According to Bloomberg, the yield on the 1-year Greek Government Bond is 97%. With other words, the market has already priced a default, at least partial.
The fear here is that even partial default could spook investors, raise interest rates on other European nations’ sovereign debt, which might escalate to more defaults and results in under-capitalization of some of the banks that lent money. Also the worst case scenario – freezing of the credit markets.
Given the price action over the past month, you could make the case the the market has already discounted some of the scenarios mentioned above. The truth is that you can never fully discount panic; therefore we need to be ready for anything. (if this is even possible)
The negative correlation between equities and safety assets ($TLT and $GLD) continues to be very high – something typical for market downtrends. With that in mind, there is an increasing number of long setups.
Today, more than a quarter of the liquid stocks went up 5% or more. The number of stocks near their 52 week high has been gradually increasing. Even in August, when the market averages slumped to the tune of 6% or more, there were a few stocks that appreciated 20-30%. With one leg out the door, I am willing to give a shot to some of the long setups I mentioned on my StockTwits page. I don’t have any illusions in regards to knowing where the market will go over the next few weeks. If I am proven wrong, I will be stopped out. I am well aware of the dangers of confirmation bias. If you are looking long enough for long setups, you will find them in any market.
Keep in mind that managing risk does not only involve using stops and proper position sizing, but also timing your exposure to the market. Now it is certainly not the time to go all in and be overly agressive.
The market seems tired as it approaches it declining 50dma. The small caps ($IWM) led to the downside today, indicating that no one wants to risk too much in front of big economic announcements. The latest Unemployment report is expected tomorrow. I don’t think it will have any significance whatsoever. The market has already accepted and probably discounted that unemployment is likely to stay elevated for an extended period of time just like the 0% interest rate and that the economic growth is likely to slow down accros the world. Bad economic news is not really news for Wall Street anymore. It is expected. European banks remain the potential turning points that could impact sentiment.
I have a feeling that both bulls and bears will be disappointed in the next few months and we won’t see neither retesting of the August lows, neither repetition of last September rally.
The recent market turmoil has conditioned many traders to quickly take profits, pull back to safety when the slightest risk is perceived and reduce overall exposure as much as possible. This is what volatile markets do to your mind. They make you much more conservative and urge you to question every trading or investment thesis you have. It is a condition that is curable, but only by the market and through time.
The good news is that the correlation 1.0 period is behind our back and individual stock catalysts matter again. We are in a stock pickers market.
Three big moves deserve to be highlighted today:
$LQDT rocketed 30% to all-time high, trading more than 12 times its average volume. These are the signs of elephants dancing, of institutions buying. The auction website for surplus and salvage assets announced that it has agreed to acquire the consumer goods remarketing business of Jacobs Trading Company for $140 million.
$SPRD, which is Chinese semi-conductor company, advanced 8% to a new 50-day high. Capital has been coming back lately to some of the more established Chinese ADRs.
$DTLK gained 9%, bouncing from its rising 50dma. They had a tremendous earnings report that lifted the stock to new 5-year high back in July. Then, the selloff in August took it down.