Living Inside a Broken Clock: Wednesday, Jan. 27, 2010

The IMF recently raised their global growth forecast. Remember the good old days? The USA, with 5% of the global population, made up 25% of the global GDP. Like locusts, they consumed somwhere around 15% of global production, and as a result of declining manufacturing and export – were almost 50% of the global current account deficit (not NET, but take all the negative balances and the USA was half).  Imagine the amount of capital flows that went into the USA to fund the twin deficits – that they used to chide other countries about via the World Bank and IMF.  And China is supposed to replace this with their empty cities and under-utilized factories?

Welcome to the broken clock.

EQUITY

Yesterday, SPX put another pin through the trend line “Since Aug 17” that is just above, but didn’t hold and closed down day over day. There is a sloppy bearish flag forming just above the 1086 line. The 50 DMA has gone flat tat the rsistance line at 1114. The 5 DMA is falling at a 45 degree angle. It should reach SPX today or tomorrow.  I think that when something falls on you from above, it has a tendency to push down.

The interesting part in all this equation is that BenDover and cronies are coming under a lot of scrutiny and, there is the AUDIT moving forward slowly – but looks likely to occur. It is hard to toss cases of money out the back door onto Wall Street’s waiting truck when the whole world is watching you. No liquidity, no rally.

Paranoid hat on: On the other hand, if I’m a great or lesser vampire squid sitting on massive amounts of futures, equities, and commodities – and I need to unload it on the next greater fool – I’m sweating bullets.  If retail isn’t coming into the market, I NEED SHORTS to take up the slack and cover on every rally, so that I can sell into them. The only way that I can get the volume of shorts into the market, is to let them think that the portals of hell have opened up on SPX.  After they’re short, the last of the MBS money goes into the pot to engineer the mother of all short covering as I lighten my load (as a great vampire squid that is). Wow. That’s some paranoid fantasy – but what would you do if you’re terribly long at this stage?

Asia was red. Europe is mainly red – except for some nordic countries.  The PIIGS are getting slapped around a bit.  The DAX closed its gap down yesterday, but opened a fresh wound this AM. DAX heals fast and has already recovered up near the highs of yesterday. IMO, this would be a good place to put a short on. Only Materials and Information Technology are green. Quite a rotation from Industrials and Telecom yesterday – which are among the bigger losers. Financials are still near the bottom of the pile.

ES slid into the Europe open, but has been tracking DAX back up to the neutral pivot, where it sits perched now and dizzy . ES ran along this pivot from the lockup until midnight. PIvots:

• R2: 1108.50 =  Uup around where the waterfall began on Jan 22 (Friday last week)
• R1: 1098 = Around the highs from Yesterday, and a definite roof over any irrational exhuberance that might arise.
• Neutral: 1089.50 = Where ES is sitting right now.
• S1: 1079 = Certainly would be a new local low – and take SPX below that 1086 level. Not likely, IMO, unless squids are worried.
• S2: 1070.50 =  We kind of put a pin down through this level in November.  But havent’ seen this since ES bludgeoned its way through November 9th. This was the site of a TD support level as well that launched the start of the big wave up since then

FX

DXY has put in a local double top [ 12/22 = 78.449; 01/21 = 78.814].  The good thing is that DXY is riding on top of the 5 DMA, the bad news is that the 5 DMA is levelling off at 78.323 – call this the floor on a daily basis and a trend breaker if DXY closes below. There is quite strong support for DXY at the 76.75 ;level – which is where the latest rally started.

On the 30 min chart, DXY has found support at the pivot at 78.3837,. This consolidation could lead to the next attempt at a new high (78.814). If the pivot gives way, the next pivot (S1) is at 78.131

NEWS

FED is coming to the wall on MBS purchases. Where will the money come from to buy TBonds then? The impact could be higher rates. Roubini thinks Spain poses the risk of disaster for the Eurozone. CDS trading is growing as fiscal deficits rise around the world. Where will the next AIG be?

China is asking its banks to review property loans. rut-roh!

SEC might drop its plan to stop MMKT funds from buying lower-rated debt. Need to put a floor under all that toxic waste that squids produce. The US is considering yet more mortgage plan fixes for underwater houses. Just chew the leg off already and get away from the trap!

Obama speaks.

DATA

MBA mortgage applications at 7 were -10.9%. New home sales at 10AM EST. More here:

http://www.briefing.com/Investor/Public/Calendars/EconomicCalendar.htm

Sloppy bear flag on the daily SPX. Sloppy bear flag on the 5 min ES. I would suggest a short play into the open on ES if the pivot at 1089.50 is breached to the downside, with a target around 1087.50 – not very much room, I know. If there is downside momentum, then I can see us re-testing the overnight ES LOD at 1083.25 – which somehow must translate to near SPX = 1086.

The magic numbers from 10,000 ft are stillSPX = 1086 to 1114. Beware the ides of squid.

Cheers.