Last Thursday I recorded a video (available to gold-level donors on Tickerforum) in which I pointed out the analog between the 2008 declines in the stock market and what we were seeing since the election.
There was a large difference in amplitude, but the timing and similarity in terms of where the market was, with a substantial level of congruence, striking.
My warning was quite simple -- the decline wasn't over in 2008 on Thanksgiving, of course, but you were playing with fire getting short in size coming into that expiration for the same reason you were last Friday -- the option skew was well into silly territory and the market itself was pretty-seriously oversold.
Those two ingredients don't always produce a rip-your-face-off move northbound, but they do frequently enough that it's unwise to bet against it with money you can't afford to lose.
Friday the market bottomed at 1343.35 with the /ES at 1340.25.
This morning we find the futures 30 handles, or approaching 3%, higher, and the futures are over +10 which is often a threshold for a "gap-and-go" rip.
I don't see a solution to the so-called "fiscal cliff", and everyone on CNBC is talking about "money on the sidelines." As in "buy buy buy" Cramer nonsense.
I love how everyone talks about how the market is "spring-loaded" when the move has already, to a significant degree, happened!
There is no actual solution to the fiscal cliff folks. As I have repeatedly pointed out what we keep screwing with are half-solutions and lies rather than anything that can actually solve the problem. The reason for this is quite simple in the main: We have lied for more than a decade about economic progress -- there has been none. It has all been borrowed and bought forward, and the ability to do that has now ended.
Paradigm shifts, when they happen, just are. The folks who recognized the housing bubble blowing up -- when I started yelling about Washington Mutual paying dividends with earnings that didn't really exist but rather were capitalized interest on houses that had already started to decline in value and were underwater the bell had rung. Yes, it took more than a year for the depths of the destruction that was to come to be recognized from that point, but the paradigm shift had already happened and in fact the shift occurred about a year prior to that when those home values peaked.
We're in the same situation now with fiscal reality. The driver of alleged "economic growth" over the last two decades was unbridled credit creation that presented a view of growth that was factually not happening. In point of fact were sliding slowly backward and accumulating debt instead of making progress. This exponential process is what set off the collapse in housing and the markets, and instead of addressing it we tried what was done in 2000 to shift and expand that leverage once again.
That experiment has failed; we now have enough data to know this is a fact, not an expectation.
What is the fair value of a market that has no exponential debt expansion in it? I don't know with certainty, but I know it's much lower than that for a market featuring that expansion. Is it half of a market with that expansion? Probably -- and likely more, because a "level" system is not what you get when things mean-revert -- you undershoot just as you overshot.
In short this is a nice Turkey week and those who piled in last week short are now staring at big red numbers this morning. But this was one of the best-telegraphed bounces with a hard analogue that wasn't that hard to recognize.
If you got caught by it step back and re-think both strategy and money management, and look for the corner when recognition returns. If not -- if you were on the ball, then enjoy the bright green numbers you woke up to this morning -- but don't fall in love with it for more than the next few weeks.
And if you're reading this and not a Tickerforum gold donor, consider joining us at the gold level of donorship and enjoy the trading videos along with much-enhanced access of the system.
Where We Are, Where We're Heading (2013) - The annual 2013 Ticker
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