2009 Previous Columns

Dec 30, 2009 (Almost) Final Post Of 2009

7:00AM New York time. Sorry about yet another erratic post. This column went up on the FXA site yesterday. No matter… it's not a time sensitive piece. I just want to run through some basic new-year strategy in terms of what I'm looking to do in the early part of the year, and talk about my "trades of the year". I would caution this up front though… I believe it is very dangerous to fight major moves as the come out of the gate in a new performance period. I don't think any of us should understate the importance performance incentive as it plays into today's capital market price action. Which is to say, fighting an early season trend is a bad idea. The strong hand early on from my experience has an easier time getting stronger than the weak hand does turning around. My trades of the year might be larger, macro ideas, but that does not mean I can run right out and execute them in size and have them work right off the bat. They are concepts that I need to look for the right time and conditions to put on.

My number one trade of 2010 is short interest rates. Right from the start you should be thinking… duh… that's stating the obvious. Who isn't thinking higher rates? Let me defend myself… first off… the macro is different from the micro. Lots of people saw the housing bubble… that didn't mean everyone who saw it and was bearish made a lot of money on the trade. Like all capital market trades, there will be all manner of bumps and detours down this path. One of the biggest early challenges will be the fact that long rates have already moved a lot in the final month of 2009, and the curve is already at a record steepness. So unless you are comfortable buying historic width in the curve, then you are kind of tied to waiting for the Fed to actually start to nudge rates up. Yet the 2-year note is only going to move so far away from Fed Funds on an anticipatory basis. And there are still many potential pitfalls for the economy moving out… not the least of which is the stock market (more on that later). So I have two dilemmas going into 2010 on bonds. Do I initiate early on, acknowledging the move the long end has already made and the steepness of the curve, and where on the curve do I concentrate my efforts? The answer to the first will be predicated on the early action. The inherently weaker the market is, the weaker it will come out of the box. I need to be prepared to sell that even though it has already moved a lot because it will be telling us something about how far it can actually go. Secondarily… I think I need to be prepared to sell all along the curve. At some point this year the Fed will be forced to raise rates and that will generate better performance out of the short end. I want to be in a position to catch that as well. Obviously, there will be many twists and turns along the road, but the bottom line is, I want to be prepared to sell rallies in Treasury prices and I firmly believe we have turned the corner and seen the top of a major secular bull move in interest rates that began way back in the early eighties.

My number two trade this year is the dollar. I think we are seeing a bottoming process in the US currency vies-a-vie the Euro (and maybe the Yen). For me, its not so much a story of dollar strength as it is a story of Euro and Yen weakness. Both these currencies have benefited greatly from the weak-dollar story. But neither Japan nor the Euro zone are in fundamentally great shape. Japan is a demographic and debt nightmare, despite massive accumulated savings and a strong current account position, while Europe generally a less friendly business region, still way steeped in social entitlements and with a number (now anyway) of weak links. Germany can't carry the whole load. So while I am in no way saying the Canadian, Aussie and New Zealand currencies can't go higher (along with a number of Asian currencies) against the dollar, the major speculative capital market cross partners with the US currency can easily be said to have run far ahead of where they "should" be. We should also not discount the US' ability to figure a way out of their fiscal, economic woes in coming years. I'll give you an example… my neighboring state of Rhode Island is taking further steps to de-criminalize marijuana. They are also looking at ways to tax legal forms. Can you imagine how much tax revenue the US government could collect if the legalized cannabis in the coming decade? Not to mention the whole new industry it would foster. 41% of all Americans have admitted trying cannabis at one point or another. There are millions of regular cannabis users in the United States… all currently getting their supplies through "underground" channels. If that money were brought above board and taxed… the economics of the whole country changes. That's just one example. Again… I don't want to delve into all the issues surrounding the dollar… all I will say is that markets find a way to correct long-standing position skews and popular opinions in ways that are totally unexpected at the time of the turn. The power of our cyclic world will not be denied.

Wow… I didn't realize what time it is. Guess I will be back on Friday to finish up my list of trades for 2010. Still to come, stocks and commodities.

Dec 23, 2009 Painful Watching

7:00AM New York time. Yes… watching holiday markets from the sidelines can be tough, especially when some of the moves being seen are those you might want to be participating in, but might not trust because of the thinness of the markets or the timing on the calendar. I'm not even going to go into which moves those are. Saying you want to do this or that as a trader/investor, but not actually doing it, is even worse than the armchair quarterback who screams at players and coaches on TV for making the wrong call or botching a play. That armchair quarterback CAN'T get in the game. The trader/investor can get in the game… anytime he or she wants. It is as easy as opening ones mouth. So talking about a position (especially saying one had it right) without actually being involved is more hot air than I can bear.

It's OK. Nothing we have seen in this final month of trading, whether bond yields climbing, the dollar rallying, or gold selling off, is of such consequence that it leaves nothing on the table for 2010. Bond yields are still under 4%. If we have truly made an interest rate cycle low this year, the 40 basis points of yield rise we have seen this quarter will not even be noticed by year-end 2010… and beyond. If the dollar has bottomed, the move back to 1.43 Euro will seem like nothing. What I believe is important, will be to see how all these markets come out of the gates next year. It will be critical to have a strategic plan. I have increasingly grown to believe that the capital markets are no longer simply vectors through which the allocation of financial resources to companies and sectors of the economy are determined. They are an end game in themselves. The lion's share of capital that they allocate to the markets will never find its way to the real economy. We have created a whole industry based on the management of that capital and an army of investors whose primary means of economic return comes from that performance.

There is nothing wrong with this. It's simply the way things have evolved. But it also means that an increasing amount of price movement in the capital markets will be driven by participants seeking to maximize returns over well-defined performance periods. I remember one December back in the mid-eighties when I was working for George. It was a few days before Christmas and we were all thinking we would see George come in and take some money off the table on his already big bets, which had already paid off well that year. He did call. Instead of taking money off… he put more on, adding to what we already considered very big positions. My point is… he made big returns that year… and the year following. There was no thought in his mind at all about booking short-term gains. He was thinking out to the following year, and who knows how much beyond that. Those were the days when few knew what a hedge fund was. And the guys who ran them were expected to make big bets for big money. Nowadays… the number of funds in existence has multiplied many fold. And you're a hero if you make north of 20%. In 1986 George was up 180%! My point is simply that, with the explosion in the number of these funds, and the "thinning" of the talent pool, the nature of the hedge fund game has changed. And that change has been toward more conservative performance, performance that tries to maximize both money under management, and minimize drawdowns from high-water mark to high-water mark. So the start of a new performance period is now frequently coincides with a turning point in the markets, and a fresh trend that will last as long as the performance period does.

I find no problem in all this. Quite the contrary, it is one of those ingredients in "knowing the game". It may be one of the sad commentaries on the economic evolution of the United States that one of our fastest growing sectors (at least until 2006) in the already fast growing financial services industry, was the growth of hedge funds. But it is a critical operational concern when one is actually one of those participants scratching and clawing for returns. I can say all this and still feel good about myself because managing capital is only part of what I do. The bottom line is; I think it will matter far less what happens the final two weeks of this year than it will the first two weeks of the new year.

Dec 21, 2009 Winter Solstice 09

6:00AM New York time. It's another one of those mornings where I wish I wasn't writing this blog. It's also the winter solstice… the shortest day of the northern hemisphere year. I say this every year. The solstice and the statistically coldest day… I think actually it's the 18th of January… are my two winter milestones. That mid January date is the start of the slow rounding bottom in temperatures before they start their inexorable climb back out in mid-February. That's still 3 weeks away but at least the days start getting longer from today. And from the 18th on the odds will slowly improve of getting warmer temps. Longer days are a definite. Warmer days are not. All of this is part of my preoccupation this morning. We had 14 inches of snow this weekend. This morning I will dig the boat out and try to get a couple of orders out the door. That is normally a modest goal, but not in weather like this. These are the hardest days of all to be an oyster farmer. Many of my fellow farmers in the Northeast will be packing it in after this week and next. They'll fill their holidays orders and close up for the winter. North of the Cape, the weather truly doesn't allow much more. We go right through. It is a struggle. Even the simplest tasks become an adventure. Motors don't want to start, cables and water pumps freeze up, hydraulic oil gets like molasses. The solstices… both winter and summer… are days that always get me thinking about the cyclic nature of our existence… and our markets. Part of it is the irony that, as an oyster farmer, just like as a trader, the bottoms get made when things are the darkest… shortest… coldest. It is a constant reminder. And it applies constant pressure toward contrarian thinking. There truly is… a calm before the storm.

I guess I need to say something about markets this morning. This is Christmas week in the Christian world. Volumes will dry up substantially between here and Jan 2. It is dangerous to read too much into the price action we will see, yet at the same time, those conditions can increase volatility as participants attempt to get out of the way of those last-minute moves that threaten to skim a couple of percentage points from performance. The dollar is one of those trades that is generating some last minute heartburn, both for those that were trying to close out the year with their weaker dollar trade intact, and those (like myself) who were looking to 2010 for potential to reverse that weak dollar trade we saw for most of 2009. It will be that much harder getting on board that trade in January the farther it goes now. By the time the 2nd rolls around, we may have already corrected the lopsided position skew and equalized the odds of a move in either direction. It will put me in a position where… if I believe in that trade… I will have to wait for a dip to initiate. The big storm that hit the US northeast will also increase uncertainty that US Retail Sales will live up to forecasts, especially coming on the final shopping weekend before Christmas. Stocks at least have some chance of holding up through year-end, providing that fresh opportunity in January for "unexpected" counter-trend price action. I have already started to talk about trades for the new-year. Now we will see what the two-weeks leading into that will do to entry points and timing.

Dec 18, 2009 Beginning To Look To 2010

7:00AM New York time. I have NOT been watching markets the last couple of weeks as closely as I usually do. I don't really trust them right now… not at least as far as my style of trading goes. I am not sure how much of what we are seeing is simple year-end position squaring/adjusting, or actually a turn in macro direction that will have legs once we get into the new performance period. I have also gotten head-faked a couple of times on some small trades and that has been discouraging. I hate getting sucked in and stopped out when there is really not a lot of flow going through and the players that are involved are just gunning for stops. My tendency is to think that there is both some macro involved as well as position squaring in what we are seeing lately. That also makes me cautious in saying that the strong intermarket correlations are breaking down. Here again… I think there is some of that going on.

My focus now is to try and set up more for getting out of the gate right next year. Where the Dollar Index is concerned… you have to remember that it is mostly Euro. And to say that Europe is in that much better shape that the US to justify a 1.60 DXY is a bit of a stretch, especially in light of recent news. I think participants are coming to that realization. You don't have to be necessarily "bullish" on the dollar to be long the Dollar Index… just more negative on Europe. The technical picture points to a turn, the question is whether or not that will be "fresh" enough on Jan 2nd to want to try and get aboard. I'm not sure about that though a bullish dollar stand in 2010 would certainly be against the grain from a macro standpoint.

I'm amazed how well stocks have held in through all this. I would have expected a lot more weakness given what has happened to the other legs of the risk trade. But… as I said the other day, that may be more a function of the TYPE of participant in equities and the degree of passive money flows that have been fueling it. In the end, that may actually create a better opportunity going forward. It sets up the possibility that the dollar and gold are foreshadowing what will eventually come to pass, but gives bears a much longer window to get set up for it. Plenty of people are pointing to the resilience as a sign of underlying market strength. That is true. Still, equities have been unable to push through recent highs even with supporting data and on days where it looks like gold and the Euro could bounce. Equities perhaps set up as the best "fresh" trade going into the new-year. If holiday retail sales come in weaker, it will be the perfect test to see if the flows will be there to the same degree in 2010 as the were since March 09. I am very skeptical and sit ready to pounce on the short side.

As bearish as I am on bonds for 2010 and beyond, I think one has to be very leery about that trade with stocks perched so precariously. A quarter or so of equity market pullback will push yields right back down to the recent lows. It will also push back expectations for the timing of Fed tightening. The upside in all that is that it will give much better levels to sell, and we will essentially get two trades out of the same timing issue. You sell equities out of the gate, and then start to put on the bond short as that trade gets played out later in Q1.

I do not have a plan for gold going into 2010. I think gold will be more a function of dollar/equity direction. And if the weaker equity/weaker Euro (stronger dollar comparatively) trade does get/maintain traction in January, it probably does not bode well for gold during that period. We may be looking at another lengthy sideways consolidation such as what we saw the first half of 09. As for oil… I think we have a market torn between weak fundamentals and a generally positive capital flow ancillary to gold and the dollar. So if stocks trade lower in early 2010 and the dollar continues to firm, oil will suffer along with gold.

So there you go. My macro trade list for 2010. I look to sell equities early on, buy the dollar. Sell bonds later on, after equities have had a chance to come off, and probably look to get long equities after a washout. As for the dollar later on, we'll just have to see about that. I expect the equity correction to bottom well above the lows of March 09… at some decent retracement level. Once that happens, that's when I see the Fed coming into play as far as raising rates, and it's too early to know what impact that will have on the dollar. At least it gives me something to start with.

Dec 14, 2009 Trading Vs Investing

6:00AM New York time. I am having a hard time in these markets lately. It is a function of the evolving breakdown in correlation between them, the spread between my personal read of macro environment and the publicized read of the economy, as well as the individual market position skews and their relevance as we come into the end of the year. Overlaid on all of that is my insistence on trying to scrape a few extra percentage points out of the markets in these final weeks of the trading year.

Behind it all, markets are both doing some very interesting things, AND providing some interesting short-term trading opportunities. And where my problem lies, is in trying to have my cake and eat it too, trying to read too much macro import into what the markets are doing this time of year, rather than just taking it all in stride as individual trading opportunities in an environment where market participants themselves are trying to sort out what is really going on. For myself, and where I have had trouble, is in keeping the two separate. I think 2010 is going to be a VERY interesting year, with lots of capital market macro opportunity. I also think it will be a very important year for the US (and world) economy generally. Yet going into that, the markets are still dealing with some very lopsided position skews, and the fallout from the start (and risk of) correction to those. It is important to separate the two.

All that means, is that for the balance of the year, my trading is simply going to be attempts at capturing short-term dislocations, but with an eye toward watching the markets behavior for clues as to their propensity going into 2010 and the macro theme they look to play out. Here's an example. Gold is off over 100 dollars from its recent high. Gold was/is part of the whole "risk" trade, along with global equities and the declining dollar. Gold may represent a trading buy right now, even if you think the whole risk trade is starting to come apart, with and upside bias to the dollar and downside risks to stocks. You could go through each and every market just like that, painting each with a separate short-term, trading dominated bias, completely separate from the longer-term economic macro.

What has also thrown me for a loop, is the resilience of equities over the other skewed markets. Perhaps that makes perfect sense. Equities are less prone to entry and exit woes from leveraged capital. Equities draw most of their flow bias from what passive money is doing. And right now, passive money is both trying to keep performance on pace with the equity indices, and passive money is becoming more optimistic on the economy generally.

All this means, from here on out, I'm going to be hard to keep up with as far as positioning goes, but I am going to be forming up my 2010 macro. For the purposes of this column, I'm going to be focusing on the latter with input only from the former. I'll start on Wednesday.

Dec 11, 2009 Wearing Me Down… Again

6:00AM New York time. Once again… I had a trade that got off on the right foot (short S&Ps from Friday), but never developed, and has, as of yesterday, drifted into the red. In the meanwhile, the correlated markets of gold and the dollar have undergone serious "corrective" moves in that time, and may be ready to resume their larger trends. And in my classic dilemma of which travel lane to get in, I chose the one (yet again) that preformed LEAST in the direction I had hoped. I remain short a full unit, but by the time you read this that is likely to be trimmed back. I'm not sure I'm ready to bail totally. This equity market continues to wear me down. There has been a mixed flow of news. We got negative news from Greece this week and McDonalds missed numbers. On the other side, Jobless Claims were good. Whatever. The market took it all with a net positive. That is the bottom line and all that really matters. Nobody ever said trading (especially as a contrarian) was easy. My view remains the same. I keep hearing a chorus of recovery… recovery… recovery. Yet ask anybody (in finance anyway) if the Fed should start to raise rates, and you get an unequivocal "NO" even before you finish asking the question. OK… so basically we have a recovery that is predicated on near zero interest rates. In my view… the reality of the economy NEEDING near-zero interest rates AND believing that robust expansion in that same economy and associated corporate profits are imminent, are two diametrically opposed concepts. You cannot have both conditions true at the same time. None of this surprises me. I (and a great many others) expect this current downturn to take much longer to resolve than many intermediate economic contractions we have had in the past. The US consumer and the US economy are undergoing a structural change. Where I take issue is with an equity market that is up 50% from the lows, on a 180-degree swing in sentiment, that would have you believe a robust recovery and strong expansion of corporate profits is right around the corner.

None of that matters for capital market direction. The pabulum produced and disseminated by the financial press is a rationale for what has already happened and is perfectly suited for public consumption by those who want to believe that the financial markets are driven by simple linear connections between price action and news and data. What is happening in real-time and the "true nature of the game" is dictated by the ebb and flow of capital… as it affects price action… all driven by traders and investors as they move around their assets in a battle amongst each other for returns. And as we know all too well, frequently that battle drives prices to excess, as buying and selling momentum, the spirit of competition, fear and greed, et al, interact to create conditions where it is more important to know "just how far this thing can go", than where prices "should" be. It is what it is. We're just human beings. At our core we're driven by emotion despite an increasing reliance on and proficiency with technology, which itself is driven by pure logic… 1 or 0. Is it any wonder we are in the situation we're in? Some people's gig is to hop aboard those momentum trades and squeeze every last drop out… in the process risking getting caught up in what we saw in gold over the past week. Others like myself shy away from what we view as "excess" in the hopes of catching a market at a point of exhaustion, and getting on board a new move in its early stages. For every trader there is a different shade of gray. Am I bummed that yet again I have missed the boat? Nahhh… its part of the game. If I manage my capital well, I will live to play many more days. And sometimes I DO get it right. Does the thought cross my mind that perhaps, instead of trying to sell stocks, I should have been trying to buy them… or even better… gold… which has come off 100 bucks from its highs! Perhaps so. But I think one needs to be true to one's self, and remained disciplined. Ultimately… discipline pays off. But one cannot rush the process, nor can one ever know with certainty that the process has fully run its course. Have a great weekend.

Dec 9, 2009 Feast Or Famine

6:00AM New York time. We've gone from not much to talk about to almost too much. I want to start with the whole Glenn Beck Goldline International controversy. It was not just a feature of anti-conservative media… it made the "popular press" as well. I only saw it yesterday, but if I had come to my attention sooner you could be sure I would have pointed to it as yet another big red flag. I point it out now… sorry I'm late. For the record… I have no idea what the future of gold is or how high (or low) it will eventually go. What I do have high confidence in, is that gold will act, over time, like any other market man has ever created. It will fall in and out of favor to varying degrees over the various stages of the business/monetary cycle. Gold is NOT impervious to the excesses that plague other markets. All markets have that in common. So just as all other markets, there will be periods of time around which, the emotional excess among a critical mass of the participant base will create a vulnerability to a price move one way or another. We are in the throes right now of a correction to one of those excess periods. Glen Beck is just another indicator, like making the cover of BusinessWeek, that this time include the likes of James Paulson, and a number of other hedge fund managers that I have recently become aware of but do not care to mention, who had (relatively) recently gotten long gold. One in particular was quoted in the press only recently as being bearish the dollar and bullish gold. It's all part and parcel to the whole phenomenon of ebb and flow of capital flow. Long-time gold bulls may actually think this current washout to be a benefit by clearing out many of these new arrivals. Though I know from personally experience that losing money plain old sucks no matter what philosophical spin you put on it. The other thing that recent market action points out is the double-edged nature of most of these commodities. They are not the bond market or the stock market in terms of liquidity and depth. And while that might seem a boon when participants are piling in, it can be a nightmare when those same players are trying to get out. Under "panic" conditions, it might take twice the price move to accommodate the same volume of buys and sells than under normal conditions.

OK… we also need to look at the broader implications of both the move in gold and the move in the dollar as it pertains to other markets as well as to the calendar. As for the calendar… I myself have been talking about the correlated trades being able to last out 2009… led largely by a rally in equities. It has been my view that once we start the new performance period and get the results of Holiday Retail Sales (which I expect to disappoint, if not in actuality but at least as a "sell the news event"), equity managers will start to look around and see that the stock market has priced in a lot more economic improvement than has been justified by the 60% rise since March. That would generate at least a Q1 correction. But over the last month, gold has both taken the lead to the upside and, more recently, the lead to the downside. It is my opinion at this point, that because of what has happened in gold (and the dollar) we have pushed forward the timetable of all that to pre-year-end-2009. This is interesting for several reasons. Markets will be thinner thanks to the holidays and more susceptible to greater volatility on less volume. It will also set up a buying opportunity much earlier in 2010. Two further points to mention… and I did this Monday… FX and commodities are more dominated by professionals who move a lot quicker than either passive equity institutional, or certainly retail. So the moves in gold and the dollar are "foreshadowing" what I think we will see in equities as the balance of the month unfolds. You can't kick out two legs of a tripod and expect the whole thing to continue standing. All this will also create an opportunity. Since gold and the dollar will correct their position skews sooner than stocks, there will be an opportunity to get back involved and essentially leg into a spread trade that could very well be profitable on both ends. Unfortunately (for bond bears)… and despite all the talk over the financial airwaves about both BOJ and Abu Dhabi selling Treasuries to fund domestic and credit needs, any problems in stocks will be bullish bonds. I want to sell them too, I just need to be patient. Lets see what kind of reception the 10-year gets today.

OK… on to strategy. I haven't said boo about trading, but I remain short a decent S&P position since last Friday. I plan on trying to stay with it for as long as possible with a combination of trailing stops and potential adds on bounces to key technical points. I am not sure about taking a long dollar position and certainly have no interest in being short gold. I think ultimately stocks are more justified in going down than gold or the dollar going up. And while I will certainly be starting to talk about trades for 2010 in the weeks ahead, it may be that we still have plenty of fireworks left for 2009.

Dec 7, 2009 Even A Blind Squirrel…

6:00AM New York time. The title pertains to the old saying… even a blind squirrel finds an acorn once in a while. That's kind of the way I felt this weekend. As you may have guessed, I sold a decent sized S&P position short on the quasi-reversal of the equity averages after the November Payroll report on Friday. I didn't trade the day all that well and actually even got stopped out of a piece well set early, and then had to reset lower. So my average could have been better. The title implies that one of these times… I feel like I'll get this trade right for a bit even by accident. I have had several of these set ups before. We had Dubai World only a week ago. We have had a couple of failed new highs and a couple of poor reactions to major economic releases before. There is no reason to think this time it will be any different than it was any of these other times. But I have to be true to my market philosophy. I have to take the leap of faith once in a while. Market psychology cuts both ways. I reminded readers Friday morning that the March equity lows were made on an abysmally WEAK Payroll report. Few saw what was happening at the time. Few were optimistic on the market's outlook that weekend. We are in a similar boat. What makes this time different? Nothing. All I know is that I read a great deal more optimism around the markets and the economy now than then. Is it 180 degrees about? That is impossible to measure. Some would say analysts and strategists continue to fight this rally… and that's bullish. But I think a great many of those strategists and analysts do not trade or take risk. I think among those who do trade and do take risk, many have had to get involved in one-way or another. I think passive money had been getting back in the market in a big way. I also know of more than a few participants who have gotten long gold and short the dollar in recent months. If you do not see that these three markets have been part of a correlated trade for the past 6 months you have been living on another planet. Look at what happened to gold and the dollar on Friday… and continues today. The types of participants who trade the commodities or FX react in much quicker fashion than passive equity mangers. I say the damage to the other two legs of this tripod does not bode well for equity prices.

Anyway… back to the title. Only time will tell whether my appraisal of the situation will bear itself out in my P&L. In my own defense… even though I have tried this strategy before… each time I have been patient and disciplined about it. Each time I have taken measured risk, and been able to be wrong without costing myself much money. I remain up about 12% on the year, and while that is down from the high point of almost twenty, that is not so bad considering I have looked to go the other way starting two months ago. Now… all I'm saying is that even by pure luck of chance… I have decent odds of being right at least ONE of these times. As always… I think whatever happens will be position driven. So the more crowded you feel the short dollar or long gold trades, the more you should be cautious on equities. Any time there is pressure on one leg of a set of trades that have been working, there is exit pressure on the other legs. Participants, in times of duress, will seek to book profits on whatever remains up in their portfolios. To exacerbate this problem this time around, we are coming into the end of the year when volumes will begin to dry up and it will be harder and harder to move size without moving price. We will see. Gilmore points out that the early part of the week has been the "risk on" half, whereas the later parts of the week have been "risk off". I myself cannot corroborate this. But lets see what happens today anyway. Perhaps the selling in gold and the Euro will end today, and both those markets will recover. With stocks having come off very little vis-à-vis those other two markets, many will take that as a very bullish sign. Who knows? All I can do is manage my risk, place my stops and let the chips fall where they may. And I repeat… it was a similar day in reverse back in March, when all looked black but in fact the opportunity was MASSIVE. Few had the courage to step up. It should not surprise you then if the top (whenever that gets made) will similarly come just as the sun starts to shine on the economy and give us reassurance that everything is OK after all. That is the nature of the world… our existence… and by default… the markets.

Dec 4, 2009 Hodgepodge

7:00AM New York time. Regular readers know I love to poke fun at people I see or hear in the financial media who either say stupid things… or are simply full of sh**. A frequent target is Dennis Gartman. Dennis writes a very popular and entertaining newsletter. But more than once I have heard him in the media expressing his view on a particular market, only to have him back on the same program 3 weeks later saying the complete opposite and that (by the way and very matter-of-factly) he is profitable participating. Yeah… I'm sure he keeps his paying subscribers regularly informed. Anyway… here is a link sent to me yesterday from a blogger with a similar view on Mr. Gartman.

OK… the big topic of today is Payrolls. It's the same old broken record. Watch how the market reacts on this report very carefully, and remember, the bottom in equities was made on a reversal move on a Payroll Friday, after an abysmally weak number (perhaps the worst, if not close, to the worst job losses we every saw in this downturn). I have no position going is though I am always prepared to take action. Yesterday's sell off late in the day seems of no consequence in front of this economic release. It makes perfect sense that participants would take some profits in front of it. Bonds were quite weak yesterday. I spoke to an FXA customer on Wednesday who told me he had been seeing selling start to come in to the short end this week. That makes some sense too. The Fed is experimenting again with ways and effects of using reverse repos to remove liquidity from the system. The market was weak last time they did this but came right back once they stopped. Trust me… if I though the Fed was actually embarking on a tightening cycle, I would not be wishy-washy where strategy is concerned. In fact, I think they are deathly afraid of what will happen to the capital markets once they do. They should be. The whole country is riding a "recovery" based on free money. And… it may be that this time around, it sets up such that bond prices and equity shares can trade lower together as fears of higher cost money spread. Oh yeah… one more thing. This same fellow was talking about how many of his hedge fund associates are now long gold. There was a time long ago when guys like Dave Lewis were talking about the benefits and potential of owning gold to empty theaters… a fringe group of capital market participants who are fixated on Weimar inflation and the breakdown of "the system". Well… they are now in the company (position-wise) of the very group that is their anathema… the fast money hedge fund crowd. Instead of the latest dot.com IPO it's gold that is the topic de-jour of the Greenwich holiday cocktail party circuit. Think about that one for a minute.

Lastly today… I'm going to blab a bit on the whole global warming thing, especially in light of recent hacked emails and the beginning of that whole movement starting to fray at the edges. I'm a big believer in fractals. Fractal theory basically says that the various time-frame graphical depictions of a particular phenomenon will all look and behave similarly. In other words, a 5-minute price chart will look the same as a daily chart if we remove any reference to price scale and stretch out the time increments to match. It's actually a little tricky in the markets, when openings and closings of the various electronic and open-outcry trading sessions create gaps in data points. The perfect theater for the study of fractals in my view is the weather. I have not said much over the past 8 months about the weather. Regular readers know my long-standing skepticism of our species' ability to forecast global warming. One of the chief sources of supporting evidence for the unprecedented nature of recent global temperature increases are polar ice core samples. They indicate that the earth has never seen such a dramatic rise in global temperature over such a short time period. In refute, I submit the average month temperature deviation for our area for October and November. The average daily temperature recorded at TF Green Airport in Providence Rhode Island for October was 1 degree per day lower than normal. No big deal. November was 5 degrees PER DAY ABOVE normal. FYI… 5 degrees per day above normal over a month is a HUGE variation. So if you believe in fractal theory, you have to imagine there easily could have been longer-term periods in our planets past where the short term swings in temperature were just as drastic.

Dec 2, 2009 Totally Procrastinating

I was in a hurry yesterday morning and forgot to post this piece. It is as applicable today as it was yesterday. I have noted where prices are different.

