we saw in the second half of  wednesday.  Now that we have bullish news,  what does thursday's trading hold in NY session ?  The chart below gives my idea of where to buy and what prices to sell for the reminder of the week.  As i post this note, ES is near the low end of my  Q4 projection (1256). I am giving a 90% probability that by thursday's close, this number will be exceeded (possibly into the upper red line in chart). 

Oct. opex and outlook for start of next week - ES.

Market commentary:

   Wednesday and thursday had some bad news out of europe, which is driving the market volatility lately.  Just take a look at the correlation between  euro and ES, and you can see the proof  of europe being in control of market direction;  you can pretty much predict the short term movements of  ES, with this correlation;  this is likely to continue until  2nd week, when the G20 leaders summit is over and we get definitive announcements, for the short term, about how much debt is loaded onto the banks, and how funded EFSF is going to be.

    So  the bad news out on wednesday/thursday is that merkel and sarkozy are not getting along.  Sounds like a bad marriage to me, and does not bode well for 2012 relationship.  Each party involved is asking "what's in it for me?"  rather than asking the question of  " until death we dont part ?"  So, the decisions involved on a day to day basis, in such a tough marriage are likely  to be pretty  tedious and drawn out.....this implies, it will take  more time to make even simple decisions (which probably take a day to make in china, because no one can question the central committee).   Western civilization is facing serious  challenges to the  current form of  capitalism - Big banks are global in nature, whereas there is no global  policy system in place, to control  these banks'  predatory  profit seeking nature.  Consequently, derivatives and wreckless trading by global banking system has resulted in destruction of many banks in US and europe, and passed on the virus now to europian nations. I am digressing.

Back to europe..... the headlines are pointing out the meeting this weekend between germany and france, and the meeting of  European leaders has been postponed to next week.  Sounds like bad news, but hidden inside is the fact that they seem to have agreed that EFSF funds will have to be leveraged to over 1T euros. This leveraging was initially rejected by  germany, but that stance has changed in last couple of days, and is the fundamental reason for some bullish moves lately. 

Technical  Landscape:

As i  starting writing this blog, emini spx futures (ES) is at 1215.25. Please see the chart, as it summaries my  outlook for  friday as well as the week ahead.  I think the highs of the week are already in.  Also, notice that in august as well as september, the direction reversed after an opex week.  People who are buying now are somewhat late into the action(on a short term basis) and we could see a pullback monday/tuesday. Clearly we are range bound, between 1180 and 1230. There is more downside risk than upside risk.  Considering all these, it seems better to find places to short, which will give a better risk reward ratio (always look for the risk reward ratio after you take a bias). I am forecasting a close on friday below 1210 on ES, with a good probability given to 1205 or below (due to weekend risk aversion). 

USD is likely to rise from current levels into tomorrow, as yen will be devalued by japanese announcements. It may be a useful tool for currency traders, to keep this bias.