Nice article here by Mike! He points out events happening in Europe as well as the CRB INdex that may want us to take a sobering look at oour positions so that we are not caught looking at stocks and suffer a huge defeat if the markets are going to be turning south on us soon!
Market Sector Outlook: Beware of Sharp Turns Ahead
by Mike McDermott
Friday’s action offered a dramatic wake up call for the bulls…
It wasn’t really the magnitude of losses as the Dow only lost 90 points and the S&P 500 was off just a bit more than 1%. No, the real surprise was in the areas of the market which got hit the hardest:
As Jack mentioned here, the commodity-heavy CRB index took its worst loss in 18 months. Chinese stocks were also hard-hit as traders reacted to new expectations of tighter policy as officials look to put the brakes on a possibly overheating economy.
European markets were also back in focus as Ireland now takes the spotlight as the “most likely to default“ peripheral country. For the last two months, traders have naively set European troubles on the back burner, but it appears we must once again face the potential for a destabilizing event on the other side of the Atlantic…
All of these issues are now colliding and trapping bullish traders in heavily extended and now quite vulnerable positions. When faced with this type of situation, there are usually two primary options for traders to pursue:
1) Get the hell out!
2) Stand pat and bet the farm!
So far this year, we have seen institutions ignore dangers and escalate their commitments to a recovering economy and a successful QE approach by the government. But at this point, it looks like the majority of traders’ ammo has been spent.
As we enter this pivotal trading week, Jack and I share increasing conviction that we are headed for a significant shakeout. The odds favor a major shift at this point and we are positioning our trading book to take advantage of what appears to be the beginning of a dramatic reversal. So let’s take a look at the field and see what kind of points we can put on the board…
Commodities Front and Center
For the last few months, hard assets have represented rock-solid trading positions as traders and investors alike looked for ways to capitalize on a widespread currency war.
The solid trends and attractive fundamentals have attracted value investors, swing traders, momentum players – basically a vast majority of market participants. The result is that “long commodities” has become an overly crowded trade that is extended and overdue for some profit taking.
“Profit taking” may be too kind of a word as we look at the dynamics which surround this trend. For one, the weak US dollar has influenced prices which are primarily dollar denominated. As the USD regains traction in the wake of European fears, it is natural for commodity prices to come under pressure.
At the same time, expectations for tighter policy decisions in major EM countries such as China could significantly affect the demand curve for many resources. We’re still in the early stages of seeing just how the new developments will shake out, but based on the heavy bullish sentiment, it would not be surprising to see a multi-week bear market in some key commodities.
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