6:00AM New York time. Well… I am totally procrastinating this morning. I have checked and gone through emails, looked at the charts and the news, gotten some things together I need for work today. Now I'm sitting at the keyboard trying to figure out something useful to say. Nope… still nothing. Gold is up another $13 ($7 today) this morning. The Euro is still above 1.50 but not really doing much (1.51 and a quarter today). The dollar and to a lesser degree stocks, have lost some upside momentum in the last couple of weeks, but they remain on their highs (or lows as the case may be). The S&P has not gone much above the mid-October highs, and the Dollar Index continues to trade fairly close to 75 (now closer to 74). Gold on the other hand has broken from the pack. It has singled itself out to be the place to be in the capital markets. For a while there you could have been in stocks or short dollars and kept up… but not any more. Whatever your reasons for being in… all you should be doing now is hanging on with both hands. I have no interest in hearing any fundamental or theoretical arguments in its behalf at this stage of the game. I don't think any of that stuff matters when markets reach the stage of participant enthusiasm gold has reached. We are in full-blown, grab with both hands, get on board at all costs market. Not me mind you. I'm a contrarian. The LAST place you'll find me is initiating in a market where people are climbing over themselves to get involved. If I were already in and were riding a core position with stop that would be one thing. But here? Just getting started? You were just as likely seeing me take out an alt-A on a mcmansion back in June of 07. And I'm not saying we are at that stage. I'm just saying that TYPE of trade timing is not my thing. And I know… just as I was way early on looking for housing to come apart, so too I am probably way early on thinking gold is making its top. Besides… if we look back at commodity history, we find numerous examples of a final rush into any number of markets over a very short period of time that create the picture of the parabolic chart on any of the longer-term (weekly/monthly) graphs. We could end up going higher by another $500 over two months and there wouldn't be anything historically out of line with that. And up another 500 bucks… I'd STILL feel the same way I do now. Clint Eastwood said it best… "A man's got to know his limitations." Nope… the best thing I can do right now is as little as possible.

On the economic front… I continue to hear a build in optimism from the corporate sector through the financial press. The ISM's, while a mixed picture from an expectations standpoint are above 50. Recent guest CEO's are saying they are seeing better levels of business and one yesterday was talking about lines of credit from the banks finally starting to loosen up. You can take all that for what its worth. All I know is I wait every week, more so now than 8 months ago, for customers to "hold off for this week" because they are still sitting on product. Again… maybe its my own perception and misread of normal seasonal patterns. All I have to go on is what I see and hear with my own eyes. That stuff on the financial news I have to take somebody else's word on. What would you believe? Oh well… these days I feel like I'm not even doing much of a job entertaining you, let along providing insights on the capital markets or human behavior. I'm sure all that will be reflected in my page traffic. Thanks for stopping by.

Nov 30, 2009 Back To Normal

6:00AM New York time. I was in my car this weekend when I heard the news that the UAE Central Bank promised to provide whatever funding was required by Dubai banks to stay afloat after last weeks problem with Dubai World. The Capital markets love a good bailout these days. Did anybody (myself included) think it would be anything different? Why not one more? What's another $60 billion essentially on the balance sheet of the world's central banks?

I'm flat again. Dubai World has turned out to be just one more catalyst that wasn't. That's fine. Things will happen when they're ready to happen. The broad theme of stability (meaning the status quo in the markets) through (at least) year-end continues to hold up. Meanwhile… I continue to see personal warning flags. My wife mentioned a MSNBC piece she saw at work on Friday about a potential "cash for old appliances" package under consideration. Nothing new there and hey… why not? No sense having ANY unsubsidized parts of the economy dangling on the edge out there. My wife also did some Christmas shopping this weekend. Her anecdotal information was that the parking lot was full, but the mall didn't seem all that busy. She said the Christmas Tree Shop was a madhouse. They sell all kinds of inexpensive Chinese products. The holiday retail season obviously has big potential as yet another capital market catalyst. We'll just have to wait until we're through December for that one.

I remain of the view that the capital markets (specifically stocks) have run considerably ahead of the economic reality. My anecdotal information remains gloomy, perhaps more so than it was this past spring. What makes it seem worse is that the businesses I know that are struggling are that much closer to the "end game" than they were this past spring, when there were more options available for survival. Now… for many places… the cushion has been worn down to the nub. I hear over my shoulder the CNBC anchor saying Black Friday sales per person were weaker than last year. Hey… maybe it's just me. Maybe (as I always wonder) my anecdotal information is way off the mark.

I hate bubbles. While I find the whole psychological/economic interplay "theatre" fascinating, I also, some days, get sick of it. The very opportunities this "condition" creates periodically… also affect swings in real-world expectation and ultimately create uncertainty in the broader world of business planning and consumer behavior. Essentially… we have all the technology at our disposal to move trillions of dollars in capital around the world almost instantaneously, but we remain driven by emotion. The US is the worst example. Another downside to the US' loss of its manufacturing base is that our fate now is so much more closely tired to the direction of the capital markets. So many more people make their living in financial services and a great many more have a vested wealth-interest, the fate of the economy and incomes ride largely with the direction of those markets. I may bum out when I'm not trading well, but I have a real product to get out the door every week aside from that. The accomplishment of that task is all about consistency, and relationships with customers, and refining methodologies, all factors that need to be looked at in a lot longer time frame. They require true long-term commitment. There is a lesson in that. If anything… the short term swings in the oyster business end up being less pronounced than I worry they will be. Maybe that's my capital market thinking trying to infiltrate and pollute something that is in fact more stable than I worry it is.

None of that helps you as a reader. The farther the market goes away from me, the more my caution is discredited, and the less connected I become to the real-time market. Whatever… the ebb and flow of my readership is just another sentiment indicator. I intend to stick to my guns and the methodologies that have consistently worked for me in the past. If there is any lesson that I carry out of this year, it's to follow my own thinking and strategy even more so to the exclusion of others, and then give that strategy some room to maneuver once I initiate.

Nov 27, 2009 What A Difference a Day Makes

6:00AM New York time. While US participants were out for the Thanksgiving holiday, a tremor ran through the rest of the financial world. By now we all know the news. Dubai World has asked for a debt postponement until May. Here is the big question. Is this the catalyst that sets off the long-expected correction in equities? I would say this right up front; don't look at this from a fundamental perspective. The world has already weathered worse news. And the government of Dubai could (I think) fairly easily, come to the rescue of Dubai World. But keep this in the back of your mind… just as a market can go up for months on news that's "less bad"… driven by unprecedented liquidity in the system, so to can a bearish phase commence on news that that may not seem initially, all that bearish. A move lower will simply be about a piling out of the theatre by participants who want to hang on to gains they have made this year AND make sure that they are in the safest vehicles possible into year-end.

Catalysts come in many forms, but if this news is one, then it is in fact a hard trade to act on. Does one sell this news despite being already sharply lower? Or do you use the dip as yet another buying opportunity in all the groups that have been riding the bull wave since March. This is exactly what I have been talking to my market associates about. When the real thing comes, it will be the kind of event that you simply need to close your eyes and chase. Because before you know it, it can simply run away from you. How ironic that the sh&% hits the fan on a long US holiday weekend when US participants' attention is turned away. The trading center that has led the rallies… gets itself behind the 8-ball as world markets take a big turn when they're away from their desks.

Today will be important. If this news gets price traction in the US… and I mean on the close… then there will be a lot of people looking at heading for the exits with not a lot of time left in the year, with much thinner trading conditions ahead, and with lots of money at risk and still in the game. That is a dangerous combination. What will I be doing? I don't know right now. I feel a bit frozen myself. I have been out of these markets over fears of excess position skew. Now we have a short-term rush for the exits… exactly what I would have been looking for… and I'm not sure how to handle it. I have been telling my market associates that when the catalyst comes, you have to bite the bullet and climb aboard. Now… here we are… and I am hesitating. OK… I just got off the phone and bought a small Dollar Index position. You can't talk about this stuff and then do nothing when the "stuff" you're worried about comes to pass. Remember… this is not a "fundamental" point of contention. This is about an event that catalyzes a "panic" market reaction. It may very well not have the same impact here in the US and managers here may simply buy this dip. Only time will tell. We'll see.

Nov 25, 2009 No Column Today

5:00AM New York time. I need to attend to a family matter today so there will be no column today. I will be back at the keyboard on Friday. Happy Thanksgiving to those who celebrate.

Nov 23, 2009 Are We Parabolic Yet?

6:00AM New York time. It's yet another day where I have no positions, so my commentary should be taken as such. While stocks and the dollar have been grinding out their trend directions grudgingly. We are still seeing a tough fight for the Euro at 1.50, gold, in contrast, may have gone parabolic. What defines a parabolic rise… a price move that accelerates to near vertical slope. If we're not there we're certainly close. All I can say is hats off to those who are fully benefiting. Enjoy the ride. I wonder if we end up seeing a $50 or a $100 up day before this is over? And I wonder if the fact that gold has gone parabolic is a signal that we are close to the end of the move for gold? Parabolic spikes in price historically travel a long distance in price over a very short period of time and see tremendous capitulation among the participant base. That's another classic statement from somebody not involved. I think it is interesting that we are seeing this happen right into year-end, when volumes will dry up and participants will push for those last few percentage points of performance.

I am not of the view that widespread inflation is coming, or is even a big risk. I do think that there has been a creep higher in many goods and services categories that are either not covered in CPI, or are argued away by BLS methodologies. But it is not an across the board trend. A look through the commodity charts this weekend shows a very mixed picture. Some are up, some are down, some are in bull markets, and some are in bear markets. Similarly… there is no consistent increase in price theme that runs through them. Which makes me think that the ones that are in bull phase, gold, copper, sugar are specific situations where participants are willing to pay up and continue to accumulate. Again… hats off to you if you're on board any of these. And if it's an inflation argument that keeps you involved… so be it. Whatever the reason that keeps you in a trade that's working is a good reason. Reasons that are not widely accepted or in doubt frequently help create even more powerful moves than those that are not as widely held or might be less credible. A good bull market requires people like me, who are sitting it out for one reason or another, and keep finding reasons to stay out.

I remain of the view that officially provided liquidity has chosen its capital market beneficiaries through participant choice. You need to be in the right market to capitalize on the unprecedented amount of stimulus in the system. In light of that I guess you can say that gold is acting as the perfect excess liquidity hedge. You don't even need to call it an inflation hedge. It's a liquidity hedge. I don't know how far all this goes or where it ends up. It seems the farther it goes, the more analysts are willing to find the courage to start calling for a top. Is that courage or simply a suicidal tendency? My guess is most of those strategists don't have real capital on the line, because as someone who has, the last thing I want to do is step in front of a speeding train. Being the wrong way in these markets can hurt your account in a hurry. Oh well. It's a holiday-shortened week. Thank god. And thank god I have a real product to fall back on to sell. I'm not sure how I'd be feeling about myself or my prospects, if trade the markets was all I did. I like to think I have learned something valuable out of all this. Refining one's discipline is an ongoing task. We are a just over a month from the start of a new trading year. I think 2010 will be yet another interesting one for the markets… full of opportunity. Unfortunately… it will probably be a somewhat painful wait.

Nov 20, 2009 Unmotivated

6:00AM New York time. I have to admit. I have grown very used to doing this column with positions on, so the longer time goes on without being involved in the markets, the less appropriate I feel this column gets. Today is one of those days. I could pass along my observations. It was pretty impressive the way gold held up yesterday with the Dow down 120 at one point. I wonder how much the recent John Paulson gold fund announcement has supported prices? I don't know if his high-profile entrance into the market will ultimately be a good thing or a sign of something else. As always, price is the ultimate arbiter, and whatever the reason, good action is only just that. We are up again this morning despite a modestly stronger dollar.

A friend the other day asked me why I don't just get back aboard the higher stocks, lower dollar, higher gold trade? The problem is, at this stage of the game, the contrarian in me will simply not allow me a fresh initiation at this stage of the game. If I were already long, (or short depending) then perhaps I would be hanging on to core positions just letting things run and seeing how far this thing gets. But at this stage… forget it. Part of the problem is the money management. If I were to initiate here, where would I consider myself wrong? All of these markets have come so far, that a correction could take them back a long way and leave the trend intact. If I get in today, do I ride the potential correction all the way back and still consider myself right? This is why… for me… it is so important to get in to the evolving trade as early as possible. That way, I can evolve my trading strategy as the trade itself evolves.

No… I believe at this stage of the game and with the new trading year right around the corner… I am going to stick to the sidelines and simply observe. I think new opportunities are going to present themselves as we get into 2010. Will any of that be foreshadowed or even begun here in the latter stages of 2009? I don't know. All I know is that there are a number of potential "fresh" trades out there, some of which have powerful but currently dormant fundamental arguments. I would much rather wait for them to show "technical life" before I start to climb back in. It is pretty obvious we have some very interesting position skews out there.

It's Friday. I am not particularly motivated. Next week is the US Thanksgiving holiday, which means the start of the lower participation holiday period. We may certainly get some funky things going on in the markets, but I would be very cautious in reading too much into it as the holiday's progress.

Nov 18, 2009 Poor Misguided Souls

6:00AM New York time. So… and once again… I'm listening to Bloomberg Radio in my travels yesterday. And the guest they have on is excitedly talking about what stocks his firm owns and is accumulating. He's prattling on about how the outlook for these stocks is bright, especially as the economy recovers… yada-yada-yada. So then Kathleen Hayes, of the "Hayes Advantage" (though I never have been able to figure out what that advantage actually is) brings up the question… "Do you think the Fed can start to tighten policy"? The guest responds without hesitation that it is too early for the Fed to start raising rates.

So I'm thinking about this guy's analysis from a logical argument point of view. The question I can't help but ask is… you're very positive on all these companies and the economy generally… but you think the Fed should hold off on raising interest rates… leaving them essentially at…. ZERO!. Now I don't like to be the fuddy-duddy who asks the question that spoils the story… but if the outlook for all these companies and the economy generally is good… why does the Fed need to leave rates at near zero to sustain it? Aren't the two statements contradictory? Lets spin the order of arguments around. If the recovery REQUIRES free money to be sustained, how durable and robust can it actually be? You see… it's analysis like this that lead me even more convincingly to the conclusion that our current rally is all about liquidity. The rest of it, economic recovery, corporate profits and earnings, that's all smoke. Those are the rational arguments that come AFTER the price move has occurred. The primary reason we have stocks where they are is that money is essentially free, and ANY return in ANY asset class beats the no return that you get with cash.

The thing that gets me (as it always does) is the degree to which we go to convince ourselves of the "fundamentals". The economy WILL recover. The outlook for earnings and profits WILL improve. But all this will be a process. I think it will be a process that includes some long-term structural changes to the spending and borrowing habits of US consumers. All that doesn't happen or correct itself over six months. In the intermediate term, just as things got overdone on the downside this past spring, so too they get overdone on the upside, and it's arguments like I heard yesterday, that stretch the bounds of reason, that work on my brain to send up red flags as to the level of sentiment and optimism out there.

The problem is not the markets. The problem is me. The problem is in not recognizing and taking to heart that one needs to be involved during the time that the irrational is building. The period that the irrational is building many times accounts for the biggest gains. As traders, we need to be in before the majority of others come rushing in. But we also need to stay in for the rush. Thanks to analysis like I rip apart above, participants, an increasing number from retail and a steady flow from their agents in passive equity management, are rushing back in. The inane commentary is not the signal to get out, it is the signal to be in. I'm sure the commentary can and will get a lot MORE insane before this is over. Maybe… just maybe… one of these times I will figure that out and ride a trend past just the early-recognition-narrow-camp-participation-phase, to the meat of the move, when the flood of capital comes rushing in, as participant's fears of missing something outweigh their fear of losing something. Then perhaps, I'll be talking strategy on positions rather than pissing and moaning about some analysis with swiss cheese arguments from a guy who's making a lot more money in the markets than I am right now.

Nov 16, 2009 Another False Alarm

6:00AM New York time. Well… it's pretty obvious by now that my failed new high in the S&Ps and my failed new low in the Dollar Index… have failed. We're already back to doing what we were doing before. Stocks held decent gains on Friday and they are up this morning. The dollar is threatening to make new lows and gold is up $14. OK. I lost a small amount on the trade. If you're going to trade against the trend, make sure you have defined risk parameters and your stop points are well defined.

I am in the same boat mentally that I have been. I hear way too much optimism justifying the rebound in and level of stock pricing. That's the key problem. There are other inconsistencies as well. Why are bond yields staying down? If this "recovery" is real, we should be seeing higher market interest rates. That is a big red flag to me that much of what we are seeing is liquidity flow driven. The authorities re-capitalize the financial system and the money flows right back to many of the same places it fled from when the financial panic was on. That's all fine. Determining where capital flows are going is the single most important factor in all of trading/investing. So why am I not embracing that instead of fighting against it? Because there are times when each of us believes that capital flows have driven asset valuations too far beyond the reality of what we believe is going on in the economy… we read that spread as unsustainable. I did not buy the idea that the sky was falling back in March, and I do not buy the idea that everything is on the road to recovery now. As always… the issue is timing… and the uncomfortable fact that markets will (often) exhibit their most explosive behavior just before the end. Our Co-Op president asked me what I though the other day about the stock market. He has had a lot of money parked on the sidelines making no interest in "cash". So his financial guy has been trying to get him to commit some capital to the bond and stock markets. Think about it. 6 months ago there is no way his financial advisor would have even had the balls to make the call. Now… with stocks already up 50-60 percent from the lows, the calls are going out. Retail is being dragged, cajoled, pushed, and otherwise encouraged to get back involved in equities… not on weakness when sentiment is low… but on strength… AFTER a large percentage move up… only when we are finally breathing a sigh of relief that the economy is out of the woods.

So there you go… there's the phenomenon in real-life and real-time. I'm on the front end of the curve, trying to pick tops in the stock market using leveraged instruments, when by far the vaster amount of money, all cash, combined with an army of financial advisors across the country, is busy working the phones trying to get their nascent customer base out of their slumber and back involved in the stock market. And STILL it begs the question… if that is really what is going on… which way do you want to start leaning with your view? How do you want to start positioning?

It's very odd for me. I forced myself away from sources of anecdotal information back in the spring when it didn't jibe with what the capital markets were saying on the way down. The reality was… in the end… that anecdotal information had it right. Now… once again… my anecdotal data is making me more nervous than I was then. Our business is slow. I wait every Monday/Tuesday for my regular weekly customers to call me and "hold off this week". I just got another notice from my bank credit card company. The rate I had negotiated down to 11% last year will have climbed back to 19% come December. Tell you what… I'm not going to carry ANY balance or even USE the card at that rate! I am going to be making my modest Christmas purchases with the debit card rather than with credit. Why do you think so many stores are now offering lay-a-way again?

In hindsight I should have stuck all along to my broader view that this equity rally would last through year-end. That makes even more sense now. Not only is it the performance year close, but it will shine a statistical light on consumer behavior for the all-important Christmas season, and foreshadow how much leeway they actually have to resume consumption going forward. Weak Christmas sales will not bode well for sales in 2010, with unemployment still rising and total compensation still falling.

OK… I'm out and I have no strategy but to keep a close eye on the markets and keep my head down. I cannot and will not capitulate here. That is not who I am. What I should take away is yet another reinforcement that these things can go farther and longer that most people expect. Hell… with a month and a half to go… we have a chance at seeing a parabolic spike in gold prices that leads even long time bulls to scratch their heads and get nervous. We'll see.

OH YEAH… I WANT TO THANK ANY OF YOU THAT SIGNED OUR PETITION IN OPPOSITION OF THE GULF OYSTER SUMMER SALES BAN. LATE LAST WEEK THE FDA REVERSED THE DECISION IT MADE ONLY A MONTH AGO, DROPPING THE BAN, AND AGREEING TO WORK WITH THE INDUSTRY TO IMPROVE SHELLFISH SAFETY USING EXISTING AND MORE REASONABLE METHODOLOGIES THAT RETAIN THE INTEGRITY OF THE LIVE PRODUCT. To be honest… it doesn't give me a whole lot of confidence in the system when the omnipotent, monolithic FDA, decides to make a decision one day that effects the lives of so many people and their ability to make a living, and then a month later essentially says… "Never mind". Whose idea was that in the first place? What were you thinking? Is it morally right to fuc# with so many people from the get go? I wonder how THEY would like it if you said… "Hey guys… by the way, we're cutting your funding by 30%, so 1 of every 3 of you will be out of a job in two years". And then a month later, after all that stress and anxiety has been absorbed… somebody says… "Never mind, just kidding". How's that feel?

Nov 13, 2009 Finally… Something To Get Excited About

6:00AM New York time. I finally saw something yesterday that I could hang my hat on… get a little excited about. We put in a failed new high in the S&P 500 and a failed new low in the Dec Dollar Index. Ok… let's preface. It's been a long time since I saw a failed new high or low that I wanted to trade. The idea behind a failed new high is that bull and bear markets need to constantly put in new highs (or new lows) to confirm their ongoing direction. But as all markets do, they can get overdone and correct. During those corrections, current price levels often put a significant distance and span of time between where they are, and the old high (or low). But again… as markets so often do, they bounce, they "resume" their trend direction. Participants who have been playing the trend direction read a loss of momentum in the correction and come back in to add to positions in the primary direction. The market resumes and heads back toward the old highs or lows. But the process of a market turn is indeed a process. So retests of highs and lows are well known and very common. A failed new high (or low) is nothing more that such a retest that manages to take out the old high (or low), but in doing so, expends all the available buying or selling power. On the other side, participants who have read the loss of momentum as a potential directional change, use the weaker rally back to establish positions against the old primary trend. The chart formation that results is a failed new high (or low).

There ARE a couple of caveats. You might (and should) be asking what makes a failed new high different from any other intermediate top in an ongoing bull market. I mean… that's what markets do right… make new highs, come off, regroup, go on to make new highs. You're right. A failed new high might BE nothing more that yet another intermediate top. All technical analysis is subjective. But for me, the more time between the old high and the failed new high, the more significant it is. A month is OK… two months is better… three months would be great. In this case, the old high was put in 16 days ago. 20 trading days would be a month. So the length of time between the two is a little less than I would like. It's 15 days for the Dollar Index. Shaky… but it's there.

Regular readers know I have been getting an itchy trigger finger for some time. We are approaching the end of the trading year. Managers will be keen to keep whatever gains the have made this year and will be increasingly willing to take profits as the year winds down. There has been a clear loss of upside momentum in stocks as anyone can see. On top of that, we have had a massive sentiment swing on the outlook for the economy going forward since the spring. We have come a long way on less bad. The financial media I follow has become far more likely to feature guests with a positive spin on both the economy and stocks. Basically… in the current environment I am reading… anytime I get a technical signal… a reason to go after it with defined stop-loss points, I'm going to. As always, I enter trades not with an eye to how much I'm going to make, but how much it will cost me when I'm wrong.

I have made no mention of gold in all this. Under the majority of economic/monetary conditions, the stock market and gold prices SHOULD be inversely correlated. In our current environment, they are not. I have said I believe the unprecedented amount of liquidity in the system is lifting all asset classes. I don't know what I would do if I were long gold… perhaps sell some stock indices against my position? The gold move and the dollar move make sense to me in the current monetary environment. The bond market and the stock market are the two I take issue with. Such is the problem in a time when capital markets are so highly correlated. How ironic that if I were a holder of gold, I would be hoping the bearish stock idea is wrong and they would simply resume higher. The world is full of paradox isn't it?

My strategy is simple. We have another rally starting off this morning. I intend to sell into it sometime around mid-morning and see what happens. I will be buying more DXZ too. I'm going to stay short my 10-year position and keep the short stock trade on the other side of that. My stops are up at the old highs of 3 weeks ago, same for the Dollar Index on the down side. The first indicator of being right on this trade will be that today's rally fails and we take out the lows from yesterday. Beyond that, we need to eventually take out the lows from November 1. Only time will tell if I am right. All I know, is I believe this time I have at least been patient. I have waited for a big rally to sell. I have gotten a signal that has, in the past, been very reliable for me. Lastly… my stops are in and I know what this will cost. That is the essence of trading anyway… right?

Nov 11, 2009 Sour Grapes

6:00AM New York time. Sorry about the oyster-related post. To come clean… I actually slipped out very early to go fishing down at the other end of the state. Still… I thought you might like a little sample slice of what I go through on a regular basis. Virtually everybody has an opinion on politics. But to most people, politics are an abstraction. It doesn't directly affect their lives. And they have jobs where somebody else gets paid to deal with the various regulators. But I say it's actually the regulators… not whoever the new administration is… that really call the shots for business. Many businesses are big enough, or rich enough, to have a battery of lawyers dealing with regulators. That's not the case with us shellfish farmers. That's why I called this my litmus test. Here I am… an ex-hedge fund guy who has tried to remake himself in a SUSTAINABLE industry with multiple environmental benefits, producing a product in a field of products that are increasingly less abundant and rising in price. How ultimately ironic it would be to be put out of business by one arm of the government while another arm is telling us how we need to move in the direction I have already taken. Is New Zealand looking for citizens?

OK… I guess I'm just stalling on these markets. What can I say? I'm not long stocks, short dollars, or long gold. The only trade I have on is the one that's not working… short bonds. What's amazing is, bond yields are actually a touch lower over the past couple of days. 10-year prices were up a touch on Monday with a 200-point rally in the Dow. And they are a touch higher this morning with a weaker dollar and gold up 13 bucks. Talk about the wrong lane on the highway! Basically, what this means is that I'm the wrong person to be asking for market opinion right now. I suppose there is no reason to think we won't simply close out the year with the current trends intact. For better but more likely worse, this game has gotten too rich for my blood.

You know… I can buy the dollar going lower, I can buy gold going higher, but stocks just screw me up. The commentary I've been hearing has grown so optimistic, it's almost nauseating. It has an excessive impact on my contrarian brain. It makes it such that, just as the market is entering that point of participants rushing in… where some of the biggest gains will be seen… I'm increasingly looking to go the other way. There is so much I miss out on.

Nobody wants to say it, but I still think this rally is all about liquidity and performance. The analytical community has been behind the curve on this one all the way. And the farther the market goes, so goes the commentary to justify it. Yeah… I know it… I'm looking up at the grapes I can't get to and thinking they must be sour. Oh well. Mother told me there'd be times like this. I'm signing off now. I have a headache.

Nov 6, 2009 Here is today's column:

This is our latest battle. The message is aimed at people in the shellfish industry like myself but anybody can sign the petition. It is yet another real-life litmus test for me on which direction my country takes. I remain hopeful. I have to be.

fight to protect your right to enjoy raw shellfish

check out the website www.SaveourShellfish.org
Sign the petition online - we are up to 2700 signatures so far.
join the Facebook page to stay informed!

Help us battle the FDA's decision to ban raw Gulf oysters!

If you don't believe this will affect you - think again.

6:00AM New York time. Well… another Payroll Friday is here. Per usual… I have no inclination at all as to where it will fall basis expectations. I think… as I always do… that Payrolls has the potential to be a "culminating" economic number. In other words, by the time people become convinced of the fundamental economic direction as it is displayed through Payrolls, the markets will have already discounted it. There is no way to know ahead of time. I would have to check back, but I believe the last two Payroll reports catalyzed the current directional trade. They were bullish for the market and the market took them and went with them. I recall at least one being a pretty big up close. The reality is… one will never know until after the fact. But each time they come about, I can't help but think about that fateful day back in March when we had that big reversal in stocks, from which the equity markets haven't looked back since.

On top of the unknown that surrounds Payrolls, my trading malaise continues. I have a moderate short 10-year note position that is doing absolutely nothing. I guess I'm actually down a touch. It doesn't matter, in twenty minutes worth of trade; I could just as easily be in the black. While I might see the potential in a short bond trade, the majority of market participants do not. The action remains elsewhere. It is the same dilemma I have been wrestling with now for what is becoming a tiresome length of time. I'm slightly down on a trade… which could be greatly affected by this morning's number… with no strong view on the number… and a stock market which, from a technical and position skew basis… is ripe for one of those Payroll reversal days… which if it occurred would create MORE havoc for my position… though none of this might happen at all! Yup… that's a dilemma all right.

So more than half of me right now is leaning toward stepping aside for the number. The single biggest thing in trading/investing is discipline and money management. So trading with no compelling odds, without being in a position of strength, in front of major stimulus with no cushion in the position, is simply a bad idea on many fronts. The only thing keeping me in is that little nagging voice that warns me I might miss something. I would guess the fear of missing something has cost more traders more money on more occasions than almost any other condition. Perhaps… as this column so often does for me… it has solidified my view on what strategy to take, almost as if putting it down on paper makes up my mind. There are times to be bold and daring… there are times to be timid and cautious. The wise person recognizes when to be one or the other.

OK… so that's done. I will only add one thing to the above… IF stocks do reverse on a better than expected number… I am going to be pouncing on that move like flies on poo. Part of my nervousness over bonds is the eroding momentum that I think the equity charts are showing. The counter to that is that everybody and their uncle on the faster money side seems to be waiting for a correction in equities.

I want to close today with an anecdotal tidbit. I have not talked about my anecdotal inclinations since the spring, when I was getting a far more upbeat assessment than the capital markets were indicating. I was pretty much pounded on by my market associates for "misreading" what was actually going on… you know… your area is different… your target market is under different conditions… etc. Over that time, the capital markets have improved markedly on the idea that things are improving. So… I find it interesting now, that our business is (in contrast to the spring), very slow. Sales have fallen off quite a bit. Not necessarily for me, because my supply was constrained, which, now is it not, so I have actually picked up additional sales. But my associates, who have an unchanged customer base from year ago, are seeing very slow sales. And from talking to my own existing customers and my expanding associate base in the seafood industry, things ARE very slow right now, with most not anticipating an upturn any time soon. At the same time, the capital markets are at their most upbeat on the economy in 8 months. Put that in your pipe and smoke it.

