Risk Appetite Back With A Vengeance

This is not going to end well, folks. Barely a week after a massive wipe out in equities risk appetite apparently has returned with a vengeance. You may recall that last week I was musing about the relatively lackluster response in the Dollar and how precious metals as well as bonds happily continued downward while equities were getting the spanking of a decade. I am still not sure where exactly liquidity disappeared to last week but it seems that risk appetite has bounced right back.

My friend Chris Carolan over at the spiralcalendar posted a very interesting piece last weekend referencing his work in the late 90s on long term seasonal cycles of high inflation and low growth to falling inflation and high growth. Apparently his work shows how these transitions occur as paired tops and bottoms. And guess where we are heading right now? Yes, a long term bottom.

Quite frankly much of that stuff is beyond my pay grade and I don’t try to spend too much time worrying about long term economic cycles lest it negatively affects my daily trading activities. But that said – it doesn’t take a degree in macro economics to figure out that concurrently falling bonds, stocks, and precious metals don’t exactly signal ‘business as usual’. The systemic risk gauge continues to push into red readings and then some, and that means we are most likely going to see a significant market correction sometime this year.

What that means for us as traders is that we’ll need to adjust our trading activities toward a more bearish reality accompanied by a massive increase in volatility. The latter has already begun to make itself felt and I’m afraid this was just one of the pre-quakes.

Now back to the Dollar which signals that investor/trader sentiment has quickly reverted back to its exuberant mean. Looking at that trading range on the USD/JPY makes me wonder if 106.75 has any realistic hopes of slowing the current acceleration lower. Last week’s candle higher seemed nothing but obligatory.

The Euro also pushing higher again and the formation on the short term panel is looking bullish as hell. So my expectation here is that we’ll see continuation higher over the remainder of the month until we once again reach our LT inflection point near 1.254.

The E-Mini may look like a juicy dip buying opportunity, and as you know I’m holding a bull debit spread. But I do have grave concerns regarding the technical damage that now stands on record. The words ‘dead cat bounce’ comes to mind and I wouldn’t want to be long futures here. Either way, even if this continues higher there will most likely be pushback near 2727 – easy number to remember. If it can be overcome then this bull market may just have another lease on an already extended lifespan putting even Takeshi Kovacs in ‘Altered Carbon’ to shame.

Words To The Wise

This is not a market phase during which I’m interested in making many bets. So I’ll probably just watch for a few days to see how things play out. I would very much love to see an advance higher in equities followed by a very convincing spike high. Because if there was ever an opportunity for a bearish reversal play then it would be at that stage. Low odds but massive pay out it plays out. It goes without saying that I’ll be watching IV on all fronts like a hawk 😉

But right now today I recommend that you all curb your bearish enthusiasm and wait for instructions. The initiation leg lower is now behind us and the market will now have to prove to us that it’s ready to shake out more of the accumulated excess of the past decade. If it does then it will be not only a cleansing experience (and thus positive over the long term) but also an awesome trading opportunity I don’t plan on missing out on.