Catalysts and Cattle Lists

Let’s go ahead and say the least – this was a beast of a week in the markets.

First let me say – I wasn’t the first guy to turn bearish on stocks, but I do like my killing to be easy; especially since markets have a way of chop-dropping downward with greater velocity than they do in fact rise. So at the risk of refreshing my status to born again idiot, I will admit to you now I’m beginning to turn a lot like bullish.

Michael Davey here, Inviting haters 😉

Looking back to last Friday, the SP500 Cash had closed the previous session at 1102.35, before the US Dollar began to rally (Dollar began rallying Friday before the open in US equities). Since this time, currencies have shifted rather wickedly, with the Dollar jamming higher and higher, before jamming higher again; then vacillating on both sides toda, only to end up flat for the session.

This in and of itself is not so fantastic. We knew there were something in the neighborhood of 95% Dollar bears. Given this is the largest market in the world and everyone was firmly cocktailed to one side of the ship, it didn’t take terrific amounts of genius to anticipate a potential Dollar rally.

This was a large part of my bearish/cautious stance on equities; combined with multiple signs of distribution, leadership turning lower (the Financials especially) and sentiment measures illustrating a nervous high-number of bulls and a historically low percentage of bears (which is negative).

Pretty clear to me was that if the Dollar began to punish over-saturated shorts, then equities would define why you pay attention to things like distribution, leadership and sentiment.

Equities would certainly get crushed.

Here we are though, having now witnessed a one-way, one-week surge in the Dollar, potentially signaling the end to the Greenback carry-trade, and the SP500 cash just closed the week at…1102.47.

You guys like difficult math I know. This amounts to about 1.5 points, or an entire .14 of a full-on percent.

Now before coming out and ringing any bells, I did try to find historical precedent whereby the de-coupling of the Dollar relative to equities was demonstrating a looming negative. I’m still looking in fact, but I’m finding nothing. If you know of any data on this, please send it my way (I’ll add an epilogue to this piece, and maybe save myself from myself at the same time). In the meantime though, I remained impressed that equities refused to sell-off in the face of a rapidly rallying Dollar and that we are but a stone-throw from the top of the 3-month trading range.

Yes, distribution, leadership and sentiment remain overall negative. Bears have that still to hang their hats on this weekend.

But I also want bring up something which has been pecking away at my intuitional insides lately. There is a rising theme building with market pros and it goes like this: “We would expect a market correction in the early part of 2010.”

I heard this more and more these last few weeks, but this morning there were 3 new guest-heads on CNBC suggesting this same thing – that stocks will finally see a correction, early next year, but longer-term this will be a good buying opportunity. This smacks a lot like the sentiment in late March, when pros were bullish but because the market had run up so fast, they wanted to see a pullback before buying.

Smack smack smack.

And while this anecdotal survey of peer pros in and of itself doesn’t get me too juiced, when combined with a market simply refusing to break-down in the face of a big catalyst (Dollar weakness abated), it captures my attention (since pros are looking at a consistent scenario and the market is pointing to something else instead; I love to go with the market in cases like this and leave my peers behind!).

Peek at the decoupling illustrated in the above chart. If I could have seen today’s graphic this time a week ago, I would have grinned lascivious last weekend, knowing I was about reap sick profit with my handsome shorts.

I don’t think most participants realize just how resilient a feat the equity markets managed this week. If the Dollar does re-trace now, what does that say for year-end holiday strength?

Smack, crackle and pop.

Either way, while I’m not going to cement my mind to this view, but I’m becoming rather ambitious again for long-side prospects and especially for prospects “early next year.”

True, seasonal patterns this year have largely been turned upside-down. Combine that with an investor public expecting weakness early in 2010 and we might just see uncharacteristic weakness late in the month here. So I’m going to keep that in mind before getting carried-away long.

Wow, not kidding, just now on Fast Money another trader pro is arguing for a 10-15% correction in stocks…beginning early January. That’s 4 heads now in just one day, saying exactly the same thing.

Good weekend – Beast out.