6:00AM New York time. I got off the water yesterday and per usual, I checked in with Bloomberg Radio. As it happened, I just caught the tail end of their market update and I heard something about 30 bucks and 1080. I'm like… holy sh**. Wow, gold was up 30 bucks! Stocks must have exploded… or the dollar reversed to the downside. Man… I bet bonds got crushed. The ride home was just long enough to get through the last of the current guest commentator plus weather and traffic and into the next market update. Aside from the 30 bucks gold was up, none of the other correlated trades had correlated. Indeed the dollar ended slightly higher on the day. Stocks were mixed and bonds were just a shade lower. For almost the past year, Dave Lewis and I have had an off and on debate… how do you… (that being Dave)… as a staunch gold bull, get over the connection between stocks and gold prices, especially when you tend to be very negative on the current fiat money, Wall Street dominated, financial system? And I remember Dave telling me… they're correlated now, but there will come a day when they go their separate ways. Well… they certainly went their separate ways yesterday. I wonder what he would say today.

I checked my email this morning and someone had sent me a news blurb about the Central Bank of India buying gold from the IMF. So there was a piece of hard news to account for yesterday. I am still on my mental/trading hiatus. There has been very little mention of gold's price move in the financial press. To the news media… if it ain't stocks… it just doesn't rate. I myself am mulling the significance of the move… especially in light of it breaking away from the pack, as it were. We've got some follow through this morning on top of yesterday. I remember Dave telling me about two months ago he was looking to add to his holdings because he was anticipating something from China. I have no more specifics than that. I know the Chinese are said to be diversifying their FX reserves with gold being one of the asset classes they have been accumulating. The only reason I even bring this up is in connection with own lingering view of gold as the "anti bond" trade. That at least, is a rationale that makes sense to me. If you can't short bonds because of the various QE mechanisms in place by the authorities to keep long rates down, and you can't sell short rates… well… just forget it for now. Where do you go? Gold. Throw in an increasing audience of public participants on top of the staunchly loyal usual following of gold aficionados and I guess you have all the ingredients for a sustained (that's for sure) and powerful (certainly yesterday) rally.

I am no longer in gold. Anytime a trader misses a move like yesterday there is a tendency to second guess oneself. I am not going to do that. I have owed gold much of the past three years and it has contributed greatly to my results but that does not change the fact that I view it as a "mature" trade. I am frequently early in and early out of markets, and often am relegated to watching from the sidelines as the final and often-volatile finishing touches are put on a price move. No… I think I am going to take the gold move as a signal for something else… I put back on the start of my 10-year short this morning. I may not be long gold, but a move like yesterday with its big new highs has ominous (I believe) implications for the US Treasury securities market. More so… moves like yesterday exert pressure on historically inverse relationships such as that with market interest rates.

So I am tentatively back in the game. Today is the Fed statement. I also don't mind having some short exposure in front of that. The end game for the authorities is getting closer. They have already taken the first tentative steps in testing the market in regard to the removal of monetary accommodation. I don't think it will be an easy process. And if markets such as gold add pressure from the sentiment side… so much the better.

6:00AM New York time. Every day is an adventure in these markets. I mentioned Friday morning I was out of everything but my short bond position. Well… as Friday started to come apart for stocks, I decided I didn't really want to try and hold on to a position in a market that people would run to if things really got bad. I covered my bond short. By the end of that day, I was happy about that decision too. I am now flat… once again on the sidelines. I do not have a clue what these markets are up to or where they will go next. I have been flailing. When I find myself flailing, the only solution is to go to the sidelines and wait for a fresh signal. It's actually a refreshing feeling when one truly lets go and doesn't worry about it. A big part of my problem when I'm flailing is the worry over missing something. In my case, I am watching the trading year dwindle. I have bumped up against the 20% barrier a couple of times and fallen back. It is a benchmark I really wanted to get through. The reality is… you can't force those things. The markets are either coming to you on your terms or they are not. The reality is… 20% is just a number. And two months left in the trading year is plenty of time under the right circumstances. Just one more good setup, and all the aggravation of trying to hold on to a percent here a percent there will be meaningless. Markets provide opportunity on a regular basis. There will be new opportunities and probably soon. When one tries to force the situation, it is also the easiest time to fall away from the rules.

And THAT has been the most painful lesson. The red flags were there… I simply didn't pay heed. My shtick is to weigh price action against the tone of news, analytics and data. And when markets do something they are not supposed to, given the stimulus, that creates the opportunity. Going into the beginning of last week, we had a stock market that was behaving in an intuitive fashion. Earnings season was in force and the majority of companies were beating estimates and raising expectations. The stock market was generally trading higher on the flow of information. But starting last Monday, it began to trade in a counter-intuitive fashion. The earnings and statements were still beating, or carried a positive tone, but the market was coming off anyway. That SHOULD have been my signal… my warning flag. How much aggravation would I have saved myself had I paid attention? Oh well… its water under the bridge and we are where we are. The lesson taken should be to always stick to the basic methodology, do not let anyone or anything affect that pure observation. Now, the only way to fix things is to wait for the next opportunity where price and information flow start to come unglued again.

These are easy markets to get caught up in the flailing too… volatility in everything has exploded. The analogy of lane changing… picking the wrong trading vehicle at the wrong time… is a big problem. As of right now gold is up $12, yet stocks are barely higher. Which markets will out-perform on which day? Who knows? The only constant is that the correlated nature of these markets remains intact. Each week reinforces my view that all these markets are part of the same trade... with equities as the leader. And if the stock market is truly the leader… then we may have a lot farther down to go in order to equalize the position skew. We have come a long way since March with no serious corrections. If last week was the start of one… we could still come off quite a bit. Then again… since I am completely out of synch with these markets, perhaps my caution should be a signal to buy the dip. See the problem.

As a curative, I am going to sit back and relax… just observe for a while. My personal uncertainty has driven me to sell markets on weakness and buy them on strength all last week… fearing that my last move was the wrong one and trying to get back on board. WRONG! A return to discipline should include waiting for strength to sell or weakness to buy. And it is going to be to follow my instincts and stick with the "fresh trade" concept. I like to idea of limiting my trading to longer Treasuries for the balance of the year. Focus on the market that is getting a lot of regular data input. That will generate the highest number of price/news interaction points. Lets get back to doing one thing… and doing it well.

6:00AM New York time. Say what you will about the market action of yesterday and Wednesday. Perhaps you are of the vein that everything is perfectly fine and the status quo remains in place. Even I have been saying one needs to give the established trends a chance to prove themselves. But something bothered me in watching the price action over the last couple. Sure gold did kind of hold on Wednesday and have a big rally day yesterday… as did stocks… as did oil… as did the Euro… all the correlated trades. But I have decided something as of yesterday. I don't want to be de-facto long the stock market anymore. It is not a macro view based decision. It's more of a risk strategy decision. We have two months left in the trading year. And the plain fact of the matter is, I do not want much position exposure to mature trades for the balance of the year. Do I reserve the right to trade gold and the dollar and maybe stocks over the next two months… sure? But as far as trying to hold on to a position… and certainly with regard to larger positions and leverage… no way. I do not trust the capital markets right now. It's all one big trade. Not only that, but it's all one big MATURE trade. You might be bullish gold because you're negative on US fiscal and monetary policy. But you cannot deny that at this point in time, your market is trading with a .9 R-value on a closing basis with stocks. To me that means only one thing… the people driving all these trades are all the same people. They own stocks AND gold AND are short the dollar. Let me ask you this: What would you say about the risk in a trade, where everybody had it on, through multiple markets, in size, coming in to the end of the year, where every one of those participants desperately wants to hold on to as much of the gain as possible? Would that make you nervous? It makes me nervous. Look at the volatility over the last week. It seems to me to be on the rise. That means participants are growing more nervous… not less so. And that means they'll be increasingly on tender hooks… ready to jump out and jump back in again. No… I think the way I want to go for the rest of the year is to stick with my short side bias in bonds, and use the other markets as trading vehicles. The bond trade is a fresh trade. Nobody's on that one yet. I think a rush to the exits among bond market participants would help me. The only problem with bonds is… if the correlated trades do come apart as a result of position liquidation, the bond market is where a lot of that capital will go. Still… I want to see if I can pull money out of the 10-year note futures consistently from the short side, despite the fact that we do not yet have a bear market. This will keep me positioned for what I believe will be one of the really big trades of the next few years. The short bond trade will certainly rank high on my big five trades for 2010.

OK… so I I'm out of my long gold position and my small short dollar position. I don't really feel like discussing WHERE I got out of them. Suffice it to say I have been pretty out of synch with the markets lately. Probably another good reason for my change in strategy… freshen up the environment a little bit. I did add to my 10-year note short yesterday once the 7-year was out of the way. It looks to me like the preferred maturity duration is getting shorter and shorter. Seemed a year back just about everything on the curve went. Then it was short maturities and intermediates that went well, but the long end was a bit shaky. Now one has to wonder about even the 7-year. I think that's a good anecdotal trend if you're bearish. I did also buy some Canadian Dollars yesterday very early for a trade. I will probably blow that out this morning or later today. I would think we get one at least one more up day in the correlated trades even if your view on them is starting to turn. OK… that's it. I don't feel like writing more anyway. Have a good weekend.

6:00AM New York time. I tell you guys ad-nausea that having a view is one thing but the P&L speaks far louder. My P&L yelled at me yesterday. I knew when I tiptoed back into gold on strength after the LAST correction that I was paying up. That was part of the reason I put on and have kept, only a very small short position in the dollar. After what… two weeks now… both these positions are, as of yesterday afternoon… underwater. All the correlated trades have lost upside momentum this week… despite an accompaniment of great analytical and news support. The debate now is… have they lost a "significant" amount of ground? Is it "meaningful" that they have done so despite a flow of market opinion that I read as predominantly supportive. This was the first week of earnings season where equity prices have actually retreated despite better than expected results and guidance from most. I am not saying any of this should come as a surprise. I have tried several times during the past quarter to short what I viewed as an "overdone" stock market. And prices HAVE managed to rally through two typically weak months of September and October. I have spoken at length of these trades being "mature". Hey… the "young-fresh" trade that is the Treasury market is no prize package either. I covered 1/3 of my position yesterday around mid-day, thankfully in front of the 2-year results, but that was small consolation when prices close up a full point. With a 5-year today and a 7-year Thursday… maturities that have been favored by our international supporters. How's that trade looking for the next two days?

The point is not to cry or moan over recent developments. The point is to determine if there is anything meaningful in the price action or price behavior that warrants a change in bias going forward. If you look at the chart of gold… or of the S&P 500… it appears to me that we have seen these types of price moves before. And in every case before, the strategy was not to cave in to the temptation to call a top and say it's over. The trade to do was the hard trade… to stick to your guns or even step in and add. Looking at the gold chart specifically… the current price formation looks very similar to the corrective move back in September, after the first move above $1000. The market ground higher for about three weeks, slowly losing momentum. Then we had the sharp break lower on September 24th, followed by one more modestly lower day. The market them moved sideways for a couple more days before resuming higher. Obviously this all led to the explosive up days of October 5th and 6th. As I see it, Monday the 26th of this week relates to the 24th of September. Yesterday was the 25th. Today is looking to start a bit higher but it's really a non-event day in the perspective of Monday's break. So the pattern would be for a consolidative day today and perhaps one more tomorrow. So if prices hold roughly here into Friday, that would be a good sign. My strategy is to keep a close eye today and tomorrow, and if we can stay at these levels, I add to my position with a stop at new lows.

Have a look at the S&P 500. I'm not going into the day to day match-up, but the current fade looks a lot like the fade was saw in the end of September… or the one at the end of August. Think there might be something more than coincidence that this "profit taking" is coming at the end of the month? Then there were the mid-August and early July fades as well. In each case, the graphical picture was the same; a slow roll over that picks up speed and culminates in a couple of sharp down days. The picture is one that makes the market look to the chart-reader like its about to vaporize into a crater… if we allow our mind to extrapolate the increasing rate decline.

Now look… you may or may not be a fan of the stock market. And totally separately… you may or may not be a fan of the gold market (and I'll throw in the lower dollar trade with this one). But one thing all should recognize. It has not behooved ANYONE to sell either gold or stocks in the hole over the past 8 months. In fact, chasing them into the chasm that our minds invent when we look at the charts has been exactly the WRONG thing to do in every single case since March. Now maybe this time its different. And maybe we have finally reached the point where literally EVERYBODY is in… where even normally contrarian thinkers like myself have thrown in the towel on trying to pick a top and have resigned ourselves to waiting for dips to buy. The contrarian turned contrary indicator. But personally… like long standing relationships of any kind… these trades deserve a chance to prove us wrong. Show me a break in the pattern. Were so close now… if you're going to do it… DO IT NOW. I have stayed with these trades this long… what's a little longer. And the idea is not simply to stay with them. To really make money in this business, one has to be prepared to look our fears in the face. One has to be prepared to pile back in when the P&L pressure is on. Money is not made by timid souls who wait for things to be up a lot and then buy when we feel comfortable getting in. The vast amount of money is made by people who are there to pick up the pieces after the big price breaks that leave others shaken and dazed. I understand… you can say that the larger contrarian play is actually to go the other way. And that by buying this dip, I am just another shmuck late to the party who is simply buying the first meaningful break in a developing much larger down move, as if it is just another break in a continuing bull market. You may be right. All I know is we've been here before. And I do not wish to sell gold down $35 dollars from its high of a mere 3 days ago.

Whatever happens… I think we will have some clarity by the end of the week. Will this current correction turn out to be analogous to others before, or will it be something new and different? Only time (and that P&L) will tell. Where do you come down?

As a separate matter… I remain short US 10-year note futures. I anticipate a firm market through the rest of the auctions, but as has been the pattern there, once the supply is out of the way, bearish participants have tended to feel a little more comfortable stepping back in (ironic isn't it). So my plan is to try and hang on to the position I have left and then get back to size toward the end of the week.

5:00AM New York time. It feels like a holiday this morning. It's 4:40 and the usual two-hour Worldwide Exchange segment on CNBC is not running. Nor are the price tickers. The charts show very little overnight activity.

Regarding Friday's price action… I always wonder whenever I see something unusual, or out of the ordinary on a particular trading day, if it is a one-off, or if we have started to poke into new non-correlative territory. Friday we had both weak stocks and weak bonds. Indeed, bonds performed relatively poorly all week, despite another round of Treasury purchases earlier in the week, and a stock market that was mostly lower. Bonds have had an on again off again relationship with the other markets all year. They have not been nearly as correlated to stocks as the dollar, gold or oil. Where they have been fairly consistent is in being able to rally on days when stocks are weak. The safe assumption to be made is that nothing has changed, current trends remain in force, and any break from the correlative pattern is temporary. I need to see more than a couple of days of non-correlated behavior before I start getting excited. This week will be yet another test for Treasuries. We have 2yr, 5yr and 7yr auctions on Tuesday, Wednesday and Thursday of this week. These are the issues that have had the most draw for foreign buyers. If the usual cast of characters step in with decent participation, it is highly likely yields could bottom and we head back toward the lows again. If the issues are not well received, we will see lower prices. It's that simple. The direction of stocks is more likely to be a secondary concern as far as bonds go.

The highly correlated behavior of markets this year has been one of the most frustrating aspects to an otherwise interesting and decent trading year. I'm sure there are many in the anti-fiat money, long gold camp who cringe every time they see gold up along with stocks. This type of extended price action relationship is on of the major reasons I lost interest in priced-based modeling for financial markets years ago. Markets can go anywhere they want and relate to any market they want… for extended periods of time… and then abandon that relationship just as quickly.

Despite the gyrations this week in stocks, it looks to me like we are simply in yet another sideways consolidation. There has been no meaningful technical damage done, and while the market did fail to go up on good earnings news this week, I am very reluctant to once again (mentally anyway) pick a top. I have done so several times this year already to my detriment. If I had stuck to my simpler and broader view that the impetus will remain through year-end, I would have saved myself much mental energy and real opportunity cost. Obviously… not so much in stocks themselves… but in the correlated trades of the dollar and gold.

There are other arguments rising out there with the ability to challenge the status quo however. Look at the Japanese yen. The yen has seen quite a round of strength over the past couple of weeks. This too needs to be evaluated as a potential warning flag to the correlative action of the capital markets starting to break down. Is it just a function of competitively low interest rates in the US reversing some of the trade funding from yen to dollars? Or like bonds… are the markets starting to sniff out the growing perception that the Fed is drawing close enough to starting to remove accommodation, and that the markets can start to act on it as a trade. Or is the pullback just corrective, and indicative of a highly skewed market in normal correction.

6:00AM New York time. I didn't make the above comment. I heard it… made by one of the anchors on Bloomberg Radio as I was pulling out of the driveway late yesterday afternoon. This morning I woke up to hear a CNBC host making the comment… "Is Britain's recession over?" Quite a change from March 9th, when all was black and people I knew were pulling cash out of the bank just in case their ATM machines suddenly stopped dispensing. If that point of panic was, in fact, the best time to get long stocks, what does that say about the point in time in which we reside now? Comments like these are the first serious flow-of-news warning flags to resonate with me at this point of the cycle. Don't get me wrong. I am not bearish equities. Not yet. If you look at the year to date performance of almost any of the big name mutual funds you will see that their performance lags that of the S&P 500 index. That means one thing. They need to buy more to catch up. Do not expect them to grow more cautious between now and year-end. They have a chance to get paid. They will not pass that up for mere prudence.

As I've said… I am NOT bearish stocks. A man's got to know his limitations. I know mine where the S&Ps are concerned. There is that ever-present thorn in my side of always being FAR too early in expecting market turns. Still, I think observing the whole process is fascinating. We have a market who's major cash participants are desperately playing catch up, with the expanding financial media story that the recession is over, despite the well known general consensus that a lot of companies are improving earnings through the one-time exercise in cost cutting. Meanwhile… those cherished few who remain cautious, are warning us that we need to see some top line growth, growth in sales, in order to really feel that the current recovery has some sustainability. Yet even those last remaining vestiges of caution are inexorably get drowned out as the rising tide of market prices slowly submerges them.

Again… I am NOT bearish. I have great respect for the flow of capital. Things may seem way over done in real time and unsustainable for the future, but that does not mean you run out and get short. The out-of-control train will run you over just the same just the same as one with a responsible conductor at the controls. And while even the most basic reversion to mean enthusiast will see the growing opportunity in equities, we will have to be patient and wait for the current hand to be played out.

Why am I bothering to talk about this now… when there is still no trade to be put on? I do so because it is important to keep in the back of one's mind. I am already thinking about my top 5 for 2010. And I still strive for the day when I will get the timing right on a big S&P trade. The is the road to self-improvement is not simply refining that which is already easy… it is staying with and finally overcoming that which is hard. And if I am right, and we will continue to see gains through year end, then that will have a significant impact on the correlated (and associated) trades. I added to my short 10-year position on Wednesday. I added another piece this morning. That is finally getting to be a real position in terms of size. I remain with a modest long gold position and a small Dollar index short.

6:00AM New York time. There are days when I will not leave the markets unmonitored, or at least not my positions without a stop. And then there are days like yesterday… or the day before. We've had a couple now. They are the days when nothing of significance is going on. In fact…we did have a little reversal in gold yesterday. We started off up about 7 bucks and gave it all back by early afternoon. Did I worry… or even care? Nope. What was the difference between yesterday and what I would call, a reversal of significance? First off… there is nothing specific I can quantifiably point to that makes a day like yesterday different from others. It's more of a visceral sense. And the description of the condition I can best use to describe it is… Island Time. I don't know… the visual of being on vacation on an island with nothing that needs to be done pops into my head. Perhaps over the next few paragraphs, I can come up with a better descriptive. The condition is essentially one of participants being trapped both above and below a market. If prices pull back, there is ample buying power among those who want to get long, to keep prices supported. By the same token, participants are cautious enough, that they are either unwilling to pay up to get more long at current prices, and/or, there are enough people willing to take profits on rallies, that the market just kind of sits there… trapped… not moving anywhere.

As with all things market, the condition is ephemeral… temporary. But Island Time days take their turn amid all other market conditions, and while they do not provide much in the way of fireworks, they have their place. They are great days for position traders to take the day off. Get away from the screens so to speak. Yesterday was a beautiful, calm, sunny fall day in the NY-Boston corridor, the perfect day to get out of the office. But not everybody enjoys a good Island Time day. They are the kinds of days that suck for market commentators. There is nothing going on, traders don't care about talking, and you have to basically "make stuff up" to keep your screens active. Those poor saps end up looking out the window by noon, wishing they were could just "play hooky" for the rest of the day.

Don't get me wrong, I wasn't HAPPY that gold reversed yesterday. But I didn't call in once, or check a screen. And I made due with the now ridiculously flimsy market reports that drift by on the new Bloomberg Radio format. Could I have tried to trade around the gold position? I guess. But then I'd have had the aggravation of worrying that I was trading myself out, and then would have had to pick a spot to get back in, all for what probably would have amounted to 5 bucks. Really not worth the effort and aggravation. Instead, my friend Jim (who is in town for a conference) took the train out to Westport, where I met him, and we had a lovely lunch at Mario's.

So I guess in these four paragraphs that contain absolutely nothing of value to you as a reader, I have summed up what Island Time days are all about. And no… I haven't thought of a better descriptive for them. By the way, for some reason, Island Time days also tend to occur only when the weather is really nice… seasonally. Go figure. And for the record, today is going to be another gorgeous day in NY and Boston. I'm on the water today doing the "oyster thing", so I'll be in full position to take advantage. For the record, I remain with a modest sized long gold position, a small Dollar Index short position, and a toehold short 10-year note position. I AM watching the 10-year futures in here, as they have taken back about half their drop from last week. It will be interesting to see if they are able to test those recent yield lows, or if they just kind of stall and start to roll over again. Island Time days don't necessarily mean you won't get prices you had targeted to do something you want. It just means you are probably not going to get much in the way of price action fireworks. I will probably add to my 10-year short either today or tomorrow. We get new supply next week; two's five's and seven's. Only after the last 30-year auction did we see what happens when those that we had grown accustomed to seeing hold up Treasury prices sit one out. I do NOT think that will be the case with all maturities, especially the short and intermediate issues. But at least there is starting to be some mixed reception along the curve.

6:00AM New York time. I was poking around Dave Lewis' blog on Friday, specifically the "other blogs I read" section. As I went through them one by one, it occurred to me that I am the least deep thinker in the entire group of 11. I can't hold a candle to the depth of research and historical study that goes into many of them. I'm not apologizing for that. I merely wonder why Dave (who's been long gold since $350 by the way) and who's as deep a thinker as any of those other gentlemen, would even bother with commentary the likes that I produce. Don't get me wrong… I appreciate that he does, and I am indeed honored to be included in that list. But I can't, nor do I try, to hang in there with those other fellows. I will say this however. I know what I am. Clint Eastwood has a famous line in Dirty Harry. A man's got to know his limitations. Perhaps it's the oyster thing, and my very personal interest in the weather the last few years that has driven me to where I am now. The oyster thing pushes me out in the weather… at all seasons and sometimes (only at great need) in the worst of it. Sideways sleet in 35 knots at 32 degrees just to get a small order out for a good customer who ran out before the weekend is usually NOT the plan. In the winter, we get a couple of decent working days a week… one has to plan to work around those and hide during the tempest. The point is, I have become a bit of a student of the weather. Scroll down this page and see. And from what I have come to see and experience in real life, is that beyond a small window of time, three to five days, predicting the weather is about a reliable as flipping a coin. Yes… we all know that winter will follow fall… but how we get there and the timing is unpredictable… chaotic. Embedded in this "study" of weather is the phenomenon of cyclically. In what is probably the closest I get to "religion", I believe in the cyclically of nature. I believe there are cosmic forces acting upon our world that keep us oscillating around a mean but bounded… climatologically… geologically… biologically. It is the study of those cycles… or more to the point… the study of various behaviors during those cycles that I find fascinating and of great value… both professionally and in my private life. When we spend 10 days hovering around and poking through the lower end of the "normal" temperature range for a certain time of year… as we are right now in the Northeast, I grow increasingly confident the longer that streak goes… the more likely we are to get a bounce sooner than later that takes us back to the other end of the range. Leap of faith you say? I say look at the data. I will tell you that it has NEVER failed to do so. On average and without fail, temps will drop as we move toward winter, but the oscillation within the band will bounce around between the ends without fail too. Sound like a market? Bond yields will ultimately move higher. But they can spend a lot of time bouncing around between sentiment extremes getting there.

And now for something a little lighter… I'm getting a kick out of hearing about Galleon Capital and their alleged 20 million dollars in insider trading gains. Wow. Let me stop myself from fainting. A 3 billion dollar hedge fund, and that's the best they got. All the shenanigans that goes on, has gone on, and will continue to go on in the world of finance and this is the best example the authorities have to go on as an example of evil-hedge-fund malfeasance? This makes Martha Stewart look like a serial killer. What it shows is that Wall Street… despite the vast number of disgruntled employees out there… does not air its dirty laundry very often. Amazing.

As for trading… I did add to my gold position Friday morning down a couple bucks. That's bouncing a bit this morning. As with all intact trends, the more evidence mounts that the "correction" isn't going anywhere, the more participants will step back in and reassert the trend direction. I talked on Friday about trading gold as the "other side" of the bond short. Lets keep a sharp eye on that relationship shall we? That's the counter-intuitive trade that's been working. That's part of the correlated trade that's been in effect all year. If we start to see bond prices slipping WHILE gold moves higher… that will be a significant change. That's the having your cake and eating it too trade. I would LOVE to have both legs of this trade working independently. But I don't expect it, nor am I planning on it. That does NOT mean I consider it out of the realm of possibility. At a different time I would in fact expect it. These days, not so much. The loss of control by the authorities and the increasing lack of willingness among large market participants to support Treasury bond prices, thus keeping yields down, will be one of the most significant macro developments we could see for the next year(s).

6:00AM New York time. I guess I'll start with the obvious. Like it or not… believe it or not… this stock market behaves as bullishly as any market I have ever seen. Yesterday, after a big day Wednesday, after a breach of a major psychological barrier, with every opportunity and reason to take a break, stocks turn early weakness into yet ANOTHER up day. Even at this "late" stage of the move, the averages can still put in a day that resides in the 90th percentile (anecdotal and in my opinion) of bullish behavior. The cycle of low earnings expectations and price action is alive and well. No one… not a single market participant… who has doubted this rally, cast aspersions on this rally, or traded against this rally, at any point since March, and to this very SECOND… has been right. That's pretty impressive by anybody's standard.

Now for the less obvious. I guess if one truly believes… if one really thinks everything remains intact, then we should be taking this opportunity to load up on the correlated trades. Gold was off $14 yesterday, and is a couple bucks lower this morning. The Euro is off a touch after not much of a day yesterday. I guess the key question is… does the evidence… the observation, still support the correlated trades to the same degree? Because there HAVE been a few changes that bear watching. First… the yen has reversed quite a bit of recent strength in the last couple of weeks. I spoke to someone at FXA on Tuesday who mentioned the yen… saying they thought it was a good way to play the dollar-potentially-bottoming trade, if you were so inclined. I found the idea compelling, especially since the BOJ had only days before thrown up its hands against yen strength… essentially given up. If that wasn't evidence of the last participant standing finally caving in… nothing is. That was almost 300 points ago. I have not done anything. He who hesitates is lost… huh? A top in the yen, I don't think would be significant on its own, but I would see it as a potential warning flag… one of those first cracks in the armor of something that has been impenetrable. Then there's the bond market. 10-year notes have made new 2-week lows as of yesterday. I know… not a big deal yet, but this is a trade I have on, this is a trade I believe in longer term. Higher short rates, and indirectly, higher long rates, all else equal, will be supportive for the dollar. And I don't think they would be good for gold. Part of the appeal of gold has been that the bond vigilantes have been asleep. So gold has been moving higher in lieu of the usual participants exerting discipline on the market. If bonds continue to come off, that (I think) competes with gold for available capital flow to do the same job.

All of these are just thoughts. They are not executable trading strategies. I think in fact one needs to give the existing trends… the correlated trades, their chance to perform. Gold could be UP 14 bucks today. In fact, if there's any lesson in all of this, it's that many times over the past six months, when (some of us anyway) thought the whole thing was coming to an end, learned abruptly, that it wasn't. Many prominent analysts and commentators have been left behind and are now looking up at all this from below. Perhaps this is a chance for me to execute the trading strategy I have talked about before, except that rather than put S&Ps on opposite from gold, I can do 10-year notes. So today would be one of those days when one puts on the gold leg. If gold rallies and yields come back down a touch, then I look for the opportunity to sell the bond leg…and so forth and so on. Essentially… I've already started to put that trade on. Throw in the potential to sell yen and DX on rallies and you've got all the flavor of the correlated trades along with the most likely candidates for reversal should the correlated trades start to fail. And with the exception of the yen, these are markets I am already trading and even have positions in. Look at that. Sometimes writing this piece is a big help in solidifying what I actually want to do.

