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Wednesday Market Review.

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    September 8, 2011

    “Throughout all my years of investing I’ve found that the big money was never made in the buying or the selling. The big money was made in the waiting.”

    – Jesse Livermore

    The most agonizing part of trading for a living is doing nothing. Today was a perfect example of such. I won’t even begin to come up with reasons why the market was up today rather than say it simply was. I also won’t put out the laundry list of why this market rally off Tuesday’s lows is anything but impressive.

    I continue to take a longer term view of the market and global economy beyond the intraday noise where markets rally in low volume and no news. I am currently short SPY and BAC and the only real threat I see to this trade is an expansion of the Fed balance sheet in September. Something I still view as a very low probability. What inspires me though to maintain this trade and not worry about days like today where clearly I was on the wrong side is what the credit markets are telling me.

    For all the chatter about whether or not this is 2008 the reality is the credit markets are drawing eerily similar parallels. Beyond record low treasuries and bond yields. Beyond falling swap spreads. Confidence among lenders is falling. Perceived counterparty risk is growing. Imagine you have a credit card bill due in a week and you do not have the money to pay the bill. You simply apply for another card and use the proceeds from that card to pay off the current. You just bought yourself another 30 days.

    What happens though if you cannot get that new card? What happens if you are perceived to be a risky debtor? What happens if some credit card companies decide to cut back what they will lend?

    In 2008 Lehman Brothers was the fourth largest investment bank in the US. Just days before they filed bankruptcy analysts were rating the stock a buy and we were told they had substantial cash on hand. On September 11, 2008 Standard and Poor’s was even quoted.

    “Their liquidity is stronger, just given the size of their cash position, and (there is) a lesser dependence on credit-sensitive short-term borrowings.”

    If you looked behind the scenes you saw a very different picture. You saw rising interbank lending rates. You saw rising CDS rates. You saw stress in short term credit facilities from commercial paper to repo markets. When Lehman failed equity selling was global and not limited to the US banking sector. Today we see the very same stresses globally but primarily outside the US.

    The ES ramp job today on low volume is a decoy. Whether planned or simply something that happened it does not change what the credit markets are telling you. It does not stop a run on the banks. It does not reduce counterparty risk. It does not lower Euribor rates. It does not encourage banks to lend excess reserves. It simply causes you to question your long term trade.

    When I write about the three card monte or use sarcasm to describe the “health of rallies” I don’t do that because I’m a raging bear. I’d much rather be bullish. I’d rather know the health of the US and global economy is strong. I would rather just buy anything and watch my account grow. Trading to the short side is anything but easy. It’s outright stressful and nerve racking. But I do believe and with the utmost conviction a huge transfer of wealth is at hand.

    It’s not easy to watch your account lose paper profits on days like today. It’s not easy to read nonsense on CNBC about why equities rallied. It’s not easy to listen to Jim Cramer call another housing bottom and it’s especially not easy to listen to Dick Bove flip flop on the banks each day.

    “It is no trick at all to be right on the market,” he adds. “I’ve known many [traders] who were right at exactly the right time, and began buying or selling stocks when prices were at the very level that should show the greatest profit. And their experience invariably matched mine; that is, they made no real money out of it. [Traders] who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make the big money.” – Jesse Livermore

    As for the SPX, below is an updated daily chart of where we are. Please click the chart to expand and read commentary.


    From  Market Recap Wednesday September 7, 2011- Macro Story.

    Images: Flickr (licence attribution)

    About the Author

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