The home stretch

"There is no such thing as reality; there is only perception in trading". These words, recently said in response to my maintained bearish stand on the markets due to the unchanged nature of the Euro sovereigns, ring so true at a time like this. As mentioned in Wednesday's post, the liquidity program the central banks agreed upon does not solve the sovereign problem, it merely makes it easier for banks to stay afloat. Few would dispute that my last statement is accurate, but so what? If our perceptions are warm in feeling, and we want to buy up the market; we will. So bearish reality sustained, is this the time to buy for a quick upside profit? Let's look at a few of the things that I think play out in making that decision.

1) approximately 1250, is the number that gets the S&P to even on the year. With the Cash S&P settling below this number on Friday, we saw an inability to follow through into positive territory on the year. But O well; market sentiment has changed. Lots of bullish sentiment grew this week after a great slew of US economic numbers. So we could get a follow through on Monday, and the chase begins when we get into positive territory. The hedge funds down on the year do not want to see the S&P go positive while they're un-invested. They don't want to face potential redeemers and have to admit that they were down in a year that the benchmark was up. So if we go positive, some sidelined money could really pump things up. It would be like a short covering rally...only in the case its uninvested money that feels it can't afford to be anything but long (and probably in a levered way). This is the great bull scenario.

2) The VIX is lower. The vix, which is a short term gauge of volatility on the S&P, has remained low. Closing below 30 for multiple days, we are seeing a market that doesn't seem to be signaling that it feels the same desire for downside protection it did just last week. This great article by Daniel Putnam http://www.investorplace.com/2011/12/two-possible-signals-from-the-vix/

takes a recent look at the historical trends in the VIX and how it correlates with the market. Read the article for full understanding, but his overall point is we are reaching levels that are generally signaling a short term bear move, but if we stay below 30 on a longer term basis, it will be a signal of a rally to come.

3) In the near short term (next few days) no big news is due out of Europe. We could easily hover here for a few days until big news comes out.

How do you reason all of this and try to make a trade? The funny thing is that as I reread it, it seems that the bull case might be the better one. If you subscribe to my argument that above 1250 could mean its chase time, then the bull move will be swift and strong. I don't know what the magnitude of a move below here would be, but we can feel pretty confident that if the market goes up, it will start to accelerate in that direction. So if you had to choose, long or short right now, you might say you're 50/50 on whether we're up or down; and if so, then you should be going long, because your upside is more probably more accelerated than the down.

Still, I maintain a bearish stance on the market. For historical reasons listed in the Daniel Putnam article above, we are probably more likely to move down in the short run. We also weren't able to close above 1250, and while the Dow is above, the S&P still hasn't broken its 200 day DMA (daily moving average) to the upside (it is around 1265 as the image below shows.

(also note all the chart congestion from November around 1250... This should make for more resistance, making it tougher to rise above.

And lastly, how could I not discuss the muddling US congress and their likely stoppage of life upcoming. Sentiment which was as good as its been in a long while late this week, got a little more sour when it came to Friday afternoon. The Republicans indication that they would block bills enabling the IMF to fund Europe could slow things down and bring this little party we had for the past few days to a halt. I take it so seriously because we're coming up on an election year, and we already know how ridiculous the political posturing can get. Notwithstanding, this is more than just a political issue for politics; this one actually matters. Discussing "bailing out Europe" will be an easy brand job for the Republicans opposing giving the IMF power, helping them cater to republicans voters who hate the concept of bailouts. This issue is almost too good for the republicans to stand on, because it can lead as a conduit to discussions about all the other financial failures that have taken place under the Obama administration. Fool me once shame on you, fool me twice, shame on me. There's going to be a lull period here, and some of the jubilation may naturally cool off, or will be forced to if the republicans really go hard on this point. America contributes 17% of the money that goes to the IMF... how hard is it to say "Don't bailout foreign countries... use money for jobs here in America. "Oh I can almost see they wry smile on Boehner's face as he tears up because it just sounds so good. I'm happy to say that being short makes plenty of sense for now.