So lets see… that makes today a buy-gold day. I guess I should make the call. By the time you read this, I will have. Selling DX is also part of this leg but gold has come off a lot more this week, so I think it's the better opportunity. Gold as a market, has a much smaller door for participants to get through than FX, so moves are frequently exaggerated. Guess that's all I have for today. Ohhh… one other thing… and this is a view that supports staying with the correlated trades. The closer we get to year end, the more likely all this momentum will stay with us into year end. Again… and I have said this a zillion times, the stock market is a performance game, and if you don't think passive managers are going to want to show fully invested portfolios at year end, you're kidding yourself. They're chasing performance benchmarks right now. October 31 is another big year-end date for mutual funds… in fact, I think Magellan closes its books then (please… anybody… check me on that), so continued buying pressure through month end looks likely. And then, so long as we don't stumble in the days subsequent to that, why not close out the year with the rest of the guys/gals chasing benchmarks too? Have a nice weekend.

6:00AM New York time. I did not post on Monday. Columbus Day is one of those weird holidays that can go either way. This year I took the day off. No matter. The last couple of days have not seen much action. We have action this morning. After a couple of sideways days we have a sharply weaker dollar again. Stocks are called higher. When I got home yesterday I flipped on CNBC just for the closing numbers. They had on their fast money five. Four of the five were either negative or flat equities. Only one was positive and he made the point of noting that he simply felt that it was a good sign that his fellow panelists were negative. None of that should be a surprise. The higher the equity market has gone, the more doubt it has engendered. What I found interesting was that the rationale for two of the panelist's negativity was a view that the Intel earnings would disappoint. I thought these guys were supposed to have more savvy than that. Have any of the earnings so far disappointed? Do we think all but a few will? Earnings season is less about the numbers and more about the expectations. So the best strategy for a company, if it wants to boost its stock, is to manage earnings expectations properly. Hell… it's gotten so, as a CEO, you can actually run afoul of securities law if you mislead investors to the upside. Moral and lesson of the story… keep forecasts and guidance subdued. You keep yourself out of trouble, make yourself look like a genius in the end, and get your share price up to boot. Everybody wins. Except the shorts. Intel didn't post a profit… or an increase in sales for the quarter. But earnings and sales were LESS BAD than expected. This whole stock market rally since March has been about conditions getting LESS BAD. And the reason, I think, why there are a whole barge-load of doubting Thomas's out there is that the intuitive reasoning behind stocks going higher is that things should at some point start getting better… and that LESS BAD only works for a while. So the longer the rally goes, the less LESS BAD cuts the mustard. This is where fundamentals get in the way. From a fundamental basis, stocks have run ahead of reality. But capital is flowing. And as one famous economist said once… markets can stay irrational longer than you can stay solvent. This is not a market about earnings or economics. This is a market about capital flows and benchmark performance. It's about liquidity draining right back into the places it was before.

That's the old story. It's the stock market rally… it's the dollar going lower as the US currency becomes the funding vehicle of choice. The weaker dollar is the same trade as Russian stocks having their best day in three years Monday (which I believe they did… or was that yesterday). I am participating in the old story only to the point that I have a small dollar short and long gold position. What intrigues me more is the potential new story that is Treasury bonds. That is the market I am watching very closely for stress cracks. Higher stocks, higher commodities and a weaker currency are not coincident with lower yields. But here again… the story is about capital flows… not fundamentals. Don't even ask where 10-year note yields should be if QE were not in force, or the trading desks at investment banks were operating with free reign, or foreign central banks and other official entities did not have the ulterior motive of trying to keep their exports up through financing their best customer. I've been talking about it for 6 months and yields have not gone higher. But every market has a breaking point. And the spread between two opposing views cannot widen forever. Last week's 30-year auction was interesting. And the markets reaction to the Fed's reverse repo operation was interesting. I know I have had glimpses of smoke before… cried wolf several times already. But finding a turn in trading sometimes is simply about poking and prodding… taking positions and getting stopped out. Finding a new point and trying again. In the end, I will simply have an answer to the question; can I maintain and make money from a short position in the US Treasury market? The answer to that one is in black and white and comes every day in my statement.

5:00AM New York time. That's it… I'm discombobulated this morning. My Cooperative of fellow shellfish farmers has just formally undertaken a major effort to change the current, publicly funded, overly bureaucratic, water classification and approval process mandated by the FDA and administered and enforced by our local authority, the CT Bureau of Aquaculture. I have a lot of work to do over the next couple of months. We are planning a reception to formally present our proposal in January at the Custom House Maritime Museum in New London, CT. Lots of stuff has to get done to prepare and I'm doing a large chunk of the work. I hope it will be worth it. If there's one thing shellfish farming has taught me is that looking at things in a different way should not simply be a one off chance event that you do when all else fails. It needs to be a way of thinking that you should explore regularly. Wouldn't it be interesting if the change that leads the United States out of her over-spending, over borrowing, non-goods producing ways is not another technology, or financial innovation, but a change in how we govern ourselves, a return to more local control over the means to and effects of production. Our efforts are completely self-serving but they have broader ramifications for any business where local specific conditions don't mesh with the broad-brush, centrally controlled, regulatory approach that has come to typify our current system.

And… I'm going to try and carve out a little recon time for myself this morning at the beach, so I'm going to get right to it. My sister is coming up this weekend for a couple of salt water fly fishing sessions, and I've been cold as a stone lately. I need to get out and find some fish.

I am still carrying my small short dollar and long gold positions. Who cares? The effect on my P&L is minimal. I am simply trying to keep myself on the right side of the game. I have been beaten over the head often enough lately, second guessing myself and the markets to simply say, I think you get paid for just closing your eyes buying the dips and staying with what has been working. It has not helped anyone who has tried to over think any of this. We have the start of another dip this morning. And it's a Friday. I have no doubt nor should it be a surprise to see some money come off the table in front of the weekend. So we get a weak day today, with a weak opening on Monday, which you're supposed to buy, before the train pulls out of the station once again, on its way to wherever all these price moves are taking us. We've started a new earnings season. If they show a pattern of better than expected results, we will have all we need going forward to sustain this rally through year-end. They're a rigged game and they're off to a good start. I am closing my eyes to the unrealistic expectations argument. That will be an issue for 2010. It is not an issue now. Gold goes along and the dollar… so long as it doesn't get out of control, continues to grind lower.

The one new position I have and potential change, though I'm probably wrong on this one again too, is I once again shorted 10-year notes. I would have to check how many times I've tried this trade in the last 6 months, more than a few. I enjoyed the move up in yields early in the year but since then, it has been an accident-waiting-to-happen trade that hasn't. It's obvious trying to short this market is going against the will of the authorities. All I'm going on this time is the weaker participation in the 30-year auction yesterday. That's not much to go on. Still… we're at a 3.2-handle on 10's with stocks right at the highs, the dollar on its lows, and gold on a new leg up. At least the raw ingredients for higher yields are there, even if the price action has not supported the idea. Again… what's the cost? You want to stop me out at the highs again? Go ahead. So what. Perhaps… for a change… the fact that I expect nothing out of this trade will make it a good one. OK… that's it for today. Have a great weekend.

6:00AM New York time. Wednesday I posed the more important question for me… about the opportunity cost of NOT being involved with the correlated trades any longer. I think we have our answer now. Oops… my bad. Yesterday was a stunner. It was a stunner on several different levels. On a trading level, I think the kind of price action we saw yesterday proves that we are in the midst of powerfully trending markets. These are not trading affairs. These markets feel like the markets of the late 80's. When nobody paid attention to Bullish Consensus or Commitment of Traders, or any other publicly disseminated or proprietary sentiment indicator you could think of. Hell… most of those measures didn't even exist yet. You just climbed aboard the trend. And since (I think) a great many traders, as a group during the past decade, have come to see market price direction as more two-sided, there has been a greater propensity to look for more substantial pullbacks, or even trade the other way, as I just painfully did. That is not the strategy for these markets. That strategy helps sustain the move. Wednesday's action also points to how powerful the flow of capital is in driving these trends. And that leads me to send out a cautionary note to the authorities. Be careful what you wish for. A weaker dollar may be good for exports. Higher stocks will help household wealth and confidence rebound. Falling US Treasury note yields in the face of all this and with sharply higher gold prices may seem like a gift from heaven, but the world has only recently learned a painful lesson that you can't have your cake and eat it too. I don't know… but it certainly seems that we are trying to get away with the same thing again.

The stunner from the fundamental side yesterday is even more fascinating. The opposing pressures in these markets just keep getting bigger and bigger and bigger. I don't know what constitutes extreme… but I have to think we are getting close… and yet it just keeps going. I am amazed by the resiliency of US Treasury security prices amid soaring gold, soaring stocks, and a continually eroding US dollar. We have more supply again this week and yields show no sign of backing up. Why shouldn't this new traunch of paper just get gobbled up like so many before it? My friend Jim gets pretty good info on the oil market, and he tells me the Gulf States are in serious talks about moving to a currency "basket" for the pricing of oil. I know this issue has come up before but he says this time its for real. Meanwhile… we have the stock market ripping higher on expectations of an economic recovery. We had a raft of so-so to lower economic indicators last week… including Payrolls… and the market took off anyway. I know I always say; pay attention to how the market takes news rather that the news itself. That is still valid as anyone who is long can tell you. Long stocks is the place to be. How about the dollar? What can you say? It has made new lows against a number of currencies and is hovering just off the lows against most others. The authorities continue to show next to no official concern and I think most (off the record) would argue that a weaker is actually beneficial. It hasn't dented our ability to sell all that paper now has it? And then there's gold. Is gold simply the place where disenchanted investors are putting their money? If you don't like US economic policy, and you can't short Treasuries, I guess you just buy gold. There doesn't seem to be inflation is any other commodity sector. Is gold saying something or is it just the playground for a certain segment of investors?

So here we are… we keep seeing everything we need to see to think everything is on the mend… that everything is fixed and all we have to do is get confidence back and we'll be right back on the road to prosperity. Un-huhh. I don't know about you… but days like yesterday make me nervous, close to as nervous as when things were going the other way this past winter. Maybe more so? At least last winter we were in the process of correcting excess through the markets. Now… we've thrown a few patches on the underlying problem along with a whole lot of money and the markets have gone haywire. Bond prices are in a world of their own, equities are saying everything's OK now, the dollar… nobody seems to give a crap about that while gold is flashing bright red warning signs about all the aforementioned. What I do know is that the current correlated direction of all this (and you can throw Treasury note yields into the mix as well) is unsustainable. Something has to give. And the longer it keeps going the less well it will end. And I already don't think it will end well. What if we manage to take it through Q4? I would guess passive equity managers are pretty much scrambling to keep up with their benchmarks at this point. They have proven once again that buying dips is the way to go, and more importantly… that Larry Kudlow was in fact right all along. There's the ultimate egg on my face.

For the record, I did get back long a SMALL gold position yesterday and a SMALL short Dollar Index position. I also sold short a SMALL 10-year position. I didn't want to pay up, but things are moving and I can't sit idly by.

6:00AM New York time. Friday morning about 8:40 was as good as it ever got for me. My 13 seconds in the sun. The only thing that would have made it worse was a complete reversal on the day of equities to the upside. Buyers flooded into the currencies and gold right after the number. I was to say the least surprised. I thought both markets were already quite long and still dealing with a lopsided position skew. I thought we were starting to see some cracks in the foundation… a growing nervousness among participants. Guess again. And it was the turn in the dollar and gold that actually led the turn in equities. Obviously as overbought as I think stocks are, there is still plenty of willing buyers ready to step in and initiate at these levels. So what looked like an obvious good trade quickly turned into a mediocre trade, then to a non-event, and finally to a small loser. I shouldn't say that exactly. I still have decent money in the S&Ps. But the Dollar Index was underwater from the get-go, and gold went slightly negative as of this morning. I just got off the phone from covering the gold in fact. I'm going to keep my small long-dollar index position for now, and try also to stick with the short S&P for now.

Again… looking back, I don't necessarily think the trade was a bad idea. We will see in the coming days what my opportunity cost is/was. Have we at least found an intermediate top, or are we just going to blow right through to new highs (or lows in the case of the dollar) now that we have paused and refreshed? The most bothersome thing in all of this was that… for a short time from Thursday night (when I couldn't sleep and I wrote my Friday post), to Friday morning on the knee-jerk reaction to Payrolls, I WAS Larry Kudlow. I though nothing could go wrong. I forgot the first and most important lesson of the markets… when life looks like easy street you have danger at your door. My Friday piece was cocky and arrogant. Blah, blah, blah. How you lookin' now champ? I have always tried to go into trades prepared to lose, always more concerned with what it will cost me, not at all thinking about what I'm going to make on it. So when I started counting my chips Thursday night, before any of this had begun, I should have been more cognizant of my own emotional surety. Markets have a foul sense of humor. And they will come to get you when you least expect it. Look at Friday. I even got the number I wanted. That is a lesson I would be served to not soon forget.

OK… so what now from here. I'm still a bit folded down the middle. Perhaps I'm way off base here, and I should be sticking with what has made me money all year, but I truly do not feel all that comfortable in the correlated trades right now, especially without them having done what I see as enough real price damage to force weak and late-arriving participants out, and correct what I consider to be overdone conditions. And that irritating stock market sits squarely in the middle of this. I'm sitting here looking at the daily S&P chart right now. On Thursday last week, we broke below a 3-month trend line that connected the July low, the Sep 3 low, and the Friday after the Larry Kudlow top. The big trend line connecting the March 9 low with the July lows is still very much intact however, and doesn't come in (as of today) until 1000 on the S&Ps. Not only that, but our current consolidation/momentum loss looks a lot like the June momentum loss that led us up to the July lows. That consolidation lasted a month and a half, and saw the S&P correct about 10% from its June high. Obviously, the market went sharply higher subsequent to that July bottom. The bottom line is… we have not really done any meaningful technical damage, nor is a sideways consolidation/correction without precedent this year. I'm picking a top on a personal measure of sentiment, but without any real technical foundation. That's tough.

11:30PM New York time. Well… it's 11:30PM Thursday night. Hey... I already said that. I can't sleep. I'm heading out fishing early again tomorrow. Things are heating up out there. Tomorrow is Napatree… sunrise. I rigged up a new popper. Man… sweet. Thing's gonna throw like a rocket. Changed out the stock naked rear treble with wound double-opposed swinging single hooks, dressed in white bucktail with a red wrap. It LOOKS like a confident lure. So I'm a little like a kid before Christmas. It helps to see some resolution on this S&P trade too. I'm short at good levels, in a market that is long… very long, and hasn't even BEGUN to go down yet. This market has ZERO tolerance for ANY economic weakness right now. I think folks are starting to get nervous too. This kind of action is new. You have NOT been rewarded for buying dips the last few days. That's an important change in behavior. That's not something participants are used to. The Larry Kudlow top is still in place. I even barked back at somebody at the shop today. Worked like a charm… backed him right off. Got the ole' blood flowin' as well. What could be better? Life is good right now. Bet it's gonna be a GOOOOD morning on the beach. Yee haa!

I am a bit sheepish about what the next thing I need to say. I shuffled my positions a little late yesterday/today. I shorted some gold. Some people will not be happy with me for that. But just like saying something uncomfortable to someone… when in truth they really need to hear it… like at the shop today… if you have an emotional attachment to your position(s)… you're making the same mistake the other side already made in 07. Anything can go anywhere…. except the sun…least not for a very long time (hopefully). The reason I went short was because it had such a big run-up versus equities on Monday. And I figured it would give all that back even if equities just came off a little, as equity managers will only reluctantly refrain (at first) from buying dips in equities. So naturally… equities were off about 2% and gold was only off 1% today. Let me try that middle lane again. Still… like it or not, gold is part of the whole correlated trade we've been in. It won't be forever, but it is now. I don't agree with Gilmore on a lot of things, but I agree with him on this one. The reason the correlated trades exist is because those are the places to which liquidity is flowing… dollars funding purchases of Treasuries, US equities, EM equities, Euros, Yen, gold. They are the same P&L. They will correct and rally together because everybody has the same trade on.

Bottom line is; this is a game that rewards pure objectivism. Be ready at a moments notice to fade your own view. I watched Louie Bacon sit in a room full of people for an hour… hear all manner of argument that supported a particular trade view. Come to that particular view on his own (apparently, to me anyway)… and then, after we had all wandered out… call the desk and go the other way… talk about an open mind. That's why I like the Larry-Kudlow-Top theme. Larry's exactly the opposite of that. Not that he runs no capital or takes no risk… but that he was the epitome of self-confidence that day. There wasn't an ounce of self-doubt in that room. He couldn't be bothered with the opinions of anyone else. He came nowhere near the concept that day that he might be wrong. With maximum ego displayed, he stepped right on his own hubris. He was perfect… a classic. He's what's WRONG with the system. A person at the "top" of the "information" food chain… who's bills himself as an EXPERT… with absolutely NO control over, or even CONCEPT of the emotional excess they are putting on display. And in so doing… he became exactly what he would fear the most (if he could see it)… the most crippling realization of all to his ego… that I AM a contrarian indicator!

OK… enough fun at Larry's expense… back to more important matters; that of OUR trading self-improvement. I've been thinking that part of my problem with trading the S&P's, is that my trading mind is geared toward bonds… or currencies… or gold. Those markets are dominated by professionals. When they turn… they can turn hard and fast. When a theme starts to change, a good many of those guys (and gals) are out of there in a hurry. Equities… there is so much passive cash moving around at a slower rate, based on much bigger flows, that turns seem to come long after the underlying reason to go the other way was apparent. Trading stocks requires a whole different time set for me. I need to hold off far longer in acting on my overly-sensitive, short-term, professionally oriented perceptions than I would in these other markets. It's always a battle.

Tomorrow is Payrolls. This one is simple for me. If the number is weaker than expectations, I'm buying the Dollar Index. Maybe sell a small addition to the S&P short. If the number is stronger than expected, I'm waiting a half hour and buying the Dollar Index. Maybe sell a small addition to the S&P short. Why the Dollar Index? I'm tired of always feeling like the guy who changes lanes at the wrong time. I'm going to have on a little of everything for the upcoming pain trade… stocks, currencies, gold… everything except long Treasuries. Just like the pot calling the kettle black… I'm morally opposed to owning US Treasury notes. Just kidding. But I would rather let them rally, and then sell them for an eventual trade back the other way as this current position skew is corrected. I think the March lows in equities hold. I'm not even sure we get very close. I am looking for nothing more than a decent correction to that rally. The correlated trades go with stocks. Longer term, the economy does recover. Commodities (including gold) are the place to be. The dollar does eventually go lower. Treasury yields rise… sharply. But in the meanwhile… things go the other way. There are bright spots… imagine the 10-year yields you'll get to sell on this move… sub 3%? But we aren't even THERE yet. That's still down the road we've just turned on to. We're in the early stages of this one. I would love a whole quarter of pain but who cares right now. God… I LOVE this part of the trade. It's like a Friday afternoon of a long weekend. There are lots of folks out there who haven't realized what's about to happen. They're going to get crushed before this is over and they are totally unaware. The market is about to do what it does best… exert the most possible pain on the most possible people. Have a great day.

6:00AM New York time. This is going to be a short one. The wind has dropped out and I want to get out fishing for a couple hours before work. I shorted the S&Ps yesterday… again. I don't know. Something about this market just smells bad. It seems to be losing upside momentum. The leadership group just keeps getting narrower and narrower. There are a TON more people in the bull camp than back in the spring. Maybe that's all selective perception in my head. This market's gone up on no volume the whole time… so what. And now were getting M&A activity sopping up share supply. What it boils down to is an opportunity. The Larry Kudlow high from last Wednesday is still in place. Monday's rally took back a decent percentage of that move. So I'm a short stop out trade away from new highs. Why not take a shot and let the market prove me wrong. The drag is that I have a hard time being long gold, or short the dollar, while I'm in the short S&P trade. So I have not taken advantage of the dips both those markets have offered participants. Perhaps now's the time to put on some long gold against the S&Ps? I'll have to think about that one. Regular readers know I've been a bit confused lately. I think I've called my friend Jim a half-a-dozen times in the last couple of weeks. I only do that when I'm unsure. When I'm confident in my view and my positions, I don't talk to anybody. I listen. But I do not seek advice or opinion. When I'm unsure. I talk to everybody. I seek out a variety of views and sift them for what makes sense to me. I thought Gilmore had a good idea yesterday. He thinks market participants (mostly institutional) are simply taking Fed stimulus and channeling it right back into the capital markets. And until the Fed starts to remove that accommodation, the path of least resistance for all asset classes is higher. So stocks, bonds, emerging markets and gold, all go up together. But once the authorities start to tighten (or seriously hint at tightening) all the asset markets will come off hard. That's an intriguing view. It fits with what we've seen and the highly correlated markets we've had.

This morning, stocks look to open higher. My view tends to be, bear phases open higher and fade, bull phases open lower and rally. Gold is up $6, a decent move, and the dollar is lower. Perhaps I will be kicking myself this afternoon at not taking advantage of the $990 price we saw a couple days ago. Or the rally toward resistance at .78 in the DXZ. That's all water under the bridge. I'm not going to try and jump on now, $10 off the lows, when I'm not all that confident in the trade to begin with. The bottom line here is, I'm not sure the one leg down we've had in gold, or the rally in the dollar has reduced the market's position skew all that much. It usually takes at least two (and the second being more painful) legs down to do that. Even from a disciplinary standpoint, I don't feel comfortable initiating new length halfway back off the lows. Guess that answers the question about putting on gold against the short S&Ps. No… I think I'll just stay with my idea for now and see how it pans out. Trying to be a contrarian frequently is a lonely endeavor. Oh well… my stops are in and I'm going to let this thing play out. We'll see. At least the fishing should be good.

6:00AM New York time. Writing about markets and trading them at the same time is frequently an interesting experience. Sometimes, I get taken out of trades for various money management/stop-loss reasons, yet the overall trade concept that I originally wrote about, still holds. Back on the 22nd, last week but less than 7 days ago, I mentioned trading against Larry Kudlow and his nauseatingly bullish-stocks/bearish-dollar tirade. My trade did not last the day. I knew at the time it was nothing more than a wise guy trade. Equities closed near their highs that Tuesday. For my part, I stepped in front of my new-high stop to get out of the trade. The irony in looking back is that, the following day…. Wednesday was, and remains, the recent high. Not only is it the recent high, but it is a recent high, but it was the start of three consecutive down days, in an environment that for the most part, was seeing equities correct only a couple of days before going on to resume their rally. That day was also a new high with downside reversal. Does it mean anything? Who knows? There have been only 3 occasions since the March 9th lows when we posted 3 down trading closes in a row. Feel free to check me on that, my charting systems are pretty primitive. So in terms of changed behavior over the past 7 months… it has potential. Bulls ought to be all over this pullback like flies on a turd. Today's close is important. Tomorrow's close is important. Will the behavior of buying dips continue to be rewarded… of will it start to be punished? Wouldn't it be ironic if that day turned into a more significant high… maybe… I daresay… the high for the year? It doesn't really matter to me. It's simply a point of amusement. I'll remain as flexible as always, and will attempt to trade simply with the motive of adding to my P&L. I'll be out of my short S&P trade (which I did double up on Friday) as soon as it starts to lose momentum, and starts costing me money. But I'm thinking… if it does pan out in the longer term, I might want to send the piece to CNBC.

Regular readers know my love/hate relationship with emotional market commentary. It's my bread and butter from a sentiment standpoint yes… but it's also the reason we continually create bubbles as a society and as an economy. The majority of us are unable or unwilling to see our own emotional extreme, so we are unable to get on top of it. The greedy trader in me wants to see more of that, and to even greater extremes. The humanist in me wants to reveal the problem to the whole world, and send people en-masse to therapy. I was trying to get to sleep last night but my wife had on this HGTV show called Real Estate Intervention. What a train wreck. This couple paid around $600k (or something like that) for their house… 100% financing… adjustable rate… at the top, and has recently been told by realtors that it should trade between $350 and $450k. The guy has lost his job, found another in another state, and has to sell the house and move. My wife (who loves that channel) had to turn the show off… too depressing. But that's how this kind of crap happens! This couple got totally caught up in the real estate craze. They failed to recognize the warning signs of emotion that were all around them at the time. And every one of MY readers know… the warning signs were EVERYWHERE in 2006. The world would be way better off collectively, if we could temper our own enthusiasms on an individual basis. Anyway… back to Larry Kudlow. There's that emotion again. Larry works with the markets every day. He SHOULD know better. Of all people… HE NEEDS TO STAY ON THE EMOTIONAL SIDELINES. LARRY!!! PEOPLE WATCH CNBC FREQUENTLY FOR ADVISE ON WHAT TO DO. YOU BETRAY THEM BY LETTING YOUR EMOTIONS RUN RAMPANT. He's like the sports announcer who opens his mouth about a guy not having hit a dinger in X number of games, only to see the guy crush one into the bleachers. Yeah… we know you get paid by the word Larry, but at least TRY to be cognizant of your own emotional boiling point. Odds are, once you get to that point, the markets are about to spank you.

Now… on to other market matters. As I mentioned above, I sold another small piece of S&P short on Friday. It is still not a big position. The only way I can make decent money is to have the move get legs and go some distance. Maybe I'll continue to build it. Every day I take a critical look and weigh what I see. But you know my track record in trading S&Ps. I'm gun shy for a very good reason. So I was thinking this weekend on my ride to Napatree Beach in Watch Hill, RI on a perfect fall Saturday morning for a sunrise fishing outing… what if I traded the S&Ps as a spread… against say… gold… or bonds. There are a lot of participants out there who keep waiting for some of this year's market correlations to break down, and allow say… gold to go up at the same time that stocks decline. Maybe that will happen, maybe it won't. But it got me thinking. Why not leg into the spread? If stocks continue to decline, they will eventually help drive gold down to the $960 area, where there is huge support. Do I cover (assuming they are still on) S&Ps simply because gold trades to support? Perhaps $960 simply means I should get long enough gold to offset (and then some) a bounce in stocks. I could do the same thing with bonds. Bonds are rallying as stocks decline. They may get to resistance before stocks are done going down. I'm sure many readers already trade this way. I don't… so the idea is new for me. It seems to make some sense. Yes, these markets are correlated, but their rates and magnitudes of decline and advance against one another vary greatly. That puts them at important technical levels at different times. We'll see how this all evolves, and obviously, you will know how I proceed and how it goes on the subsequent post to my trade execution. All the best.

5:00AM New York time. Yesterday's action sent me to the sidelines. I wish I had seen it and acted on it sooner. I guess that meant Wednesday. I could have saved myself a couple of percent. I did remark in my Wednesday post how much attention the weaker dollar was getting in the financial media. I did trade momentarily against Larry Kudlow. Oh well… looking back and wishing "what if" is a ridiculous endeavor in trading. The reality is… you didn't… and that's OK… the question always is, what did you learn from this and would you do anything different the next time. In reality, I shouldn't bitch. I have been keeping my positions on the modest side for some time now, not necessarily feeling a bit insecure, by staying with those trades in spite of knowing they were way overdone from a position skew standpoint, and could turn badly at any point. I had decided a while ago to stay with these markets until things start to crack. Yesterday it cracked for me. Again… if you were one of those who bailed on Wednesday because of weaker stocks or firmer bonds or slightly weaker gold… then hats off to you, you've got a lot better market feel than I. What was a bit ironic yesterday, was that the catalyst market… equities, held up better than many of the other markets. The Canadian Dollar got decimated. Gold was down 1% while the Dow was off half a percent. Maybe that's not so strange. Maybe it makes perfect sense. Maybe there were a lot of people like me who didn't really buy the continued equity market optimism, up 55% from the lows, but wanted to participate and could buy into the weaker dollar, higher gold argument. So when things started to get ugly yesterday, they (like me) were the first ones out the door. Equity market guys are still buying dips. I guess the next couple of days will demonstrate whether their patience or my prudence will be rewarded.

Maybe I'm wrong. Maybe all this we be nothing more than another 3 or 4 day correction in what have been so far, some powerfully trending markets that include, higher stocks, a weaker dollar and higher precious metals. Maybe I should have been buying gold yesterday instead of getting out of my position. I'm not sure. I only know I've done fairly well this year (yesterday aside), and I periodically need time to sit on the sidelines and reassess anyway. My friend Jim's proprietary sentiment and flow indicators all point to things starting to drain to the other side of the boat. His first and oldest equity sentiment indicator is once again above its upper band, in danger territory, with prices never having come off much after the FIRST time it visited those levels, and that was a month ago. I don't think anyone would argue that we have some markets at this point with some significant position skews in them. How far will they pull back… how long will it take? I have no idea. I just know there were some warning signs ahead of all this for a couple of weeks. To me, it's not so much a function of how long or to what price level, it's more about being able to recognize the signs that directionally, things are getting worn out. Markets are dynamic… so your thinking and sense of timing has to be dynamic too. For me… getting locked into one view or another simply delays the inevitable overwhelming doubt that surfaces as the corrective move goes farther and farther, eventually threatening to become the new trend. To me, that is not the time to be deciding you might be wrong, when the majority of market pundits and prophets have finally gotten on board the "new" theme and CNBC guests are bombarding you with the "it was obviouses" and "we've been short fors". By then, I'm (usually) looking to go back the other way again.

