Distortions Within Fragile Markets

Distortions within fragile markets more and more are becoming evidenced not only by trading swings, but by statistics in real world consumption; geopolitical concerns tempering lots of endeavors; a realization that defaults among 'submerging' economies and energy entities is a valid concern; and a shaken the 'junk bond' market; more pending.

That investors and speculators have been as complacent as they have is really a phenomenon of the structural nature of investing today, complimented by the flight-safety 'harboring' of money in American markets. But even as Exchange Rates temporarily take the edge off Dollar strength, Oil continues heavy, while commodities barely have temporary stabilization. No central bank movement or policy bias is at this point going to change (for instance) China's determination to 'hoard or not to hoard', when in reality they've been feeding-out supply into a saturated market (including raw materials), while everyone looks solely at Oil.

Last night I reviewed the big picture that got us to this spot; last week I pointed out the 'fragility' of these markets, with an expectation of erosion, interrupted at times by desperate rallies; and especially attempts to do so in the week prior to Expiration. We're so pleased that the market allowed us to capture gains each days this week; both long and then short on Tuesday and strictly newly short on Wednesday (after any residual gains on a prior profitable short were taken) for traders. What matters here is that traders understand the need to be nimble at times; that they recognize to scale-out and harvest some profits; but retain what we call 'skin-in-the-game' in the event we get serious plug-pulling calamitous hits.

Today was very fortunate, in that the 'almost routine' effort to rally a soft opening set up the opportunity to 'sell-short' virtually at the day's high, just before what turned out to be a fairly dramatic up-and-then-down day. Sure it's tempered in the evening trade, but that doesn't mean markets hold up overnight. What will matter here is whether any rebound effort merely rallies to the breakdown point and then heads lower. That point is the rising-daily-trend outlined in the video.

Speaking of the main video, it's longer than usual tonight to explore troubling aspects of market behavior, though we've written or spoken about almost all of it in lengthy commentary recently. Perhaps too lengthy; so tonight we'll focus on the video, and as I attempted earlier in the year, limit our text commentary here especially when there are no developments we haven't outline the essence of in prior commentary. One item that is new is a proposed Dow (DOW) / DuPont (DD) merger.

While shares may rally on that, keep in mind that major amalgamations of such companies (regardless of whether approved), when occurring during times of a relatively stagnant business environment, hint at a consolidation to cut expense as well as labor force, and often precede dividend reductions. Regardless, the celebration of a deal should be tempered by considering that backdrop.

The geopolitical backdrop is not irrelevant. Domestic media focuses on a flight away from candidate Trump of course, but ignores an underlying situation that should matter to everyone, while cognizant of not repeating historical mistakes (such as the Japanese internment early in WW II). The head of the French Police commented that they'd need 20 times the personnel they have to effectively be able to monitor 'known' radicals and sympathizers in France, and that logically causes others in Europe some nervousness, including Chancellor Merkel, who beat out Donald Trump as Time's Person of the Year. So while the vast majority are politically correct, clearly just hearing the FBI Director say 'we don't know' if the San Bernardino terror-wife was a plant by an Islamist group says volumes. She was vetted. It is an issue, not for fear-mongering or losing American values, but just imagine the repercussions of not being more circumspect. 

Bottom line: News tends to worsen as markets decline. FOMC and Expiration are ahead next week. An absence-of-bids can drive prices lower alone. The primary uptrend is again not only being challenged, but breaking slightly. An effort to retrieve it perhaps will be mounted; but odds favor the downside.  

Daily action - hold short Dec. S&P / E-mini from approximately the 2078 level Wednesday morning; and has lowered the fixed mental stop to 2058 for the first hour Thursday. If that comes out, it will be for 'half' the position taking 20 or so handles of incredible gain for just a few trading hours, and we'll approach it yet again should it be harvested. If so, the balance will be retained pending my first video comment for intraday traders. 

For investors, let this unravel further overall. It's not merely seasonal selling or tax selling, but many downgrades and realizations that next year won't start in a strong way for business, for energy or for commodity-related businesses.  

By the way, according to Bank of America, credit and debit card spending data: core retail sales (excluding autos which are mostly non-revolving credit funded) dropped by 0.2% in November, the first annual decline since the financial crisis and affirming what I noted last week from VISA through Black Friday. 

We stay short overnight as outlined.