Have a great weekend. Oh yeah… by the way… I did put on a small S&P short yesterday to test my theory. Not going to make or lose much on it, but I do try to put my money where my mouth is.

5:00AM New York time. Once again… sorry about the off schedule post yesterday. Well… as you can probably guess from the price action, I've cut back on my aggressive bond short after yesterday's two-year note auction. I certainly don't want to be short a boatload as the results of the next two auctions come in. Here's the piece I posted yesterday morning on-line for FXA while filling in:

No biggie. I remain short a more modest position now. Everything is kind of modest at this point. I'm long a modest Canadian dollar position. I'm long a modest gold position. They're mature trades, yet they continue to work. Obviously… I will be keeping a close eye on both bonds and stocks going forward. Bonds are going to be a huge trade and stocks… well… they've been driving all these other markets and they're up in the stratosphere for sentiment skew.

Now on to my bad wise guy trade; this is an example of what never to do in trading. But yesterday, Larry Kudlow of CNBC was beyond nauseating. He was SOOO droolingly bullish stocks, along with being bearish the dollar, to the point that he wouldn't (once again) let the guest analysts get a word in edgewise… unless of course they happened to agree with his view. And you wonder why I don't sit in front of the screens on a regular basis. Anyway… it got so bad, (before I actually turned the mute on) that I couldn't help myself, I just had to sell some S&Ps short against his tirade. I figured anybody that emotionally bullish, so absolutely sure that they will be right… just has to get traded against. So there I went, pissing into the wind. You know what happened to that one too. Oh well. I haven't done anything REALLY stupid for a long time, so it almost felt good to let go. Larry Kudlow should really be on talk radio, or perhaps Fox news with his own time slot, because he is the farthest thing there is to an objective journalist. Why do they even bother to get guests for him to interview? He doesn't let them speak. He's an embarrassment and I'm amazed CNBC hasn't canned him yet.

9:00AM New York time. Sorry about my off-schedule post, but the timing of all this starts today. In my regular random listening to the financial news the last couple of days I've heard a couple of guests on CNBC/Bloomberg mention the dichotomy between what the bond market was telling us, versus what the stock market (and Gold) were telling us. Both of the guests I heard were inclined to believe the bond market. Hmmm. I myself question the validity of ANYTHING the bond market says in an environment of quantitative easing. Doesn't quantitative easing imply at least one large participant without P&L pressure, with unlimited financial means? How is that a two-sided market? And I'm not even saying the Fed is the biggest factor in all this. Look at the historical auction result data. Non-comps and indirect bidders are HUGE. That's another couple of mega-participants with motives other than P&L results and simply making money for investors. I don't care that the US Treasury market is the largest, most liquid market in the world. How much liquidity has been put into the global monetary system over the past 18 months from financial authorities? Think that volume of capital flow can't put a dent in… or support Treasuries? I say yes. I am now short a pretty good bond position. But I'm very nervous about it. Not because of the technicals… or the economic fundamentals… but because this is yet another week of supply. And despite the massive dollar volume of securities being auctioned, and the increased frequency of those auctions, those new supply events have in fact been BULLISH. Think about THAT for a minute. So here we are again. George used to say, "find a premise that is wrong and bet against it". I disagree with the premise that yields will fall in this environment. But the participants involved are the biggest on the planet… with virtually unlimited capital. They're the ones that PRINT the money. Any wonder why gold is trading at $1020? If you can't short bonds, where do you go? Lets see what happens today. We've had three days of modestly weaker stocks and bonds have gone nowhere. In fact, they are hovering right around recent lows of just under 3.5% yield. They tried to rally Friday and failed. They tried to rally Monday and failed. Folks… find me a market that has drawn strength from another market and then fairly suddenly fails to do so. I don't know if that price action is significant. I don't know if all this concern the last few days over the weaker dollar has changed the dynamics. I don't know if there is an increasing view that Treasuries are being "manipulated", and can thus be traded against. I just heard Rick Santelli mention that on CNBC. By the time he talks about something, you can be sure the idea is out there. I expect the 2-year today to go well. If the 10-year rallies on those results, I am no way going to stick around for the 3-year tomorrow or the 7-year on Thursday. Far better to lighten way up and then resell after Thursday. However… I also have a stop below last Wednesday's lows. That will REALLY get me short. The idea behind trading is to keep oneself in a position to MAKE money. I have been saying, when bonds go, it will be a BIG trade. It's a trade I don't want to miss and I want to get it early. If 10-years can't trade up (or even trade lower) on today's auction, it will be one more piece of the puzzle to me that things are changing… and not in a good way for bond bulls.

I will probably post a short update tomorrow looking at what happens later today.

6:00AM New York time. Today looks to be a better opportunity day if you're of the mind to simply play existing trends in their recent directions... if you've got the stones to step in front that is. Gold tested below $1000 just and hour ago early in the London session. The dollar is higher, stocks are indicated lower, and Treasuries are a touch firmer. Asian markets were slightly lower overnight but I think they were quasi-holiday sessions. I did nothing on Friday. I mentioned adding to my bond short but decided against it. With yields bumping up against 3.50, its similar to the situation gold was in before it broke of its triangle. Why sell against the resistance BEFORE it breaks out? Especially when current prices are already right there. If it fails, and goes back down, you're screwed. If it does break out, you're entry is not going to be a whole lot worse that it would have been had you bought it before. 10-year yields are at 3.47 this morning. They weren't a whole lot lower on Friday. It's simply an issue of conservative money management. I don't want to be a hero… I just want to hit the green. Hey… a golf analogy. And I don't even play golf. Anyway… I am about to pick up the phone and put some gold back on though. This morning's low is $996. It's about $1000 right now. It may not be a bad trade independently to buy some here with a new low stop, especially in front of a lower US equity opening. We've had a couple of corrective days in equities with a third down morning pending. That's pretty much the script we've been reciting… a couple days down then back up. And we know if stocks have a good day it's going to be supportive to gold and the currencies. A couple of items of caution are worth noting however. My friend Jim's proprietary S&P position skew indicator is above its upper warning band. The last time it was up there I traded the market from the short side to modest success. The indicator is notably better at calling bottoms than tops. Basically, I think this all boils down to money management and prudence. Yes… we know sentiment in equities is by all measures off the charts. And while we may want to believe that gold and the dollar can disconnect from equities any time, the reality is… they are still very closely correlated. Ask yourself this question… if you knew the S&P was going to be down 15 points today, would you buy gold this morning? Or sell the dollar? There you go. I certainly wouldn't. I myself think what we're seeing in all these markets is the greater fool theory on a colossal scale. Everybody is keenly aware that the majority of equity sentiment indicators are way overdone. Lots of participants are very leery about jumping in here and many are calling for a pullback. But like an ETF, when money comes into your fund, you are duty-bound to put it to work. The flow of capital back into passive equity vehicles is immense. Meanwhile, the higher the indices go, the more cautious the "smart" money becomes, and the less long they are… or even short. That's the phenomenon. It's like watching a train wreck in slow motion. You know the bridge is out, and that you should slow down or even go back, but the passengers are all screaming about being late. So you stay on board to see just how far the train will take you. In a nutshell, this is how bubbles form in the first place. Deja-vu all over again.

6:00AM New York time. Well… it's 5:25AM EST and I just got BACK from fishing. You know… fishing can be a lot like trading. You think you have everything all lined up for success… right weather, right tide, right time of day, right time of year. Then you go out to take advantage when everything is there and get skunked. Just like trading. You think you have all your ducks in a row and then the markets come around and smack you in the face. Not that I'm saying I've gotten smacked in the face. Just that it can, and does happen, and sometimes, at those very times when you're MOST confident, and think you've got it all figured out.

First my trading updates; I had a feeling yesterday was going to be a corrective day… and perhaps the first day of a couple of corrective days. I sold 1/3 of my $C position and covered 1/4 of my 10-year notes Thursday morning. 10-year futures never did take out that low from last Wednesday. We need to get above 3.50 for that, and so far 3.50 has been an important physiological level. My plan will probably be to see how far this rally wants to go, and then (as I usually do) look to sell the first down close after the bounce. If the market closes lower today it will be today. If I sense a stall in the market, I may actually sell into the rally with a tight closing stop. Either way, ideally, the bounce will be of a typical ratio to the down move from last Friday's high (118-20… the reversal day) and the low from Thursday morning of 116-23. Those are the rough levels from my very basic charting service. That will result in a minor lower high. That may put us in position for another test of 3.50. I'll be employing the same strategy for the Canadian Dollar and for gold. Yes… the currency and commodity trades have been going for a while, and yes they are mature/old stories. But they're old because they continue to work. And I think one needs to play them as trends-in-force for as long as they continue to work. When I lose money twice in a row by buying dips in the currencies you'll know. And to be honest, I've been playing them smaller than I normally would with a trend that has only just begun. That's why I've been trading the bonds with bigger positions. It's a young trade. Hell… you could even make the case that bonds are still not a down market. My gains are unrealized. One more big up day and there won't be any gains at all! I've already tried to play the short side about a month ago and that didn't pan out. This one might not pan out either. Now that's a fresh trade… one that hasn't even started working yet. Talk about early.

The one thing that makes me nervous in all this are equities. Equities are more overdone than any of these other markets. We're up 55% from the lows. The rally off the 1929 crash bottom went 60% before retesting and giving back most of those gains. By all historic measures of "bullishness" this rally period is out there in the 90th percentile. Conditions like that are fleeting and they usually end painfully. A big correction in stocks SHOULD be very bullish for bonds. In fact… that's one of the most important things I'll be watching as we move out in time. The correction and retest in stocks will eventually come to pass. I have been saying I think it comes very early in 2010. Who knows? If bonds react in typical fashion by rallying, then I will have to put off my desire for a big short until stocks correct their position skew and put in a bottom. If however… bonds (for whatever reason), FAIL to rally on equity weakness, then I think that will portend and even larger and more significant move in Treasury securities, and one that calls for an even more aggressive trading posture. It will be a major FU trade. I haven't spoke much lately about FU trades, but that would be one. Well… I'm whipped. I'm going to relax for a bit before the wife and child get up. Have a great day.

6:00AM New York time. Today is going to be an interesting day for me. I now have on a decent short position in US 10-year futures. It does not take a rocket scientist to see that this trade has NOT been the place to be since June. Despite all the fundamental negatives, (obviously there are positives too), yields have managed to come off 70 bps, from a high around 4% to a low in the upper 3.20's. The market has backed away from a recent test of those lower yield levels last Friday, and now resides around 3.41. This morning, bond prices are a little firmer. Meanwhile, we have stocks higher (yet again), big new highs in gold (up 11 bucks this morning), and renewed weakness in the dollar. All this comes on the heels of better than expected Retail Sales and Empire State Manufacturing yesterday. I have frequently said that big moves often start from one (or at least just a couple of) critical day (s)… one day (or days) where the market in question convinces participants that something is wrong… something has changed. Take a look at the 10-year note futures chart. It is clear to me from the price picture that this market has lost upside momentum in the last two weeks. The slope of the trajectory of the recent rally has slowed. That may be temporary, merely a consolidation, or, it may be something more significant. There is considerable overhead resistance between 118 and 119. There are a couple of major lows that come it up there. Prices have retreated from the high made last Friday. Yesterday they tested and held a minor low set last Wednesday. If this market is to remain in an up phase, then it should hold that minor low from last week, go on to retest Friday's high, and eventually go through. On the other hand, if this market is ripe for a move lower, then it will either turn back down today (or over the next couple of days), taking out that minor low from last week. It could also have a minor bounce to below Friday's high, then turn lower, and STILL take out that minor low from last Wednesday. Either way, the evidence of an increasing bearish inclination will be the taking out of that minor low from last Wednesday. That's the first objective. And the reason I look for all this today or perhaps tomorrow, are the other markets. We had corrective stock, currency and commodity action late last week. Monday we saw the stabilization. Yesterday we saw the tentative continuation. Today we are seeing the full-fledged directional push. We're looking at the first higher opening call in stocks in several days. This will (I think) be the 8th up day for equities in 10. We have gold up $18 in two days. The currencies are either making or are close to making new highs. The best of conditions for pressure on Treasuries is right now. If they cannot do it now, I don't know WHAT it will take. This is not really a technical call. I simply make the point that there are some very good fundamental arguments out there to support the bearish case in bonds. And the ancillary markets are moving in a direction that should be associated with higher yields. However… markets go when they are ready to go. Despite the potential negatives, until enough participants are willing to sell bonds, prices will remain with a bid. So here is the latest test. If the bear case is starting to emerge, then we will see a change in price behavior… and soon… from making higher highs and higher lows, to making lower highs and lower lows. The 116-18 low from last Wednesday is the 1st low of significance that needs to be breached. And if there was ever a day where we were close enough… and the stimulus from outside was there… it is this day. So far… no go. 10-year futures are up about 8/32nds. I already have a decent sized short on, but I think I am going to sell more into this morning's rally and see what happens. Turn it into a trade if it manages to hold strength through the day. Besides bonds, I remain with a small long position in gold and a moderate long position in the Canadian Dollar.

I was having a chat with an old friend on Monday. I we were talking generally about (the majority of) people's inability to see excess, to see bubbles forming, to see the euphoria that comes with a market top, the desperation that goes hand in hand with a bottom, and to see their own emotional swings as those two extremes are visited. And I made the point that oyster farming has helped me to see that better in my own life. It has made me a better trader. Most of us live in cities and work in offices. If a storm is coming, we simply wear a raincoat or take the umbrella. That's the extent of it. The cycles of nature do virtually nothing to disrupt our daily routine. I myself have to watch those cycles very carefully. I'm out there in them. They are the difference between having a boat and having a sunken boat, between being safe and being at great risk. That observance of cycle and the associated preparation and action for it, as it swings between the calm and the storm… warmth and cold… has become part of MY daily routine. And even if the weatherman says the next storm's not going to be a bad one, depending on the time of year, we move the boats anyway.

6:00AM New York time. I'm in pretty much the same boat as Friday. I have some positions on but I'm not exactly thrilled about their prospects. Most of the trades I've been in for the past year are mature and they sure behave that way… like the leaves on the trees in September. They're still on, and green… but they look old and worn out. And you know that the first week of slightly lower temps is going to get them turning. Still… as all of my trades are still kind of riding the coat tails of equities (though that correlation is getting pretty old too) I think I just need to stay with them and let them finish up to whatever end they go. Look at gold on Friday. Ok… the first attempt through $1000 I can see selling coming in and pushing it back. But gold had a decent close on Friday, well through the $1000 mark and up at the highs of the day. Look at it now, back at $998. I'm not saying its over. I'm just saying it acts tired. There is a lot more two-way flow lately… a lot more money now moving out, balancing what is still flowing in. And taken in the context of a market that was essentially in a giant triangle since February, the inability to sustain a fresh new leg higher on the breakout is even more interesting. Again… I'm not saying its over. But I think it does warrant a bit less enthusiasm. As such, I for one am happy to be participating at a smaller position size. I think we have the same phenomenon going on in both stocks and the dollar. I remain long a moderate sized Canadian Dollar position. Same thing there… yes… it's hanging around the highs. That's a good thing. But further headway is grudging, and back-offs from those levels are common. Even the Euro, which has been on a relative tear lately, compared to everything else, has taken 3 months to go to go from 1.42, where it was in June, to 1.46. Yet between March and June it went up 10 big figures. Maybe I'm just splitting hairs, and we are actually on the cusp of a renewed leg down in the dollar and yet another rush into commodities… including gold. I just don't get that sense. Again… I think we see a continued grind in all these trades through year-end, but if you're expecting fireworks as we work down toward the wire… forget it.

My best idea I think is still trying to probe around in the bond market for a good short side opportunity. Look at bonds today. Now I know this is just one day. And market moves are made up of many days and weeks of continuation price action stuck together. But with S&Ps weaker by 8 points, gold down 8 bucks and the dollar higher… where are 10-year notes? How about unchanged? That's kind of my point. Bonds and equities and gold and the dollar have this much in common. They've all seen their best days. Unlike a mature trade, the short side of bonds is a fresh new trade. It is a trade very few have stepped into. The trade has been to go the other way. Yet we're bumping up against levels that are proving (and will prove) very tough to get beyond. And the fact that lower yields have correlated WITH higher stocks and commodities doesn't bother me at all. I continue to think more and more that 2010 will start off at least as a counter-intuitive trading year. The real economy bottom and start to recovery will become obvious, but at the same time stocks will run out of gas from over-commitment, and take commodities and the currencies with them lower. The ultimate buy-the-rumor-sell-the-news trade. Meanwhile, bonds go lower as the ability of major participants to maintain lower yields (and the desire to do so) wanes. Yeah… I'm it sounds little like a fantasy right now. But markets have a foul sense of humor. And the trades that were frequently become the trades that ain't. Especially around fresh key benchmark time points.

6:30AM New York time. Yesterday was another good day for Treasuries. Again… one would have to categorize the 30-year auction as "oversubscribed". 10-year notes closed up almost a point. I established a small short position on the close. No… I did not get to sell a 3.20-something handle. But 3.34 is pretty close. Besides, I figure yields may not be done falling yet. I would not be surprised to see Dec futures take out the high from early September, which would put the yield back around 3.27 or so. And they might even make a run at 119 basis the December futures. For now, I want to be prepared for that. I have been talking about the manipulated nature of this market for some time now. and I think given that, one has to look at trading it in a somewhat counter-intuitive fashion. Linear thinking would have you believe that the greatest pressure on this market, given the Treasury's financing requirements, would be around the time of supply. But in a manipulated market, the reverse is true. That actually becomes the time of greatest bullishness. That's why I figured yesterday wasn't such a bad time to put on the short… after supply has been supplied. I think still however, for this trade to even modestly work, we need to see continued buoyancy in stocks and commodities, as well as weakness in the dollar. We also need to see the economy continue to bottom out… drastically slow its rate of decent as it were. I do not think the level of rates can hold up to this kind of fundamental assault indefinitely. What did George used to say… find the premise that is wrong and bet against it? And since I would make the case that stocks and commodities, as well as the dollar, will generally maintain their trends into year end, (those are the trades where people have been making money this year, so that's where the strong hand is), I think that we could at some point see Treasuries yields back up. The attractiveness of the trade to me is its freshness. Stocks have been going up steadily since March. They have crushed basically every bear along the way in their path. Gold too, has expended a tremendous amount of buying power getting through $1000. The dollar is at new lows against the Euro and the Yen. How long before officials in those countries start squawking about valuations. Anyway… it's a toehold position. We'll see what comes of it.

Beyond that, I don't have a lot to say this morning… other that a brief touch on politics. The conservative talk show hosts must really be going after Obama and health care (as well as Van Jones and other potential communists in the administration), because my dad this past weekend was so wound up, he was practically vibrating. He gets his news from Rush, Sean and Glen Beck. Personally… I think each is insane in their own special way. But what's up with Republicans lately anyway? Holy Christ… we had 8 years of Reagan, 4 years of Bush Sr., 8 years of Bush junior, only broken up by 8 years of Clinton… who was a fairly moderate Democrat anyway. Its not like the GOP hasn't had its spin at the wheel. And now, we're just a year into the first activist Democratic administration since Kennedy, that is trying to actually address the long-avoided health care issue, and the conservative machine is having a fit. Maybe that's the problem. It's been so long since we had an activist administration, conservatives are simply panicked out of their shorts by the prospect. Change… after all… is scary. I'm not a big fan of liberals myself, but even I think the behavior from conservatives recently is abysmal. They are constantly pointing to the decline of America and her values but then they turn around and act like spoiled children, as if the country was their own little fiefdom… and how can anybody come in here and just mess with the status quo, as if life in America is going to change markedly over the next 4 years. Here's how I see it. Through 50 years of various administrations, nominal tax rates as a percentage of income have barely budged. The lifers in the various government agencies are really the ones who set policy on the ground floor, where it interacts with American business and entrepreneurship. Yes… the government has borrowed a lot of money. But does anybody think a Republican administration would not have used the same tactics to combat the economic downturn? In reality… things really don't change all that much from administration to administration… except when one declares war on somebody. So personally… I just wish both sides would calm down… then perhaps we could all pitch in constructively to this whole health care issue. We're the last of the G-7 to not have national health care. It is a tremendous competitive drag on our economy to have US corporations picking up the entire tab for their workforces. The end result will be far from perfect. But the system we have now is far from perfect. Only by starting down the road are you in position to improve it. That's my two cents.

5:00AM New York time. First… my trading activity from Friday. I posted early AM with a small gold position (having just sold half of it) still short a small stock position, and with no short dollar exposure. By about 11AM I made the call that neither stocks nor gold looked like they were going to stay down. So I covered my S&P short and bought back the gold I had sold earlier in the London AM, taking me back to a more substantial, if still modest long. I also bought back the small Canadian Dollar position I have had long on and off for a week now. I guess I'm happy. Gold looked great on Tuesday AM but still managed to close below $1000. By the close yesterday the Canadian Dollar gave back big gains from the thin Monday electronic session and then a nice opening on Monday. Its net move over two days was nil, while the Dollar Index, which I had been trading all year, got crushed, and closed very nearly on its lows. I felt kind of like the guy in the traffic jam on the freeway who finally decides to shift into the "faster" lane after being passed by dozens of cars, only to have that lane come to a dead halt and the lane he was in start moving again. To add insult to injury, the Aussie Dollar had a very good day, so it wasn't a commodity currency thing. Perhaps all this talk about BOC intervention and QE is keeping participants nervous about the long side. And maybe it simply means I made the wrong choice of short-dollar options. Tuesday morning I did was sell a quarter of my gold position up $10, at $1006, thinking it was the conservative thing to do after having run stops above $1000.

I think this morning I just want to have a talk about the bond market. I have grown more and more convinced that this is one of the more highly manipulated markets we have had to deal with in recent memory. It's the conundrum all over again. Except this time, the Fed isn't raising short rates, it's the Treasury is selling mountains of paper. We had a three-year auction on Monday. If I had to characterize it in one word it would be "oversubscribed". Tell me please… who in God's name wants to lend the US government money for 3 years, at 1.5%, when the stock market is up 50% from its lows, 10% on the year, gold is pushing $1000, oil has rallied $25 in 6 months, and everybody is talking about green shoots? The worst thing confusing all this is that 99% of economists are trying to justify this price resilience with their typical, linear, economic explanations. It must be that bonds are discounting disinflation. Or… the stock market is over-anticipating and economic recovery. Lets remember, back in the days of Greenspan's "conundrum", the same thing happened. Economists refused to give credence to the idea that foreign central banks could actually buy enough Treasuries to keep coupon rates down in spite of the Fed hiking short rates. We should have learned from that recent experience. It's the same thing now and they are making the same mistake. Here's my advice… DON"T LISTEN TO THEM. Bonds yields are staying down because foreign central banks continue to buy them by the boatload, as do the US primary dealers and other Wall Street trading desks. When is the last time you heard anyone from Goldman Sachs or Morgan Stanley say anything negative about the bond market? They can't. They are now beholden to the very powers that are selling those securities. Me thinks it wouldn't go over well to get bailed out and then turn around and bad-mouth the hand that is financing you. Wall Street needs as much good will as it can muster right now. Getting vocally bearish or trading against Treasuries would not be a wise move. I don't know if it's simply unspoken or if there is an un-made-public directive down from the top. All I know is what I see... and it don't add up. Dave Lewis was right. That's one of the reasons gold is going higher. Gold (and silver, and stocks for that matter) are the anti-bond trade. If you can't get bearish bonds, what's the next best thing?

What I DO know is that this period of goodwill will not last forever. And the longer Treasury prices stay up as supply held among participants accumulates, while the Dollar goes lower and a whole host of commodities trade higher. Along with stocks improving and the economy working it's way farther and farther through its generational trough, the worse will be their outlook will be as the banks clear their own problems and become less slaves to Federal largess. We are still in the waiting game stage. But 2010 may bring a different picture. When it comes… it will be a big one.

6:00AM New York time. I'm going to start putting a disclaimer at the end of this column. Worse, I'm starting to see myself as Dennis Gartmanish. I mentioned briefly on Wednesday that I was going to buy a little gold… just as a precaution against a breakout. So I posted this column and then bought a little… 1/3 of a full position. I do my morning chores around here and head off to the shop. As I pull into the parking lot, Bloomberg mentions that gold is up 10 bucks. I'm thinking… holy sh&%… it's breaking out! I hate buying breakouts. That usually gets me into trouble. But the range in gold had gotten so tight and the duration of the consolidation has gone back so far… I thought this time anyway… I would participate. So I buy another unit. I also put a buy stop order about another 5 bucks higher… just in case… along with a stop for what I just bought on the downside. Now I have both sides covered. Well, a couple hours later, I get the call. I'm out in the field so I have no idea what's going on and I have no idea which order they are calling about. Well… obviously I got filled on the buy stop. Now I'm long a full position. The close on Wednesday and all of the price action for yesterday is now history. I actually sold 1/3 of my position Thursday morning up 10 bucks from Wednesday's close and then another 1/3 about an hour ago. I'm still long a 1/3 position, which isn't much, but we've also rallied $30 in two days. It would not surprise me nor should it surprise anyone for a reasonable percentage setback before pushing through that $1000 level and then on to the old highs at $1030. But today is also a Payroll Friday. And I don't really want to have my ass hanging out with large positions when I have NO idea what the price action will be off that number. Lastly… I have in recent weeks been a lot less hesitant about taking profits. I have gone through some very frustrating periods this year watching gains on positions evaporate as participants push prices back in my face. If there is one thing I can say about trading this year, it's that very rarely have these markets completely run away from me an NOT allowed me to get back in at decent levels. If gold prices don't back up, and they just blow back through $1000… so be it. I will ride my little third as far as it will take me.

So there's the last two days in my account. Again… I HATE being seen as one of these people who tell you they were long AFTER a move has happened. But by the same token, what can I do? Once I post for the morning, that's it. I am pretty much away from the computer. And I do not have the time to write every day. I suppose I could simply leave my trading activity out… and just talk about the markets… but I think that would cost both credibility and those regular occasions where the best example and exhibits are my trades and the price action. And I do try my best not to discriminate. You hear about my land-mine experiences as well. I guess we'll just leave things as they are and I will continue to subject you to occasional apologies over my after-the-fact trading commentary.

OK… that was the past couple of days… now for the next couple of days. First off; I DO think we just saw a break out in gold to the upside. But as I said, $1000 is a big psychological level, so a first attempt and rebuff is not unexpected. And, we get Payrolls today. That number will have a huge impact on stocks, which means it COULD have a big impact on the other markets… including gold. Is the positive correlation between equities and gold still in place? Who knows? Wednesday was a breakout day for gold and a moderately weak day for stocks. I think that was a case of gold simply running out of trading room in the range, and the result was that the net directional propensity of participants became apparent. However, I think the correlation with stocks will reemerge from time to time, especially whenever these markets have similarly lopsided position skews. I remain with a modest short S&P position this morning. My thinking is this; I want to see the reaction to Payrolls. My guess is that the September move lower in stocks is not over, and we will resume going down once Payrolls is out of the way. That can happen two ways. We can get a bullish number, which sets the corrective bounce high somewhere above current levels, or we can get a bearish number and stocks can head lower right from the start. The reaction from gold to either of these scenarios is important. If gold is now acting as the "anti-stock" trade, then a weaker Payroll report and lower stocks could be bullish. I want to be ready to reinitiate early on if that seems to be the case. Gold could also go higher WITH stocks on a lower than expected decline in Payrolls. That is the rally in stocks I want to sell. That is the rally I expect to fade. So if the correlation between stocks and gold reemerges for Payrolls, then I would sell into the equity rally and leave gold alone… on the leap of faith that it too will fade, and ultimately provide me with a better buying opportunity toward the end of the day, early next week. Best-laid plans all to be sure. As always, I reserve the right to improvise as conditions warrant.

As for other markets… I bought back my small Canadian Dollar position this morning. We seem to have held support and are trying to turn and I have an easy and obvious stop. This position also provides me with a short-dollar toehold in a commodity currency. Enough said. I did NOT take advantage of my 3.2-something handle in 10-year notes as I mentioned I wanted to. Part of that was that I don't think stocks are done going down. And the next leg of that should push yields back down again. It has been made apparent time and again in Treasuries that you don't have to rush this trade. It is the most manipulated of all the capital markets lately. This WILL be a HUGE trade when the time comes… but that time is not yet. Until then, one needs to pick and choose short-side entries very carefully. I think that's it for today. We'll see how much of this pans out. Good luck.

6:00AM New York time. I was in the FXA office yesterday. It was the perfect day for it. I needed to keep an eye on the S&Ps and that was the perfect venue. What I was looking for was a change in net participant behavior. Basically, I wanted to see if there would be more volume selling into the rallies than there was buying on the dips after Friday's "exhaustion" reversal. Yup… pretty simple stuff. The predominant behavior back to spring has been to buy dips. So the only way to roll this market over is to start punishing that behavior. And yesterday was like a script out of trading 101. The market opened lower and sure enough buyers emerged. The much better than expected ISM data was a big help. But it was also the test. The highs for the day got made on that number. From there it was a succession of lower highs and lower lows for the day. I didn't feel comfortable until we traded back to unchanged post ISM. The icing on the cake was when all those buyers who came in and bought the opening dip were finally underwater on those additions. I sold another unit on the ISM rally but then took it back for a trade about mid-day. I remain with a modest short position. I'm just glad I'm trading the S&Ps without disaster this time. What was really funny was watching the CNBC crowd as participants faded ISM. Larry Kudlow and that crew were on, and they were positively beside themselves that the market could trade lower on that news. They even managed to shout down one of their bearish guests, not letting him get a word in edgewise, who was trying to provide his own explanation. Ahhh CNBC… you ARE priceless! Guess in all the excitement of a rising market since March, the anchor crew forgot about all those days past when the market faded BAD news, and was able to turn around and close HIGHER. They've been well conditioned. So now that the equity averages are 50% higher (with some stocks WAY more), and the rally 6 months old, they are having a hard time adjusting to the fact that the market might actually start to shrug its shoulders at good news FINALLY showing up on the fundamental side. Such is the cycle of life. I also love the long line of guests they have been parading on recently who tell the audience they have been long all along. Where'd THAT come from? I'm sure as September rolls on, we'll also been hearing more and more from guests who've been SHORT the whole way down. Where are they now? Who knows? The trick is to not get all worked up when you hear that kind of stuff, but to see it for what it is… an indicator of aggregate sentiment. And I gotta tell you… if you use some of the financials as your sentiment gauges, its gotten positively insane. I mean please… AIG trading at $50… up from $10! Crazy man!

In the larger macro, this S&P trade is just a momentary sideshow. I am far more interested in the levels to which an equity correction will drive the ancillary markets. I would LOVE to be able to sell 10-year notes with a 3.2-something yield handle. I would love to be able to reenter the Canadian Dollar at 87 cents, or the Aussie at .80. And to be perfectly honest, I'll probably get another great buying opportunity in the equities themselves. If we get all this corrective action settled out during September, there will still be plenty of time left on the calendar to have these other trades go, INCLUDING STOCKS, into year end. Of critical importance too will be how all these other markets trade under this corrective equity stimulus. Gold reversed and closed higher yesterday. Perhaps that means something, perhaps not. The degree to which any of these ancillary markets hold in or even break away from their correlations with equities will go along way (as it always does) to demonstrating the underlying participant propensities and thus capital flows. Gold for example, is in such a tight range right now, it could very easily ride out a month-long equity swoon without doing anything. If it can hold in without breaking to the downside, that alone would be a huge sign to me that the eventual breakout will be higher. In fact, after looking at the charts this morning, I think I am going to reestablish some of my gold position. There is simply no place left for this market to go except break out in one direction or another. I maintain my upside bias. As for stocks… I have no doubt that they will continue to torture passive managers for the balance of the year. Imagine a situation where nervous managers finally cave in on their caution, get long (where we just were), the market gets whacked, makes them cautious all over again, then bottoms, and starts dragging them right back in again just in time for book closing in December. Whew! That's quite a scenario. Easy Plant… take it one day at a time please.

6:00AM New York time. I feel very much alone this morning. The market it seems, has been of two camps lately. Those that feel US deficit spending and consumer balance sheet damage along with associated global economic woes will lead to both higher rates and higher inflation, and those that feel we will slowly come out of this with little negative price ramification and perhaps even a bit of deflation. The former camp was never enamored of stocks, but did tend to be negative US Treasuries, negative the dollar and bullish gold. I have maintained a position in this camp most of the year. The later camp tended to have a bullish view of stocks. I mean, how many times in life do you get to buy stocks 60% (and some much more) off their highs. Interestingly enough, both camps found gratification together over the past year as all these trades have maintained a relatively strong correlation… and still do. But on Friday… I simply had the inclination to get out of everything. (In the morning) I watched gold trade right up to the upper band of that big trend line that goes back to February. I watched stocks start off in rally mode for a tenth straight day. We are coming up on the end of the lighter-volume, summer holiday season and getting into one of the seasonally worst times for stocks. In my book… it seemed a dangerous time to have a complacent attitude toward being long equities. Or, as in my case, to be involved in all those correlated surrogate trades that had ridden up along with equities. On top of that, I was tired of watching short term gains in my P&L come and go as those same surrogate trades sloshed around TRYING to keep up with stocks but generally not maintaining the same directional bias. So bye-bye long Canadian Dollar, bye-bye short 10-year, and bye-bye what had shrunk to a very small gold position. For now I have abandoned the same macro that has served me so well this year. I was fully prepared to wake up and find everything moving in my face and having to re-initiate on a fresh breakout to the upside in gold.

True, I was, and am, nervous, but I have always said, being alone in your view on the markets is not a bad thing. Friday was somewhat gratifying in that two of the markets I exited at least provided P&L gains for the day before reversing by day's end. Only gold held onto gains for the day. But it doesn't end there. As I mentioned above, stocks had been up nine days in a row prior to Friday. And they were looking at a 10th day during the morning. By any sentiment measure you wish to choose, stocks are overbought. I have been saying for months that passive equity managers are being forced by performance pressure to ramp up their weightings. Again… the months of September and October have not been kind months to the equity markets. On top of all that, Friday saw a minor reversal in the equity averages. So yup… you guessed it… I got short S&Ps. Not a big position, but lets see how things develop today. Shanghai got crushed 6% last night. The Nikkei was up 1.6% early on last night before I went to sleep but reversed lower by the close.

So here I am. Neither in the overall negative-on-prospects-for-the-US short-dollar/short-Treasury/long-gold camp. Nor in the everything's going to be OK long equity camp. In fact I sit with a position in direct opposition to that view. I fly this morning completely along. I have no idea how long all this will last. Deep down I still believe in the longer-term macro. But I also need to make P&L. And I cannot ignore periods where I see excessive position skews and vulnerable markets. Should we go through a rough patch, it will simply provide a better opportunity to get back into all these trades at much better levels. This short equity trade is going to be a day-to-day affair. The market needs to inflict pain early on, or I think participants will pounce on the first decent stall and start buying again… much as they have during the past weeks. Price action, to prove this trade, must start to punish that behavior right from the get-go. Only then will I feel there is something a little more meaningful here than a couple of days to the downside.

7:00AM New York time. I'm not really sure why I'm bothering today. I couldn't sleep last night and eventually woke up late. All the markets I'm trading are simply sloshing back and forth and not going anywhere. Stocks are the only market maintaining directional momentum. Figures… I'm not trading them. I will reiterate only one point this morning. Draw the upper and lower trend lines in gold for yourself. I can't remember the last time I saw a market coiling and compressing its range so consistently and for so long. Narrowing trading ranges build a great deal of energy. They release on the breakout. I don't know what is going to be the catalyst that breaks gold one way or the other. I DO know that there is virtually no room left in the range. And the northern hemisphere summer vacation season is wrapping up. We are entering the final and frequently most active third of the year. Interest rates are defying equity market forecasts of economic rebound. There are several major market forces driving price in what I see as opposing directions. I believe we are going to see the Sep-Dec period resolve those pricing issues in a big way. I don't know which way that will be. But starting next week I am going to be keeping an extra sharp eye on the behavioral signals. Are stocks the mini-bubble or do bonds have it wrong? Is the dollar finally going to break and take gold and other commodities higher as stocks continue to push into year-end? Whatever the answer to these and other questions… I think the answer will start to become apparent not far into September. In the meanwhile… I say enjoy the last unofficial Summer vacation day. Clear your mind. And ready yourself for what awaits.

5:00AM New York time. I was talking to one of our FXA clients yesterday, who happens to be in equity sales. We were talking about the markets and he was of the same bias as myself… that equity managers in needing to catch up with their benchmarks will continue to drive the equity indices higher than the economic fundamentals might warrant, and also pushing the sentiment indicators well into overbought territory. His added spin was that a good percentage of equity mangers, and some of the very big ones at that, are on an October 31 fiscal year end. His point was that there is potential for a mini-panic to get in up to that date. Hmmm… interesting.

The stock market continues to be the place to be and the ancillary markets continue to be reluctant to follow directionally. Perhaps that is a function of the strong risk-on/risk-off correlation breaking down, perhaps it is because the phenomenon of getting paid for benchmark comparison performance is confined to equities. Who knows? Personally I have a hard time believing that 10-year notes will continue trading so resiliently given equity gains and the consistent improvement in economic indicators. In the end, as always, it doesn't matter what I think, it matters what prices do. The only fact that really matters is that I continue to bet on higher long rates in an ungratified fashion. Maybe these markets will ultimately be proven prescient, having stayed more connected to the possibility that all this "strength" reflected in equities will be nothing more than an inventory correction in an otherwise long-term flat consumer demand environment.

As for trading… I took advantage of gold being up 10 bucks yesterday morning and bailed the balance of my position. Despite the fact that the trading range in gold continues to compress, it seems more determined than ever to stay contained. By the time this market is actually ready for a breakout, the range will be so tight, even a guy like me who hates initiating on technical breakouts will be able to do so. Meanwhile… I traded around my 10-year short, selling a bit more in front of the 2-year results and getting taken out shortly afterward on a tight stop. I remain with a small short position. Like I said above… I have a very hard time buying a 3.5 percent 10-year rate given the relentless bombardment from better numbers and continued flood of supply. Then again… all of this HAS been going on for some time now and prices haven't broken. Perhaps the undercurrent of "unofficial intervention" is really keeping this market up. Ultimately though… as every trader knows, the markets are bigger than any one entity or institution. And very often, the longer the ultimate direction is resisted or restricted; the more impressive will be the ultimate directional break. So as long as they don't carry me out to the upside, I am going to try and maintain at least a core short in a market who's days I feel… are numbered. I am starting to feel like short Treasuries (along with a flattening of the curve) is going to be a big trade for 2010. I'm also thinking 2010 sets up for being a tough year for equities… at least in the first half. That would fit with a stronger dollar and probably weaker commodities generally. But I'm totally jumping the boat. All of that will depend on where the markets end up for this year. And we still have 1/3 of the year (and some of the traditionally most active months) left.

6:00AM New York time. I put quite a bit of additional risk on last Friday… just in time… I think. I doubled up on the gold at unchanged after Wednesday's reversal. Then I added another unit while it was up just 4 bucks. At the same time, watching bonds hang in there as stocks, gold, and oil rallied, and the dollar sold off, was just too much. They stayed roughly unchanged for nearly two hours (it seemed) while all this was getting going. They were the gimmee trade. I got up to almost a full short position before they finally caved. That felt good. I also got long a small Canadian Dollar position for the first time in quite a while. I decided it was time to take the plunge into a commodity currency and get away from the Euro.

Here's the rub. My friend Jim's proprietary work has the S&P 500 above the "danger line" as of Friday. That puts it into sell territory. I don't think its news to anybody that participants continue to be dragged kicking and screaming into this market just to stay in the game. Not that you want to run out and sell it right away, but at the first sign of weakness this is usually an indicator you want to go with. So here we are again… gold is testing it's upside range, bonds have broken a bit, and the $Index is once again sitting right on its lows. Yet we have the lead market… US (and lately Chinese) equities way overbought (or… in the case of the Chinese market… recently having entered bear market territory). I WISH these ancillary markets would just break out on one of these big up days in stocks and get this over with! The sloshing back and forth in these constantly narrowing ranges is getting a little old. So that's my quandary. Or at least it was a few moments ago before I hit the bathroom. In those few moments of quiet repast and reflection I have decided to simply take some of my position off and see what happens. One consistency in trading this year is that gains for me have come in chunks and over very short time intervals. So there has been nothing wrong with taking even half of my position off and booking some profits. In the last several instances, what I left on the sheets traded all the way back to breakeven anyway. As much as I want my target markets to resolve directionally (as stocks have done), they repeatedly fail to do so. All my wishing will not change that. So I'm off to get my phone (and my first coffee). I'll be right back.

OK… I'm back. That feels better. I took off half the bond short and half the gold long. I left the small Canadian long position on. Given how this trading year has gone… basically big swings up and then giving a lot back, booking profits and staying out of harm's way is not a bad idea, especially as the trading year starts to wind down. I am within a stone's throw of my P&L high for the year… which itself is just a couple of good trades away from my minimum P&L objective for the year. So at this point on the calendar, I don't mind trying to get there on three or four more "chunk-o-money" trades, then going flat in between.

As far as my friend Jim's proprietary index. I think I am going to try another shot at catching an S&P down-move at the first sign of technical failure.

Lastly today… I want to touch specifically on gold. I heard a guest on Bloomberg Thursday or Friday last week talking about the upcoming IMF (and I think the ECB's) upcoming September gold sales. This guest said the amount was more than 500 tonnes. And that got me thinking again about the whole debate over the plusses and minuses of watching (and trading on) fundamentals. It occurred to me that the difference in myself, and so many other participants, is that there's a strong difference in how fundamentals are approached. If you're one of those that actually "trade" on fundamentals, then it is highly likely you wouldn't want to be long gold during the month of September. The impending fundamental will guide your trade. I, on the other hand, will often blindly be unaware of a fundamental, or, in this case, be aware but simply not really care. The way I see it, as always, it is the reaction of a market to the fundamental that is important. If the IMF and ECB (lets say), make all their sales into the market, and prices don't move much, what does that mean? What do you do? I could make the case that under such a scenario you might be worse off trying to get back in after the fact. I'm not trying to make excuses for my shortcomings on reporting on news and its importance… its just that no matter how many times I try and get into that game, my visceral instincts just won't allow me buy into it in a meaningful way. Which translates on these pages into a glib mention or downright lack of attention. That's my apology to you guys.

6:30AM New York time. The last two days have been pretty dead. I did put a small position back on in both long gold and short 10-year notes on Wednesday mid-day after stocks reversed to the upside from being sharply lower in the morning. I really didn't feel good about it… but I felt I had to do something given the action in equities. My intuition was right as Treasuries continued to move a bit higher and gold a touch lower. Same thing yesterday; we had a modest up day in stocks, yet 10-years moved slightly higher, while gold was slightly lower and the dollar was quiet. I think its simply a case of being smack in the middle of the dogs days of August, the last chance at summer vacation, and the trading action shows it. Despite the counter-intuitive price action, net movement was very small. Say what you will about the dollar and theme change, but there's no way you are going to sell me on the idea that Treasuries can maintain a rally if stocks are going higher on better economic news. This morning we finally have the euro a bit stronger even if it hasn't fed through to either 10-years or gold… yet.

Still, as I peruse the charts, I have to say, for all the talk about theme change in the dollar, and stocks being overdone to the upside, the two markets that have held their directional levels better than any other market. The two major ancillary markets to them, the 10-year note and gold, respectively, have been where the greater action is. 10-year note yields have dropped about 30 basis points and gold has dropped about 25 bucks. Compare that to the S&P 500 futures which are a mere 6 points off recent highs and the $Index, which is only about 80 points off its lows. Go figure… what are my trades… 10-year notes and gold. My thinking at this point is that persistence will eventually pay. I'll probably add some additional risk today. The important thing is that for all the commentary and analysis warning of a pull back in stocks and a better environment for the dollar, none of that has actually come to pass in terms of net price change, and yet current action has been enough (perhaps) to take the edge off the extreme position skews we saw in both markets lately. Anytime a market can battle back against a headwind of analytical stimulus, it should be paid attention to.

However… given that everybody else seems to be on vacation, I've decided to keep this piece on the brief side and not delve into too much else. By the way, I just got off the phone from adding to my position. That's a first… executing a trade AS I'm writing about doing so. We'll see. Much of what is going on still makes me nervous. I guess that's the way it's supposed to be. Have a great weekend.

5:30AM New York time. I remain on the sidelines. I think we are only partially through our current counter-trend move. Despite high confidence that we are only part way through, I am unwilling to try and catch some of it. I cannot see myself getting essentially… long Treasuries. Besides, I cannot imagine how it would feel to overstay my welcome on that side of the trade and have to justify to myself losing money on a trade that I had earmarked early on in 2009 as one of the major opportunities of the year and on which I had BEEN making money all year. No… I will simply sit tight and be patient. We have seen time and again how these counter-trend moves exhaust themselves, and the major trend re-emerges in only a couple of weeks. Proper positioning and timing when that time comes is far more of a priority. I can make everything back and then some in a very short period of time once that bottom is in. THAT is what I need to prepare for. I am going to take the opportunity to re-look at alternate currency options… probably the Aussie or the Canadian Dollar, as well as some alternate interest rate instruments. I think it might be a good idea to separate myself a bit from the emergence of any US/Euro Zone interest rate/recovery rate differential trade. Both the Aussie and C$ are currently pulling back and are, in their own way, part of this same macro, correlated trade. As for interest rates, Gilmore thinks the better opportunity going forward is in a curve flattener, and outright looking at the short side of the short end of the Treasury curve for potentially better opportunities toward higher rates. I'm still leaning toward the idea that those are trades more geared toward 2010, when the real economy gains more traction and the Fed is confronted with needing to remove accommodation.

Stocks remain the leading market in all this, and I think we can see the S&P trade all the way back to 940 before needing to start consider support levels and re-entry. Yesterday's rally, while making bulls hopeful, simply took the S&Ps back to overhead resistance they had broken the day before. I am lucky in that my friend and benefactor, Jim, has some great proprietary flow indicators for the equities indices. We'll both be watching those carefully.

On one final note, it is fascinating to watch the official BLS inflation figures point their way toward deflation, all the while watching my local state government look at every opportunity they can to levy new fees and taxes to help close their gaping budget gap. Here in CT, our Governor recently signed a bill to institute a salt water fishing license. For just 10 bucks, to can have the privilege of fishing the naturally prolific marine waters of Connecticut. A fresh water license is $25, but at least the state operates an extensive stocking and management program throughout inland waters. Meanwhile… the trucking company I use to ship oysters continues to levy a fuel surcharge of 5%. Another little tidbit that doesn't count in the compilation of official inflation figures.

5:30AM New York time. I never did sell more 10-year notes on Friday. The market rallied and never came off. Stocks stayed down all day. I chickened out. I mentioned on Friday needing to see a higher significant low in the $Index before being convinced that something more meaningful was going on. Well 10-year futures actually made a higher minor high on Friday. And the $Index did put in a higher low in bouncing to the upside. So all weekend long I had had a nagging feeling that things were starting to turn. The picture of the 10-year chart kept running through my head. If the 10-year had turned up and made a minor higher high, then perhaps that would lead the other correlated trades in the same direction. Then last night, just before going to bed, I checked prices one last time and things were already starting to creep against me. I took off half my position. I wish I had taken it all off. I took off the balance this morning. I am now flat. I have given back about 6% during the course of this turn.

A couple of things I will note. This does NOT appear to be a theme change. These trades are still highly correlated. It is just that stocks are way overdone to the upside and they are taking a breather. How much of a breather this is remains to be seen. I am not sure yet if I am going to try and play the reverse trade through the ancillary markets. I'm sure there remains a big position skew in the $Index and gold. For right now though, I just want to go to the sidelines and enjoy not having anything on. I have some pretty good proprietary sentiment and money flow tools at my disposal courtesy of my friend and benefactor, Jim. So it may be that I just ride this out from the bench and look to get back in fresh once it runs its course. That might be a long way given how far we've come. Still… for me to switch sides requires a change in mindset that I'm not sure I want to commit to. The last thing I want to do is get all prepared to go the other way and have all this be over. I mean, betting on that trade means by default you're bullish Treasuries. That is not a statement I'm ready to make yet.

So… for now, I'm going to keep the column short, go back to licking my wounds a bit, and just keep an eye on how all this develops and think about things. Three steps forward two steps back is a lot of work for not much gain but sometimes that's the way it works. We still have a quarter to go. And Q4s, just like market closes, are frequently the most interesting.

7:00AM New York time. I think today is going to be an interesting day. I look at the markets and I see a lot of pent up energy. It's not one specific thing, its just kind of a whole bunch of factors that are resolving independently. Let's start with the dollar. I was truly amazed by the speed at which the whole "theme change" idea was embraced by so many in the analytical community. It makes me think there are a lot of professionals out there who are looking for a reason to buy the dollar. They see a market way oversold and increasingly moving against "economic fundamentals", hence they are drawn to it like moths to a flame. I personally have no idea what the economic fundamentals are. Yeah, sure, the US economy looks like it is trying to flatten out. Yeah, sure, perhaps the US will lead the world in finding the bottom to the global slowdown. And perhaps in a year or so there will be interest rate differentials to consider. But the huge dynamics of international capital flow, the interplay between current account surplus countries and current account deficit countries, is far too complex to quantify into a sound bite. You might as well flip a coin on what the "fundamentals" actually are. I prefer to look at the objective reality of price action. And despite analysts' "desire" to see a new reality in how the $ relates to the equity averages, Friday's dollar strength on equity gains looks increasingly like a one-off. Yesterday the old relationship asserted itself, and the day before. And I think Tuesday as well. The objective reality is that the $index is not that far from its lows, and the rally through Monday stalled right at overhead resistance. If you want to convince me, show me a higher low and then a first probe up into that resistance. The bet I'm making is that the trend remains in force and we see a lower low in the weeks ahead. But if we ARE to make a higher low, then we should probably see it somewhere in the current price neighborhood, and over the next few days.

And how about gold? I look at the gold chart and I see HUGE energy being built up. We are in a long, extended triangle (pennant) that goes all the way back to February! I'm not going to go into the mechanics of pent up pressure from compressed trading ranges but suffice it to say, the longer the formation, the greater the move once the break out occurs… in either direction. And we are now SO compressed, that the effective price range for Dec gold is down to $30 ($940 to $970). Again… if the dollar can't rally, and the path of least resistance is lower, then which direction does that foreshadow the breakout in gold to be? My view aside… we are moving toward directional resolution one way or another.

Now for bonds. All I will say is, how are bonds looking if gold breaks to the upside and heads for $1000? Yesterday we had a big rally on a successful 30-year bond auction. That came on the heels of a poorly received 10-year note auction. You can't tell what these auctions are going to do from day to day. Which simply tells me the big boys are out there playing games in these auctions. That's short-term stuff and not at all relevant to the larger direction. Those guys are holding positions for a couple of days at most. And in many cases lately, the price reaction off the auction is actually the action you want to fade. I am leaning toward adding more to my 10-year note short this morning. If I'm right in my assessment, then this recent rally in Treasuries is a gift.

And now on to the driver of them all… US equities. Here's more objective reality for you. We are AT the highs for the year in the equity averages. I could even make the case that all of the back and forth price action for August so far is nothing more that a running correction. That's a correction that can't make hay to the downside. Why can't it make hay to the downside, because of the backlog of participants who need to get involved. I was in my home office yesterday afternoon with CNBC on and actually heard my first very honest (and respectable) comment from one of their fast-money-five. I forgot which on. Anyway (I think it was Guy), he said what's been helping keep the market going are traders like himself, who've been continually trying to short the market, and have been wrong, adding fuel to the fire to the upside. Dude… it took a lot of courage to come out and say something like that on national TV. You just took a step up in respect in my book. How many times have you heard a financial analyst/commentator on CNBC admit they were wrong? Can't think of one time can you? Guess nobody's ever wrong on that network. The point is, we are sitting right now AT THE HIGHS!!! If you have been calling a top for the last 5 months… YOU HAVE BEEN WRONG! Unless of course we just made the high this morning. And once again we are looking at another lower opening… yet one more lighting of the candle of hope for bears that finally… this is it… time to get short. I have no doubt that sentiment in equities is overdone. And I do not doubt that we are discounting company expectations that will be hard to live up to in 2010. No doubt, the market is racing ahead of the real economy. But do not forget what this "game" is about. This game is about money… pay for performance. And when the client calls and asks how the fund is doing, it is a far more painful experience telling them you're still being cautious than it is picking up the phone to your broker and putting cash to work and being able to tell that client that you're long and making money. Why do you think so many of these larger trends in recent years have run through and turned on the calendar year? Pay for annual performance. And yet on the surface is that fascinating phenomenon of theme change. Put out there en-masse, in a heartbeat of time, by guys who don't have any risk on and aren't paid for performance, but who see the sentiment and are just dying to call an end to it. That actually tells you where participant's comfort level lies. Participants would be far more comfortable if the dollar rallied, and equities took a breather. Guess what…? Markets don't make participants feel comfortable. It is their job to make participants feel UNCOMFORTABLE!! Have a great weekend.

5:30AM New York time. I'm not sure what to say this morning. There has been a lot of talk (past my ears anyway) the last few days (since the Payroll report) that the change in price behavior in the US$ is the start of a change in theme. It is the start of a return to a more normal fundamental trading condition, where the currency trades on more typical interest rate outlooks and other economic data… as opposed to money flowing back to the safe haven $ in time of financial stress and back out as those financial stresses abate. I am not ready to make that leap. And let's face it; the dollar was widely viewed as needing to go lower long before the financial crisis of 2007 reared its head. Simply because conditions in the markets have "normalized", does not mean we are looking at a meaningful macro change. If I were to strictly look at the charts, without any influence of fundamentals, I would say that the last three days of activity (since Payrolls), has actually been simply corrective. The $Index has tucked right up back under at huge shelf of resistance at the .80 level. Gold is sitting on a short-term up trend line between the two significant July lows. And 10-year notes are also bumping up against a downtrend line that can be draw across the July 13 high and the July 31 high. In fact… I think what you're SUPPOSED to do is use this correction to put your position back ON again. You know as well as I that contrary arguments ALWAYS pop up to test our resolve during corrective periods. What is interesting is the rapidity and degree to which the analytical community has pounced on this theme change just since Friday. It's 5AM and CNBC just had on yet another analyst who was touting the idea.

My plan is to simply sit tight again today and see what happens. I have not added to my small bond short or my small $Index short. I did add a little gold yesterday. As I said… if capital is still flowing as it has been, then we are at levels where the $Index and the 10-year note should not go much higher… and gold should not go much lower. That's not saying they can't… but when so many seem poised to climb aboard a "theme change", the last thing you want to see prices do is start breaking trend lines and trading through support and resistance levels.

The reality is… if we DO have a theme change coming, then these markets need to prove that in price action. AND… if they do… they would also be poised (given the position skew and fundamental bias) for significant moves in the counter trend direction. There would be plenty of time to climb aboard that train. We'll see.

5:30AM New York time. My poor timing of the S&P 500 continues. Price action off the July Payroll report was anything but exhaustive. Markets traded from the get go in the direction to which they would stick. There was no sell the news reversal in equities. Interestingly enough… it was in the ancillary markets where cracks in the trend showed up. The $Index had a big day to the upside. Gold was weaker. Bonds however traded lower and stayed lower. Perhaps this is more evidence of "leapfrogging"; the propensity of correlated trades to switch off between daily directional and counter-directional moves… perhaps it is something else entirely. I suppose, given the success I have had, and the reliability of trends, I need to have some loyalty to these trades. I need to play it as though nothing has changed until markets do something of a meaningful technical nature. I have no doubt that we are approaching a significantly overbought condition in equities, just as we were and remain seriously oversold in the dollar. The question is, does the backlog of buyer wanna-be's negate that condition, or at least delay it's manifestation until much later, allowing the equity averages to reach an even greater extreme in position skew.

The one plus in the short S&P trade for me was the positioning and execution. My stop was tight, so even though the position was a large one for me, the cost was only 1.5%. Not bad considering the reward that could have ensued had Friday been an actual exhaustion day. Again… the benchmark for a good trade is if you would have done it again under similar circumstances. Answer… I would have. And again… from a directional standpoint, I think this continues to point out the overriding influence of passive money flowing back toward equities over the much smaller universe of leveraged players in determining ultimate direction. If passive money is flowing, one can see bullish consensus pinned at an extreme level for weeks at a time.

The mixed news in all this is that I remain with minimal positions in both the short-$, short-10-year, long-gold trades. While that may have been a bonus Friday in the $Index and gold, the problem is that once again, I have traded myself virtually out of short bonds at a time when they certainly behave like they are going to test the recent yield highs. Perhaps the rally in the $ and sell-off in gold then are actually gifts? Perhaps I should be looking, in subsequent days, to get my position back on, so long as I remain confident that nothing has changed and those trends remain in force. I certainly should at least give those trades a chance, and show them some loyalty given their track record over the past couple of months. I think my strategy then will be to just kind of ease back in over the next couple of days. I am leery about jumping right back in all at once on the heels of Payrolls with my full size given the position skew, and yet current retracement levels (in the $DX and gold anyway), are pretty decent for a minor, in-line correction. It's like I'd almost feel better if they pulled back a bit more over a bit more time. That would give me a more defined low/high to play against. Once again… this is probably just my tendency to be early along with my hype-sensitivity to perceived positioning imbalances surfacing again. Once I start to see those signs of lopsided positioning, I get all twitchy and I am ready to get out… when actually, most of these things take much longer to develop. That's truly something I need to work on.

5:30AM New York time. What if you could maintain your bearish US economic view without having to be positioned in the long-gold-short-dollar-short-bond trade? How about just short stocks? I throw that out to my early readers who are still hanging around and originally came over from Dave Lewis' site. Those folks tend to have an almost "religious" belief in gold, but I'm sure are being irritated no end by watching stocks trade higher in like fashion. I myself see all of this as just a series of trades rather than an ideological struggle between fiat money and hard currency standards. Like the song says… I believe in nothin'. But I know it'll come out right. I have continued to lighten my current trade load. Since my last post the number of warning flags and personal indicators in terms of position skew have continued to mount. One of my most reliable contrary indicators has flipped over. I have not taken all off, but I am down to minimum positions. Nothing has changed in the longer term, but the markets need a break and some kind of price retracement. And they couldn't have chosen a better time to get shaky. It's a Payroll Friday!

Not only have I lightened up my core, but I have taken a small short S&P position into Payrolls. And given the proper opportunity, I intend to make that position into something a bit more substantial before this is over. As I said, it is the perfect time for a Payroll number. Payrolls…, which has a 50/50 chance anyway of being a sell-the-news number… released at a time when some of these markets are sitting on the most lopsided position skews in months. I think I heard a guest on Bloomberg Wednesday mention that the bullish consensus for the Euro was at 97. He said it was the biggest percentage ever seen. I can't vouch for the statistical accuracy of that statement… but my indicators were going off at the same time and completely independently. It's all adding up to some very good potential for the accident waiting to happen trade. And what better place/time for the accident waiting to happen trade than a Payroll Friday… in stocks… on a perfect NY summer vacation season afternoon… when all people really want to do is get the fu%# out of there. You can't see… but I'm wiping the drool from the corner of my mouth now.

My strategy is this. I have a toehold short S&P position right now, complete with GTC stop above the highs from yesterday. If the number comes out better than expected and the market rallies, I sit tight, hoping my stop doesn't get hit and waiting for the stall/reversal. If we get it, I add another unit as the market crosses negative, increasing the stop. If we stay down for the day, I add one more unit on the close. Then we hold on and see where the ride gets us. If we get a weaker than expected number, I sell an addition unit on any subsequent bounce to the original sell off. I increase the stop and then wait for the close. I look to sell the final unit on a weak close toward the lows.

I do not expect this to be a long-lived trade. I see it as merely an opportunity to hedge against my remaining core macro position, and profit from a momentary and situation specific position imbalance condition in the markets. And I like the idea of using a different vehicle from what I've been trading the macro with. It will also allow me to try and work on my S&P trading…, which definitely needs work. My stops are all measured and the cost of the trade is acceptable. Best of luck everybody and see you on Monday.

4:30AM New York time. Once again… my apologies for not posting in a timely fashion on Wednesday. And I'm sure it bothers me more than it does you guys. I think I'm just overly sensitive to it because I'm constantly ragging on the CNBC crowd for doing it. The fact is… this column is about how markets work… not what trades to put on. As I have said many times, if you read these pages for what to do in the markets you're missing the point entirely. You need to develop your own intuitive sense. If you are ever going to be successful in the markets for the long term, you need to come up with your own set of disciplines and methodologies. These pages are only meant to show you how I develop my own, and how they evolve over time as markets (and participants) change.

Ironically… just as the bond market was providing such a nice short-term opportunity, I did see some warning flags start to go up in some other areas. In listening to the financial news I heard someone mention the dollar losing its reserve currency status again. It has been weeks since this argument was at the top of the discussion list. Markets ARE actually in a trading range you know. Except its not the trading range you think. It's the trading range between the extreme arguments of the dollar losing reserve currency status, and the dollar recovering because the US is leading the world out of recession. It's the range between US government debt being downgraded and US government debt being the ultimate safe have in times of financial stress. In many ways, it does not matter what price action does, once you start to hear the current range ends of these arguments, the price action will frequently be coincident. Don't get me wrong, price action is most interesting as well, but frequently the two very separate observation types can be made during like time windows.

I have to admit, I made the addition to the bond short into a trade. And I took the added size off yesterday morning. It was a quick point on a decent number of contracts for me. I remain with a full and decent sized total position in the short-dollar-short-Treasury-long-gold trade. But I am debating lightening the load still further this morning. One of the other balancing acts I've been trying to get across is the trade off between conservative profit taking and maintaining the proper sized position… for those times when markets move into that all-critical final blow-off stage. The June 4th downside blowout in bonds is an example of that kind of day. The market had been trading lower for the entire prior month. And even afterward, prices languished around those lows for 5 days before posting any kind of recovery. But to really make all the hay you could, you needed to stay short through the whole process. I was short and well positioned through the early stage, but bailed on my size too early and never really capitalized on the whole move. Hey… you work hard to get positioned for the evolution of trades, you might as well get the whole thing. Anyway… point being… how do I balance the risk of sticking with a large position against the observation that the range end of the major market argument is being reached? You come up with an easy answer to that one you let me know.

I think the answer (as it frequently is) is to seek out the middle ground. Nothing is saying I need to go to the sidelines… but taking part of a risk unit off when one has 4 risk units on might be something of a prudent (or perhaps disciplinary) compromise. And looking at all three legs of the trade, I have to say that gold appears (to me) most vulnerable of the three. We have recently bumped up against the big trend line that runs between the Feb high and the early June high. That crosses right about $980, or just above yesterday's high. It is not at all unusual for a market to fail on its first attempt (or even second for that matter) at getting through major technical resistance. And as we have already seen this past week of trading… gold can drop $20 at the drop of a hat on nothing. Prices could back off to $935 and still not violate the bounds of the current extended pennant formation. I think ultimately we will blow the upside of that pennant… but it would surprise me greatly if it were to happen on the first attempt.

So there you go. I think things are getting a little frothy in the near term, but the overall trends remain intact. The stock market as the ultimate driver of all this is still out there. There is a lot of cash on the sidelines and much of it is controlled by people who get paid for performance. And right now, their performance has not kept up.

5:30AM New York time. Welcome to August, another month has slid by. First, let me wipe the egg off my face. I no sooner made the comment on Friday about grinding directional markets that the currencies and gold explode in their trend direction. Oh well… break my heart. Guess I'd much rather be wrong in my comments but have the right position than the other way around huh? There are no perfect axioms in trading. It's mass human behavior. It's like mercury. You try and put your finger on it and it just squishes away in a different form. All I know is both gold and the dollar totally whipsawed participants in the last five trading sessions. If you got run out of either trade on Tuesday/Wednesday could you possibly have gotten back in at good levels on Thursday/Friday? Who knows? All I know is gold closed on its recent highs and the $Index closed on its recent lows. THAT is the only piece of information that in the end really matters.

The most interesting ancillary market action to me was that of bonds. 10-year notes were up a point on Friday. Maybe it was residual positive sentiment form the 7-year auction. Maybe it was a big player or two seeing the opportunity to run the market on a midsummer Friday in thinner-than-normal conditions. All I know is I personally have a hard time swallowing bonds up a point, with the host currency on its lows and gold up 20 bucks. Stocks made a new closing high and more importantly, held the big gains from the day before. Earnings continue to come out on the better side and most economic indicators, with the exception of employment, have lost downside momentum and are trying to turn around. Given all that, I added to my bond position a bit on Friday afternoon, and again this morning. I now have a pretty decent bond short on. It was the perfect set up. We had the counter-trend rally that took prices back a reasonable percentage from my entry, back to a significant psychological level, on questionable news, on a thin Friday during the summer. I can position my stop conservatively on the added size, with minimal cost. Now we'll see if it all pans out. Firmer global equity prices this morning are a positive, news out of China is a positive, and yields are already starting out a touch higher.

I still think we are destined to trade back up to the recent yield highs above 4%. I think we are in a bear market in bonds that will see a succession of higher highs and higher lows in yields for some time to come. I think a great many participants and a great deal of sideline cash is getting dragged kicking and screaming back into stocks… domestically and globally. The return of risk appetite is being forced upon an otherwise cautious or even negative analytical view. This is the best possible scenario for bulls. The rally is coming sooner than many expected or wanted. That's the way markets work. They make the most number of people as uncomfortable as possible at the least convenient time. I submit it will take a decent amount to time to get all these people back in. The more resistance there is the longer it will take. Ironically… the longer it goes it seems, the more people seem to get nervous about how far and how fast it has come. Again… perfect! The problem will come once all are in. the problem will come once you start hearing a preponderance of POSITIVE commentary regarding prospects for stocks. But that ain't now. We're in the sweet spot. This market phase doesn't come around all that often, or last all that long, so enjoy it while you can. I'll be keeping my finger on the pulse of commentary every day. The next hurdle will be the end of earnings season. That rigged game has generated a tremendous flow of positive news. We'll see. As I have said, I would love to see this rally last through year-end. There would be great irony to start the economic recovery year of 2010 seeing stocks get whacked right off the bat once everybody's back in. Who knows? That's still 5 months away. Anyway… I'm off to oyster-land. My stops are in and many others are reeling from recent price action. I can relax.

5:30AM New York time. Tuesday and Wednesday were a rough couple of days. We took the last two weeks of price action and negated it in two days. Gold took back $25 at one point. Both my $Index and gold positions went back to scratch from decent gains. Ironically… the bond trade, which had looked like the dog of the group only a week before in terms of underperformance, pretty much held where it was. That is now the leg with a meaningful cushion.

I am not a big one for market truisms. Most of the "universals" get discredited over time. One however, that was brought to my attention my a very savvy trader many years back, and has stood the test of time for me, is the statement that bull markets grind higher, while corrections tend to be sharp and violent. So if there's any consolation that can be taken away from this week, it's that the behavioral characteristic I've seen leads me to believe that the sharp break of Tuesday/Wednesday is corrective… not directional. So as long as we have put in the intermediate lows, we could perhaps get back on track to grind it back out directionally over the next couple of weeks.

What's also funny, and this is why I watch CNBC, is that their fast-money group, including special guest Dennis Gartman, were all cautioning on the stock market Tuesday afternoon, saying it has gone too far too fast, and that they (especially Dennis) were going to neutral. Personally, I don't ever remember Dennis saying he was getting long. But hey… he writes a newsletter… not run a hedge fund. For all the stupidity, this is the value of that network. That amidst the nadir of selling you can get a group like this out there, uniformly capitulating during the worst of the selling, but providing a valuable signal and insight into individual participant psychology. And I love the fact that they are all on record as getting negative. I was out in the field so I didn't see any of the subsequent segments on Wednesday or Thursday, but I wonder how long it's going to be before this crew "magically" becomes friendly again to equities, and is looking to take profits on their length. I have read Dennis Gartman many times over the years and find him to be a very entertaining commentator. But seriously Dennis… stick to commentating. Trying to convince people that you're actually taking meaningful positions in a fund whose posted results are out there and whose P&L stands on its own doesn't become you. And trying to fake it only makes you more of a contrary indicator. Even Bill Gross had the brains to stay quiet after his last two gaffes in calling the Treasury market.

OK… now my liver is vented too. We'll just have to see what happens over the next couple of days. I debated long and hard about adding to my positions on that recent setback. In the end, I decided to leave it alone. Generally I only like to get to that REALLY larger size on pullbacks that lose momentum ABOVE my prior entry. To add at what would have essentially been right around my original entry is bad discipline. If these trades are good, then I just need to be patient, and I will have plenty of opportunities to add down the road.

5:30AM New York time. Have to do a real quick one today. It's Tuesday afternoon and I have a very early, and probably a very long day in the field tomorrow. I would have just blown off the column but it WAS quite an interesting day. Gold obviously got whacked. I think this is simply a temporary dis-commensurate move to the other correlated trades, simply because the gold market, especially when the position skew is a little lopsided, can be a lot more violent. We are still in that big triangle formation that could perhaps see prices pull back as far as $820 and still be OK. I personally don't think it goes that far. Reason being; the price moves in both bonds and stocks were even MORE interesting. I plan on looking to add as soon as we see some signs that this current sell-off has run it's course.

How about stocks? Even after 8 straight up days, the stock market shakes off early weakness and closes virtually unchanged. This market trades as though net participants HAVE to buy. And there still seems to be some healthy skepticism out there. You can't argue with price action. I told you my theory the other day. If we hold strength into September, we are going to see one last big push higher into year end as under-invested passive money (and plenty of others too) simply have to get shares on the sheets.

Now for bonds. What a trading day! We take yields all the way back down to 3.61 from 3.71 on weak stocks and then all the way back up to 3.71 on the 2-year results. What a whip saw! The significance here is that the shorter-dated paper has tended to find good demand and thus supply has actually been bullish for the market. Not today (or yesterday depending on when you're reading this). I think that is a potentially significant development. We'll see what the rest of the week brings, but if supply is going to start being a bearish influence on the market… and it hasn't generally been so far, that is a significant change.

5:30AM New York time. I have to admit… I did nothing market related over the weekend. I barely though out the markets. I did work half a day Sunday in oyster-land to make up for the couple of days away earlier in the week. I got poured on. In our area, we continue to be quite a bit cooler and wetter than a "normal" year. Last year at this time we were about 400 cumulative degrees above normal. This year we are about 200 cumulative degrees BELOW normal. We have only posted a daily high above the normal daily high twice since June 13. I bet my local cocktail purveyor a twelve-pack we don't see a 90-degree handle once this summer… I'm still liking that bet. Between now and the second week of August is the normal temperature peak of the year. And the 10-day forecast as of last night did not show a single forecast high north of 80 degrees F. How ironic it would be, and so like our species, to have built all the hype and worry over global warming right into a short-term high, in an otherwise decline macro global temperature trend.

OK… OK… what can I say about markets this morning? Truth is… not much. The Wall Street/corporate earnings machine continues to pump out a steady, manipulated stream of better news. That continues to help stocks at the expense of bonds, boosting risk tolerance, which drives down the dollar and helps gold. The engine seems to be running fine. All that could end at a moments notice of course… but over my shoulder, I hear the sound bite byline from CNBC asking if the market has come too far too fast. So long as I continue to hear those things, I remain positive and with reduced concern levels.

I continue to view the larger technical picture as carrying the day. That picture is simply this; stocks posted a new high for the year only Friday. That follows a new high on the year set Thursday, which follows the new high for the year set Wednesday. Get the idea? Stocks making new highs, especially with heightened levels of skepticism and nervousness, is a VERY good thing. Especially since I happen to be one of those people who feel that stocks are the capital market proxy for the future direction of the economy. That's not good for long Treasuries. I believe that the bond market has begun a long, extended bear market, the spike bottom in rates being the colossal flight to quality we saw in 2008, along with the authorities promise to buy enough securities to insure those rates stay down. Those two events brought rates down to where they would have otherwise never gone. We have now made a lower high in bond prices during the recent June rally in Treasuries. That correction has now rolled over, and I believe we will see a new low in prices before this move subsides.

The Dollar Index chart continues to look abysmal. It participated least of any capital market during the mid-June/mid-July bounce in bonds/sell-off in stocks. Technically, I expect that chart to continue rolling over, eventually generating a leg down similar to the one we had back in April/May. As for gold, we have traded sideways since the February high. In all that time the best traction we could get to the downside only got us to around $870. If that is the extent of the correction, in a larger move that has taken us over the past 8 years from $250 to where we are now, then I say watch out. Sideways moves in markets build up energy. They do so because professionals quickly turn to trading the ranges in ever-larger size. So when the break finally comes, there are all those bad positions to cover plus the need to get back aboard the primary trend. In sideways conditions, other regular participants tend to fall away from the market, losing interest. So once again… when prices break, there is a whole groundswell of returning trader/investors who want to get back involved. The combination can be explosive.

That's all I have today folks. Every day is an adventure and we'll see what today brings.

5:30AM New York time. First off, sorry about the wrong date on Wednesday's post. I had flipped my desk calendar back to June for something else, so when I glanced at it in my semi-unconscious, per-caffeine state on Wednesday… I saw 24 and typed it in. Believe me… nobody was happier to discover later that morning that it was actually the 22nd. It was like picking up two free days. I can use all the free days I can get my hands on lately.

Obviously, sticking with the short bond trade has turned out to be the correct move. No other week in recent memory has highlighted the need to have trade diversification as this past one has. Monday and Tuesday we saw 10-years rally despite stocks rising… hmmm. While the Dollar and gold traded higher in characteristic fashion. Yesterday, we saw bonds get whacked on a big day in equities, but gold was weaker while the Dollar was little changed. The only consistency in all this has been the rally in stocks. You might ask why not just be long stocks? Good question. The answer is a simple one. I suck trading stock indices. Of all the major capital markets, I trade stock indices worst of all. Even when I get the idea right, the market just has a way of getting to my psyche. I either get panicked out, or I miss-add… or something. All I know is… stocks have my number. I guess my temperament just isn't in line with stock market price behavior and timing. The end result; I have simply learned to leave stocks alone except in all of the most obvious situations. No matter… every market provides opportunity on a regular basis, so staying away from the equity indices is no big deal. Still... given the price action for the week, I guess one has to ask the question as to whether or not the "macro" (for lack of a better description) correlation between the capital markets is starting to break down? Answer… I don't think so. I just think we are seeing an increase in the number of episodes where one market will run ahead of the others any given day, while another will lag. Then in subsequent sessions we get something of a reversal of fortune. It's one giant game of leapfrog between the markets. The important thing is to see them all moving in a general direction that is favorable. To that end, I have no complaints.

Regarding equities… one theme I am continually hearing in the commentary is the lack of volume. No offense, but if your job is managing equity capital, or telling people HOW to manage their equity capital, and you're letting the lack of volume get in the way of participating in this rally… you're going to have a lot of explaining to do. I really don't know why volume is such a big bugaboo for some people. I myself would RATHER see people fighting a move… staying on the sidelines because they don't "believe" or "trust" the sustainability. Guess what… see ya later pal… trains leavin' the station and you ain't on it! I personally get MORE worried as I perceive participants are increasingly piling INTO a trade. Perhaps this goes back somewhat to my poor track record on trading equity indices. The pundits I have been hearing in the financial press are waiting for volume to pick up as a signal to get IN! Hell… by the time I see that… especially given the distance in price we've already traveled… I'm already looking for an excuse to get OUT. Perhaps that's why I never seem to stay long enough in stocks to see the fruits of my idea. I need to really s-t-r-e-t-c-h out my time frame. No matter… the crux of the biscuit is that there are still significant numbers of participants (and their money) that are waiting for more "definitive signs" that this rally is for real. Meanwhile, prices keep going higher. They get paid to be right and they're not. The pool of buyer-wanna-be's gets ever larger. The wall of worry adds yet more bricks, and cautious managers get farther and farther behind their benchmarks. Mark my words; if this market continues to hold in for the balance of the summer, and we get into Q4 without vindicating the "cautious" majority, there are a whole lot of people who are going to have one heck of a time getting caught up over three months. I mean how long can you be wrong with a calendar year performance mark before you finally cave? In fact, I'm hoping ALL these trends can just hang in there till September. If they can, I think there are goods odds that all of them; stocks, bonds, the dollar and gold, can all see a final push of participation to close the year. Hedge funds want to post results too you know. I'll tell you one thing. That would make things very interesting going into 2010 in terms of trade ideas for the year. But… slow down Plant… that will be and this is now. And for now I have no issues with any of how things are progressing… other than to periodically wonder if I should use some of these little leap-frog setbacks as point to add and really press the bet. Have a great weekend.

5:30AM New York time. Obviously, I did not get a chance to post on Monday. It's been an interesting couple of days. I talked with Dave Lewis a bit about trading on our visit. Oddly enough… some of the discussion got right into the wheelhouse of what we saw in the markets over the past couple of days. We've had a bit of a break… perhaps only momentary… in the strong correlation we've been seeing between stocks, bonds, gold and the Dollar. We had a pretty big day going in all four on Monday. Dave was all excited when he checked on things Sunday night and gold had broken north of $940. 10-years were down half a point. Monday morning started off in like fashion. Gold was up sharply, the Dollar was lower, stocks were stronger and the 10-year was still down half a point. But as the day dragged on, bonds rallied, reversing totally by the end of the day despite the fact that stocks closed higher, gold held a $12 gain, and the Dollar was weaker. Yesterday… they did it again. 10-year notes were up sharply despite the fact that stocks managed to close higher yet again, the Dollar and gold were quiet. We're now looking at gold being $20 higher than last Friday and 10-year yields being 20 bps lower. Go figure.

But as Dave was suggesting, despite the fact that the Treasury market and the huge Federal borrowing requirement is one of the key issues at the center of the storm, they will also be the most difficult trade. His point being that the Treasury market is where all of the authorities' attempts to keep yields and thus the cost of financing down will be directed. And since Wall Street is now beholden to those same authorities, trying to be short the bond market will be like trying to sail into a stiff headwind. In addition, we have official foreign participants whose vested interest also lies in keeping yields down for the foreseeable future. His idea, as it has been all along, is that the bond vigilante's efforts will be seen more in gold prices and the dollar that in the actual Treasury market. So almost on cue… (We talked about that issue over the weekend) the markets provided a stark example of that effect on Monday/Tuesday.

So here we are. I've got some decent sized risk on. And I've got some decent money in both the gold and the Dollar side of the trade. My 10-year note position is now a scratch. We're all the way back to where I got in despite being at 3.70 just two days ago. Thank god I decided this time to diversify using gold… rather than strictly a bond/dollar play, as it was last time. And I'm not really sure what to do here. On one hand, and in a vacuum, I have a hard time believing 10-year yields will trade right back down to the lows we saw a week before last. On the other hand, equities have expended a great deal of buying power energy to mount their recent gains and post the new highs we have seen. They are due and entitled to a pull back. Perhaps 10-years have already made their move. Or… perhaps they will build further if stocks correct. We're already seeing a correction in the Dollar Index this morning. It's a tough call. I think I will sit tight for now. I'm going to look at each chart on its own merit rather that try to keep a correlative mindset and look at all three as a single trade. All things being equal, this bounce in 10-year prices would not be totally unexpected. We had a decent move down last week; this week has taken a percentage of that back. I'll be watching the other markets and gauging how 10-years react to them. That's about all I can do.

6:30AM New York time. Wednesday was quite a day. All markets participated. When the correlated trade is firing on all cylinders it's a beautiful thing to see. It runs like a brand new car. Even though my risk levels are slightly "undersize", it turned out to be a pretty good day. And then yesterday, when bonds were up and gold was down five bucks, I added a bit more to both those positions. So I am slowly creeping back up there. I certainly have enough risk on to get hurt if things go badly. Fortunately, Wednesday put a good bit of distance between some of the earlier entries and yesterdays add. We will see if the worm has truly turned. I have waited for the correction in bonds, the Dollar and gold to work itself out since June 10th. I started looking for them to end almost 13 days ago, at the 15-day mark. The low yield was put in on trading day 23. As with all corrections, once they run their course, and the primary trend reasserts, we should expect each market to put in either a new low, or a new high, depending on the primary direction. We should not worry that the reason for that re-assertion of trend is not apparent in the now. The "reason" will not be apparent until after the fact. We should not even worry that the primary net opinion finds the continuation of trend and posting of that new low or high unlikely. If the majority knew where markets were going in the future, prices would already be there. It is the very unlikely ness of it all and surprise with which it takes net participants that helps make it go. This is the spot where money management takes over. This is the spot where we roll the dice, hope we are right, and try to hang on for the ride. For me, this trade is in fact, only my second swing at a couple of major trades I am trying to build my year around. Just as no one could foresee yields going to 4% on the day the Fed announced they were going to increase coupon purchases and yields on the 10-year spiked down to 2.5%, so too, few were talking about a return to 3.25 on the day that S&P (or was it Moody's) downgraded the outlook for the UK economy and US 10-year Treasuries traded to that 4% level. Now we sit at 3.55, in a market that has begun to trend higher, posting a couple of significant higher highs and higher lows along the way. Where does another higher high take us? Or a lower low in the Dollar Index? Or a push through $1000 an ounce in gold?

I guess… as I have in the past, I should apologize for my lack of fundamental justification. Or my lack of complex chart analysis to tell me all this is going to come to pass. Instead… you poor bastards have to listen to me talk about "making the bet", and the maintenance of capital management discipline as the primary tool toward coming out of this successfully and with my shirt still on. DAMN RIGHT! This is another one of those times where we have to just stand up and be counted, where it is not good enough to sit on the sidelines and "comment" about what is going on. If these market trends are real (and I haven't even TOUCHED on the stock market yet), then I (we) MUST be involved. There is an old saying that 80% or your money in the markets gets made during 20% of the time. I think that idea comes close to the mark. Much of the time markets are going sideways, or correcting. It is those few times when the correction subsides, and the position skew is right, and participants are under positioned, or even better, the wrong way. When the majority thinks nothing is going to happen. When lots of people are away. And it does. It should not scare you that at those very times you feel alone. You ARE alone! That's the place to be baby! We humans feel safer in numbers… when we're in a crowd. In markets… you are very much NOT safer in a crowd! You are (ironically) frequently far safer out on a limb… all by yourself. Yet another paradox of life huh?

And what IS the fundamental really driving all this stuff? How about US stocks? More than any fundamental, short of a major economic number, or financial market/institution shock, that's what's important. Are higher stocks an "unlikely" trade? I still think largely so. Most of the Dollar bears and gold bulls I hear maintain their bias because they think the US is in the crapper. Yet they need to be rooting for equities to support their own trade… another paradox of life. Most professional equity managers still seem pretty reluctant to be all in. The green shoots dying argument caught hold in no time. But take a look at the S&P 500 chart. We traded lower for 22 days from the old early June high, broke the 200-day moving average to the downside and everything. Now in just 4 trading sessions we are threatening those recent highs! Do you think passive equity managers are long enough? They get paid by keeping up with their benchmarks. Again… do you think they're long enough? I hate to tell you… but THAT is the only fundamental you need to have a view on. If stocks fail and go back to where we were a week ago, bonds go higher, the Dollar rallies and gold goes back to 900 bucks. It all vanishes like a fart in the wind. Will they? You're guess is as good as mine. Another flip of the coin. What's YOUR bet? MY bet is that equity managers ARE behind their bogeys. And my bet is that earnings expectations have been pegged so low, that it becomes easy for corporations to beat them, creating a stream (this month anyway) of positive earnings news. Will all that carry the day? We'll see. My bet is made, the cards are dealt. Stocks look to open weaker. Perfect. I love weaker openings. Keep em' nervous I always say. Have a great weekend. We'll be up visiting Dave Lewis' family for the next couple of days so I'm not sure I'll post on Monday. I'll bring the machine and see what happens.

5:30AM New York time. I put some risk back on yesterday early morning on my way to the shop. I also decided to stay with the Dollar Index as my chief FX vehicle for now. I just don't feel like adjusting to a new currency at this point in the trade. I don't know… I guess the stock market rally on Monday got me all screwed, up. I had said in my piece on Monday that I expected relatively slow summer trading for the next 7 weeks. Guess not. On the very day I open my mouth, the market throws ice cold water on the idea. So kind of being unprepared, I decided, spur of the moment, I should at least have SOME risk on just in case this move develops into something more substantial. I also added gold to my trading stable. So now I'm long a small gold position, short a small 10-year position, and short a just slightly larger Dollar Index position. I've got about a quarter of the risk on I should, if I really felt I had a trade by the balls. But I'm still not convinced all of this is real. I generally like to wait until I can read an obvious financial press bias, along with either a strong intuitive price reaction to stimulus, or… even better, a counter-intuitive price move to data. Basically… I like to wait for clear signs that the market has an obvious position skew. In truth, I haven't seen too much of that this time around. Up until last week, we were getting very much expected price action to somewhat weaker data. And it's not like you're hearing overwhelming bullishness on bonds. In fact, most of the commentary I continue to hear in the currencies remains negative on the Dollar. So what catalyzed everything on Monday… a slightly stronger private sector retail sales report? That's not much for me to hang my hat on. And I guess participants have taken heart in some of the better early earnings results. Still… one has to give price action its due. I've been around long enough to know that sometimes, market moves can come out of the blue at you, crumbling of their own weight so to speak, and only later develop the rational that makes it seem like so much sense.

What I'm hoping for now over the next few days is a bit of a rally in bonds that falls short of the recent high. That would be a great situation in which to add the next unit of risk. In the absence of that, the farther down it goes, I'm going to look for any little rallies off that to sell. If yields are have indeed bottomed at the 3.27 they printed last week, a yield much higher that the last significant low yield of 2.50 back in March, then I have to expect that the trend toward higher rates remains in effect, and we will eventually see to new highs somewhere above 4%. As for the Dollar index, the chart continues to look abysmal. While there has also been a resistance to printing new lows, I think that result is only a matter of time. That will help gold, that will help oil. It will also help equities. Like it or not, we remain with highly correlated markets. Anybody out there thinking the Monday rally in stocks didn't play a big part in yesterday's move higher in yields is dreamin'. And once again… go figure that not long after I point to a number of downside targets for the S&P, and tell you all about how bad the chart looks, that it turns around and is in position (as bonds were a couple weeks ago), to convince participants that they have broken an important trend line to the upside, and might very well now trade back to the recent highs. That's the way markets are (these days anyway). So I'm going to take a page out of the Louie Bacon playbook, swing 180 degrees at the drop of a hat, and climb back aboard… midstream… with little warning.

6:00AM New York time. I guess I should start off with bonds. Damn… I have to say… I never expected to be talking about a 3.25 yield on 10-year notes! We're getting to the point now where we're not just talking about a correction… we're talking about a separate move. And it shows no sign (to me anyway) of being done. When supply is bullish… in an environment where excess government borrowing is the chief negative concern… it doesn't leave the bears a whole lot to hang their (our) hats on. So until we get some… hell, ANY… signs of exhaustion in the move, I plan on staying away. My rational mind knows the bearish concerns will resurface at some point. The more yields fall now, the better the levels will be when the time comes to sell.

And much in Treasuries (as it has been forever) will depend on the direction of stocks. There again, I see no signs that our current move to the downside is done. The chart looks bad, there is still a big long side position skew left over from the run up between March 9 and June 11. From a retracement standpoint, I'd say we have at LEAST another 30 S&P points on the downside. And that's just to get to 40%. It would be ANOTHER 30 to retrace 50% of our move off the bottom. To make matter worse, it looks like we're seeing a more "normal" summer, where participants take some time off and the markets settle into more of a range trade. So we could be looking at another month and a half anyway of low volume, corrective action to my preferred trades. That means we set up for a more normal, end-of-year push where everything kind of boils over and packs everybody's second-half performance year into the last four months. Those are conditions where you better get it right in good size into year-end if you're going to put up any kind of numbers.

Obviously the same thing goes for the Dollar and gold. I did look at a couple of alternate currency options over the weekend, specifically the Aussie Dollar and the Canadian Dollar. The Aussie chart looks a little scary right now. Talk about catching a falling knife! The Canadian looks better, like its found a bit of a technical bottom, so I may over the next day or two take a toehold and see where it takes me. But even so, the more I become convinced that summer vacation mode has taken hold, the less enthusiasm I have to put ANYTHING on. I remain with a very small Dollar Index short and no bond position.

Wish I had more to say but let's face it, it's looking like a beautiful mid-July day with lots of people looking to take advantage of that, and me with plenty to do out in the field anyway.

6:00AM New York time. Let me start off by saying I bailed on the rest of my 10-year short position early Wednesday morning after I posted my piece. Once again it was pure luck. I did not anticipate the kind of day it turned out to be, I simply didn't feel like dealing with yet another day where the market wasn't ready to go down. I took my Dollar Index position down to just short of nothing as well. I have just a small piece left of that one. This also highlights (once again) why I'm not an advisory service. If I were telling people what to do in the markets, rather than simply talk about how to deal with them, my readers would have been pissed for my getting out and not telling them. Oh well. I continue to be shocked at the reversal of perception in the bond market. We've gone from worthless Treasuries just a month ago, to can't get enough of them as of today. Still… while my view hasn't changed, they still don't trade like a directionally exhausted market.

One thing I have started to question is whether or not the Dollar Index is the best vehicle for me to play the weaker dollar trade. The Dollar Index is mostly Euro. So really, I'm making a play on the Euro/Dollar ratio. Europe's got its share of problems too. The Euro is just another fiat currency. I suppose just about every G-20 country is a fiat currency at this point given what has occurred in the global economy. While not as dovish as the US Fed on monetary policy, the ECB has still gone a long way in regard to pumping money and stimulus into their system. And they beat the US to the punch a long time ago in terms of government intervention (interference) into business. The Euro is NOT a commodity currency. What the Euro DOES have going for it is that a number of countries have already indicated their desire to diversify out of the US Dollar and into other currencies. The Euro (along with the Yen) actually has enough currency in circulation to provide that option. When I first started writing this column, I was trading the Aussie Dollar. While that has gotten lots of attention (and thus perhaps overdone) as the quintessential commodity currency, it does bear looking at. I'm going to check on the Canadian Dollar as well. And of course, there's gold. Perhaps it should be more of the situation where I split my FX exposure between some currency and gold. I'll be thinking about that this weekend.

The other thing that is pushing me back that way is the potential that we're (for the first time in two years) looking at a slow summer. This is the first summer in three that is not dominated by major financial negative news. This is the first summer in three where if you're not at the screen every minute you miss something important. Participants are finally getting a chance to breathe… and I think many of us are exhausted and very much looking forward to some down time.

OK… so there you have it. To tell you the truth, I'd rather be doing something else right now as well. I don't see myself taking any action today. I still think the bond market is an eventual time bomb. I still think the US Dollar is due to got lower (against somebody). I still think we have seen the bottom in stocks back in March and at some point we'll make a higher low and kick all these markets into gear once again. But that day does not appear to be today. It's high summer and I'm headed outside to watch the sunrise.

4:00AM New York time. It's 2:30 in the morning. At 2 the thunder and beating rain woke me up… again. We normally get about 3 inches of rain during the month of July. The 8th just began and we've already had close to 11 inches for the month! Heavy rain is a bit of a pain for shellfish farmers. Every harvest area in the country has a rainfall closure trigger. It's an FDA thing. For us it's 3 inches. So every time we get three inches of rain over a 24-hour period, our State Department of Agriculture, per mandate, has to close our beds and conduct water and meat samples for fecal coliform bacteria. We have never failed a test to reopen but the closure is automatic, so it can put a temporary dent in your sales. Your customers tend to not like it either. We are currently closed from the 8-inches of rain we got LAST Wednesday. We were hoping to be back open this Thursday. But we had three or four bands of heavy thundershowers go through between yesterday and last night… so once again, we've got to be close to another 3-inch event. In the 8 years I've been growing oysters the average number of closures per YEAR is one or two. This month, we're looking at two consecutive weeks of being closed, during the height of the tourist season, when all our local seafood customers are seeing peak seasonal sales. Kinda sucks. Timing IS everything.

Markets have certainly injected some timing complications of their own as well. Since last Thursday's Payroll report, stocks have been under considerable duress. And the risk-aversion trade has reared its ugly head once again as well. We now have yields on the 10-year note pushing 3.45 and we have the Euro testing 1.38 again on the downside. Gold has managed to hold in rather well. Don't get me wrong… a trade back to 3.45 or 1.38 is nothing in the grand scheme of things. It will ultimately create better selling opportunities. But in the short term, it puts off any momentum turn, and causes me to adjust my own timing and risk levels. I am maintaining small short core positions in both the Dollar Index and 10-year notes. But even small positions weigh on you when they continue to grind the wrong way. I added a bit at one point early Tuesday morning… only to last about 6-hours before taking it back off again. It looked like bonds and the Dollar were starting to give it up, but then stocks began to weaken and before you know it, yields are back down and the Dollar is higher. If there's one good thing to the immediate gratification nature of the capital markets, it's the ability to climb back in (or out) at a moments notice. And I certainly am putting my bigger-trade expectations on hold for the time being. If anything, markets seem to be building momentum the other way. Stocks closed on their lows again, just as bonds and the Dollar closed on their highs. And as more and more technical indicators cross or roll over, more and more mechanized systems get triggered to take action. This pushes the technicals even farther. We get the feedback loop firing on all cylinders. The case can be made now that 10-year notes HAVE broken out through their downtrend line that extends through the March - April - May highs. Again… all this will only correct the position skew even farther. It changes nothing in the fundamental backdrop or in my macro appraisal of where things are headed. What it does do is chip at my P&L every day, while pushing me farther and farther to the sidelines and a flat position, looking for the next sign of directional exhaustion, and opportunity to reposition. I've spent another 1% in the last couple of days and brought the total cost of this recent trade foray to 3%. And I thought I was being patient. Imagine if I had NOT been. Even worse… imagine if I were a really long-term macro guy trying to hold on through this whole thing. Since the test of 4% in the 10-year we have corrected 55 basis points over the last 5 weeks. And the story line behind the drop in yields continues to build! I don't care how long-term you are or how deep your pockets… that kind of momentum swing has got to have an effect.

The problem with talking strategy at this point is that NO discussion will be complete without including the outlook and direction for stock prices. And not only don't I have a strong feel for stocks right now (as if I ever do… I think I am least successful in them than any other capital market), but I read the charts as being able to go anywhere. We have now made a lower low, through the June lows made 3 weeks ago. We are also testing the 870-880 level in futures, which had been somewhat of a pivot point during May. None of this is of great import except to say that things in stocks… good and bad… tend to be cumulative. As a bunch of small bads pile up, prices retreat, create an even bigger bad. The other thing is… and this goes back to my trading the equity indices poorly… if I tend to be early in other markets, I'm REALLY early in stocks. Long after I think things have washed out - they really do. So if I'm pointing to building negatives in stocks right now, what does that say for the perception of the broader participant base? If we retrace even 40% of the early-March through early-June rally, we could see the S&P at 840. A 60% correction (not unusual) could take us back to 785. Those levels are still a long way from where we are now. What would THAT do for the risk aversion trade, bond yields, and the Dollar?

6:00AM New York time. Well… as you can imagine, Friday was not such a good day for the old P&L. My worst-case scenario for Payrolls came to pass. The markets showed strong stick-ability to the number. They reacted to the weaker than expected number as the book tells you they should. Stocks were very weak and closed on the lows, the Dollar and bonds closed firmer and on their highs. In the thinly traded electronic session Friday, the Dollar firmed a bit more while bonds were unchanged. This morning the Dollar is higher still and bonds are down just a touch. As always, I will not debate the significance of the number for the economy. It is what it is. The more important observation to me is how the markets reacted and their ability to hold directionally. And what I saw was an indication that there remains too much optimistic length in equities, and the neither the bond market nor the Dollar has washed out enough bearishness to resume their larger downtrends. There will come a day… but it sure wasn't Thursday… and it may very well not be today.

As for strategy, I did stick with the plan and lighten up on my 10-year short as we passed the noon hour and it became apparent the market was not going to fail. I took off 2/3 of my position by the close. I did nothing in the Dollar. To me, the Dollar chart still looks far worse than the 10-year chart, and as a lower volatility index, the cost to hold one contract is (usually) less than the cost to hold one 10-year note future. Plus… that was a smaller position to start with. Who knows… all that may change in the next few days as well. The sideways consolidation in the Dollar Index, which looked so vulnerable last week, has been quasi-rescued by the last three days of price action. It remains the same pattern to me but now the odds of it NOT breaking down and in fact, breaking higher, have greatly improved. I have no intention of standing in front of a train. If 10-year notes break the downtrend line I've been watching and looking to sell against, I will probably bail on the rest of the position. If the Dollar index breaks its consolidation to the upside I'll bail on that one too. I will not put myself in the position of having to emotionally defend nor fundamentally rationalize two trades firmly in the red and moving against me. I would much prefer to clean the sheets and look to reposition the entire set. We have entered the first half of the new month. That means we will get lots of fresh and high-importance economic data. We will also start to get corporate earnings. So there will be plenty of stimuli coming to gauge market reaction against.

Lastly today… I will say now for the record that I would go through the same trading strategy again. Yes I was wrong about the outcome. But I was patient… I was disciplined… I was happy with the leverage I utilized and with the strategy I employed. The entire trade, start to finish (to this morning's levels) cost me 2%. Anytime you can position for a major move, be wrong, and have it cost you only 2% (as a leveraged player anyway), you should be happy. There will come another day and another opportunity for this set of trades. The ticket is to keep yourself, both mentally and financially, in a position to pounce again without hesitation. If there is one consistency in these markets over the past 18 months, it is their tendency to run between sentiment extremes. I do not expect that to change. The problem remains simply one of gauging that emotional level, and deciding when enough is enough. And as always… it will be the markets and their price action on stimulus that will signal when we have reached that point.

6:30AM New York time. Today is a big day. And as always, with Payrolls, it will be where we settle at the end of the day rather than where we trade during the day that will tell the story. 10-year notes sit just off their recent yield lows, just above the psychological 3.5% level, and just under a fairly substantial down-trend line that can be draw from the March high and through the May high. So if the number comes out exceptionally weak, then that trend line will be vulnerable, yields could blow down through the 3.5% level, and the bond bulls will have people like me on the ropes. Conversely… the reverse is possible as well. We could rally bonds on a weak number and then reverse intraday. We've see that plenty of times too. It all boils down to daily action, and where the market closes. That will tell us what the underlying propensity is of net bond participants at these yield levels and with our current fundamental backdrop. Obviously… I have made my bet. Since I can't do anything about the number, my focus needs to be more on preparedness and strategy. The worst-case scenario would be; the number is weak and bonds rally, holding on to gains into the close. In that case, I guess I lighten up a little bit at the close, just for the disciplinary aspect. The second scenario would be, the number is weak, bonds rally, but reverse lower by the end of the day. If that scenario comes to pass, then I plan on pouncing on the weakness, and taking my position up to full risk levels by the close. To me, this would actually be the most bearish behavior for the market. This would also be the best scenario from a trading aspect. It would confirm the market's bearishness and yet wouldn't have me selling the market in the hole. The third scenario is that the number comes in less-bad, bonds sell off, and hold their weakness into the close. I would probably sit that sell-off out. While I only have a little over half my position on, the reality is, we will have many little short-term rallies even after the "top" gets put in. I have no desire to sell bonds on a big down day. When I say I want to put the rest of my position on on weakness, that really means I want to sell the little bounces after the 3.47 yield low is confirmed. The final scenario, and the one that leads me to stay away from selling INTO a Payroll induced sell off, is the possibility of a reversal on the day from an early down move on a "less bad" number. Given the history of market reaction to Payroll releases, such an outcome is not beyond the realm of possibility. Bonds have shown quiet a bit of resilience this week. Several times it looked like the sell side was gathering momentum, only to have the market get bought and come right back. I'm bearish… but I'm not suicidal.

OK… so that's my word on bonds. What about the Dollar? The Dollar has actually been comparatively much weaker Treasuries. I guess I'm not as beared-up on the Dollar as I am on bonds because I see things in the currency as less quantifiable. This is another one of those trading rationalities we all use. In theory, I should be more bearish the markets that act the worst. In reality, I typically feel better selling into a market that has bounced, rather than one that I fear MAY bounce. Weak markets don't give that entry on strength. They force me to sell weakness. For a contrarian such as myself, that is often the harder trade. And yet… the inability to rally is the single biggest indicator of underlying selling pressure. Weird. I am slight UNDER half exposed in my Dollar Index short. I need to work that position back up to proper risk size as well. I think we eventually see new lows and another run to the downside. As for specific strategy, it will be largely coincident with my 10-year strategy. I would love to get a reversal to the downside to sell. I will resist chasing a move lower. The dynamics of the relationship between the Dollar and the US economy is somewhat different for the currency that it is for Treasuries. A less bad number intuitively should be good for the Dollar. But the evidence of the last year or more shows the reverse. That's because of the dominance of the risk-aversion trade. That is… as evidence mounts that the economic downturn is moderating, risk tolerances from global participants go up, and money flows back out from safe havens (Treasuries and the US Dollar) to more risky, higher returning assets, such as stocks, emerging markets, commodities, and corporate bonds. One negative for the risk aversion trade, is the recent stall in US equities. In the early days after March 9th, stocks had a much greater impact on Treasuries and the Dollar. The rally was new, and participants were WAY under invested. Now, the rally is much more mature, the position skew has been corrected (perhaps even tilted to the long side), and far more needy of evidence that things actually ARE getting better in the economy. So that factor is no longer there to help Treasuries and the Dollar lower. It doesn't mean it can't happen, it just means it won't develop as easily. OK… that's enough for today. Best of luck to everybody and enjoy the long holiday weekend.

4:00AM New York time. Yes… it is 4:00AM as I post this column. But just like last week, most of it was written on Tuesday. Wednesday has become one of my regular oyster seed days… so there's no way I can write this column and get out as early as I need to. First… a correction… I have been talking about Payrolls just like it was a normal month, and the report was due out on Friday. With the holiday it's Thursday. Sorry for any confusion.

Tuesday certainly traded like a quarter end. Markets acted thin but people had to get stuff done anyway. 10-year note yields went from 3.48 to 3.57 and then back down to 3.49. What's that about? They settled by the end of the day at 3.52. Not great… but better that below 3.50. The Euro started strong, getting up to 1.4150 and then traded back down to 1.40. Gold was down 15 bucks at one point. Yesterday was one of those days where, if the markets provided you with the opportunity to do something you wanted to anyway… perfect! Otherwise, they were just noisy and volatile and I am not going to read too much into the action. Econ data was neither here nor there, and who really gives a crap anyway with Payrolls coming up. The financial news blamed the early equity strength on less bad Case-Shiller, and then when stocks weakened they blamed it on weaker Case-Shiller. Don't these people have any shame? Or maybe it's just an issue of the two shifts not getting together on a single story line. I guess you just say what the producers want, and since the producers could care less about the markets, that's what you get. I am so frustrated with Bloomberg Radio at this point anyway. I used to get price updates every 10 minutes. Now that they have consolidated everything through Bloomberg TV… I'm sure a cost-cutting move… calling it the Bloomberg multi-media broadcast, I have no idea where things are. The anchor will say things like… "as you can see stocks are up"… and all that gets from me is a scream at the radio… "NO… I CAN'T SEE YOU MORON… I'M LISTENING TO THE FU*&%^ RADIO!!!" It's like that old joke… about the popular radio ventriloquist who did well until TV came along". I did add to my 10-year note short and my Dollar Index short prior to the US open. The 10-year worked out OK… the Dollar index not so much so. I was way under invested in the Dollar Index anyway. That doesn't excuse poor timing on my part, but in the grand scheme of things, its not that big a deal.

The commentary I have heard this week so far continues to be for the most part Dollar and long-rate positive. It's not rampant… but it's OK. I personally think the Dollar Index chart looks terrible, and if all we can get out of this consolidation is a skimpy, 4-week, sideways formation, then that tells me there really isn't a lot of real buying interest in the greenback. I'm hoping shorter-term guys are all long and looking for a pop to sell.

In the near term, everything's going to hinge on Payrolls. In a way, that sucks. Unless the markets move a bit away from current levels (my price averages), there is a high likelihood that we get a big initial run on Payrolls (bullish for the weak US economy trades) that you're supposed to sell into. But in my case, that means sitting on some potentially nasty short-term losses. That all assumes that Payrolls is at least as weak as forecast. Unfortunately… I think that's a given. June is one of those months where the seasonal adjustment factors take away from the unadjusted number. That's because normal seasonal summer hiring starts during June and runs through July. To adjust for that, BLS subtracts from the unadjusted number in relevant hiring categories. You can see all that on the BLS web site. I hope I'm wrong. But I've got something of a bad feeling about this one. I'm going to try and post Thursday, just in case anything happens today and to prep for the number.

6:00AM New York time. It's funny how things work. I don't have to remind you what sentiment was like a month ago in Treasuries. We were about to get downgraded. England HAD… not officially… but kind-of. Things no doubt got a little crazy. So the market started to recover… pull back from the brink so to speak. Well Friday I heard it the other way. CNBC was talking to Holly Liss. She's the chick from Fuji Securities (I think) that works on the CBT floor. What does she say… something to the effect that traders here think we could pull back toward 3% by the end of the year. There you go… from one extreme to another. What are we talking about here… 400 basis points as the base? So a test of 3% would be a move that represents 25% of the entire face value of the benchmark note! From fears over ones sovereign debt - to can't get enough of that sovereign debt... in a month. Gotta love it. That would be one heck of a move. But hey… if oil can do it, why not 10-year notes!

Obviously I'm kidding. And my stretching of the facts to make a point is only that. But the two-part phenomenon that this illustrates is, I believe, an extremely valuable tool in taking the temperature of the markets. It not only highlights the tremendously varied opinions out there from which participants can choose. But it also highlights the propensity of the financial media to follow the story wherever it goes without regard to where you were literally moments ago. While this particular comment may not mean much to many people, to me, it means a great deal. That's the kind of extreme comment I want to see as I build a position the other way. The greater the insanity used to justify a current price move, the more one should feel comfortable about fading that move… taking a contrary position. What makes me feel even better is that such a comment gets made literally 6/32nds above my latest entry… with more position to go. So even if I am wrong… and yields DO go to 3% by year-end. My average price will at least be established at prices very close to when I started hearing those kinds of things. And if I'm EVER going to take a shot at any of this stuff… I want it to be at spots like that.

It seemed there was another interesting battle going on in Treasuries on Friday. Was it my imagination, or did it seem like longs were trying like the dickens to print a 3.4-something handle on the cash 10-year? You know… if I didn't know from first hand experience that such things occur… I would just write it off to my own hopeful/nervous perceptions. But I KNOW it occurs. I have personally known and discussed the practice with those who have executed that very strategy. In fact… it happens all the time. Orders from upstairs come down… "Get me out if we trade through thus-and-such!" Do you think that's not going to get around? Do you think the short-term predators on the floor and at investment bank trading desks don't know where the stops are? Somebody pinch me. So once in a while, at critical psychological and technical price points, participants probing for those orders will (cumulatively and without direct contact or strategy) use enough of their trading ammo to push prices through that target point. With any luck, they will create a run, and thus have plenty of short covering activity into which they can sell whatever excess length they accumulated. It looked like they were trying to do just that on Friday afternoon. And they did get that 4.49 print up. But the market snapped back, and settled at 3.51. I know it's not much. But the extremes to which markets go, and the turns from which they come are often signaled by behavioral subtlety such as this. Again… perhaps its all in my head, I'll be wrong, and we will settle today at 4.45… leaving me with egg on my face, an underwater position, and in a vulnerable market-psychological state… too frozen to add my balance and now too uncertain to feel comfortable with my best-laid-plans.

I will also say this morning that the Dollar Index chart looks terrible. It's getting that look like it just wants to roll over and revisit the lows. The Dollar has not benefited from the recovery in bonds. It has not benefited from the resilience shown by stocks. That is another subtle change in behavior. While I have not noted much bullishness in the commentary, it has at least fallen off the radar screen as a point of concern. The media was very concerned about it 4 weeks ago. These markets are all feeding off one another. It is hard for me to believe the Dollar can revisit its recent lows and have long yields continue to fall. Perhaps this is one of those cases where the unlikely trade turns out to be the right one, where exactly because bonds should not rally on a weaker Dollar… they do just that. But again… I need to place my bets… and that is NOT a bet I personally would make. I believe this is a big week. We have a fresh Payroll Report at the end of it. We have consolidated a like-amount of time to several prior consolidations. It is a ripe time for SOMETHING to happen. How that SOMETHING resolves I have no idea. My bet is that the resolution will be negative for bonds and the Dollar, and at least neutral for stocks. We'll see. With all the seasonal factors subtracting from unadjusted Payrolls this month, it is very hard to see us getting a surprise less-bad number. But perhaps it will be the reaction that surprises. Again… all I can do is wait and see. The greatest pressure on me to continue to execute the plan will no doubt come in the final stages of that execution. That's the way the world works. It's always darkest before the dawn. The highest tides occur at the flood.

6:00AM New York time. Well… I got my 3.5-something handle yesterday in the 10-year note. I guess the low was 3.55 or so on the 7-year auction results. I added to my position on that strength. After all my recent yakking about that level, there was no way I couldn't pounce on it when it finally happened. Yesterday was one of those times where it was wonderful to be away from the screens. I'm sure if I were sitting in front of CNBC I would have been immersed in a sea of bullish commentary and gushing anchor people. While I would have been able to rationalize all that as part of the whole sentiment swing… I know listening to it all would have only added to my own anxiety and hesitation about standing in front of the train and pulling the trigger. But being out in the field, I simply look at the time of day, turn on the radio to find out where things are, and make the call. No emotion… just execution of the plan. The emotional aspect had already been measured and factored in.

Ideally… I have a bit more position size I am allowed to add on strength, with the balance of the position (theoretically) getting added as the market fails. I have done nothing else with my Dollar Index short. I still need to add more to that one too. Perhaps today I'll do a little more? I would prefer to have some strength to sell there too but who knows. From my perspective, I see similar market behaviors from earlier this spring repeating once again in the bond market. It was only 3 weeks ago that we were worried about US sovereign debt. Didn't Bill Gross have some negative comments about the investment value of US Treasury bonds at that time? That would be the icing on the cake for this rally… to hear him come out positive on the market again. Anyway… three weeks ago we were pushing 4% and worried about our (the US) credit rating. Yesterday we traded down to nearly 3.50 and there weren't enough 7-year notes to go around… 180 degrees around and 45 basis points in 20 trading days. All of a sudden I keep hearing the deflation word bandied about too. Deflation huh? Gold is off all of $60 (6%) from a multi-year high of $1000 and we should be worried about deflation? Okaaaay. Personally… I'm sticking with the strategy of trading bonds around these emotional swings with an overall bearish bias. I take the positive auction results yesterday with a grain of salt. Short to intermediate issues have tended to be well received all through this move higher in yields. It's been the long end that the market gagged on last time. Besides… there are all kinds of games being played by dealers over the course of these auctions as well… so if anything… results can be VERY misleading in terms of longer-term underlying direction. Given that, yesterday's results were simply another momentary disruption that provided a good selling opportunity. We will see over the next few days if this latest push lower in yields has a chance of becoming the next significant intermediate low in a larger overall trend of higher yields.

Obviously… the ancillary markets will be important as well going forward in confirming whether or not the bond market's corrective rally has gone far enough. I believe I have been patient enough. I believe the market has had enough time to work its recent excess out. I feel much better selling strength in this market than trying to chase weakness. The fact that stocks have generally held after the recent sell off is a positive. The fact that the Dollar has not been able to work higher as it did during the April correction is a plus too. That is an indication of greater underlying weakness. But of course… all that might not be worth diddley. As always, the proof will be in the P&L. There's nothing else to say. Have a great weekend.

8:00PM Tuesday New York time. It's now Tuesday morning. Once again, I'm going to be out in oyster-land very early tomorrow, so this piece is going to be written throughout the day, and into the close. I was just watching CNBC. They had on the chief economist for UBS. He was discussing gold as an investment. I had to turn it off. It was nauseating. The gentleman was peddling the same old tired line of fundamental bullshit. No wonder participants have been, and continue to grow disillusioned with much of the typical investment bank research out there. How can you POSSIBLY talk about gold (at least over the next year) without talking about the other capital markets… including stocks! Even a child could look at the price action and see that all these markets remain as intertwined as ever. Gold is NOT trading in a vacuum. The only way you can discuss it in a true fundamental sense is to look WAY out… beyond all this near term noise, to the long-term prospects for the Dollar and interest rates. Its like these guys all have jobs to do… and they are going to do them… the way they always have… no matter what is currently going on and how it all fits together. I suppose I should just calm down. It is in fact this type of thinking that provides the rich market opportunities we are currently seeing. These guys are the new doctors and lawyers… telling a boatload of big-money clients what they should do… even if it is NOT going to make them any money… even if it is going to continue to get them involved at the totally wrong time in the move. And it totally glosses over the TRUTH of what is currently going on in a greatly reduced, lower leverage, more risk averse, capital market participant base. Ante up boys! Baby needs new shoes!

I DO have some additional/new personal observations that I think may be important to MY readers. First and foremost is the reaction in the ancillary markets to yesterday's big sell off in stocks. We saw new lows in the equity averages. Did we see new (near-term) highs in the Dollar… or 10-year prices? Nope. I am not sure this is significant, but it certainly gives me pause to think. We may yet see additional movement this week. However… as always… when markets perform better or worse that one expects given a piece of news or data stimulus, and contrary to recent behavior… we need to take notice. It may be that we do not see these new near-term highs in the Dollar. Or lows in yields and sub $900 gold prices. If we run out this current swoon in stocks without those corresponding moves, I would make the case that there is greater inherent weakness in both the Dollar and Bonds (and strength in gold) than would otherwise be the case. It probably means there is true, big, passive money liquidation going on that is outside the leveraged, faster money trading community. The passive money guys are the ones that really drive the big macro trends. The faster money leveraged guys are the ones that drive the near-term gyrations. While I might not get the kind of correction I would truly prefer before getting back involved, it would actually be AS IMPORTANT a development, and might actually indicate an even greater underlying weakness in both the US currency and US Treasuries. That condition could ultimately result in even greater movement down the road than if it were being dominated more by a smaller group of more nimble leveraged players. That is why I am as equally concerned with the time factor as I am with price.

OK… its 7:30 Tuesday night. I have to admit… I scratched my itch a little today. I took toehold positions on the short side of both the Dollar Index and the 10-Year note. The two trades washed for the day. Treasuries loved the 2-year note auction. The Dollar… who knows? It got clobbered. Certainly nothing in stocks did that. And I gotta tell you… you can count the number of times on one hand in the past 3 months where on the same day, the Dollar had a big move lower and Treasuries had a good day. That is NOT something I believe can last. Obviously… my bet is that Treasuries end of being the fake out… and resolving lower. Haven't foreign entities (specifically the Chinese) showed a fondness for short paper over longer lately anyway? Basically… it comes down to this… I sure as hell wouldn't want to be a long-term auction long going into this weekend. Dealers are going to be blowing that stuff out over the next couple of days. I still think we could see a 3.5-something handle on 10s, and with any luck I'll use that to sell, and have half my position on with a low 3.6 handle average, with the rest looking to go on as the market fails next week. That's the plan. What do they say about best-laid plans? I'll have a similar size position on in the Dollar Index and might possibly be long some gold too by then. Be back Friday.

6:00AM New York time. The funny thing about complex natural systems, they have an ever-ready ability to throw an unforeseen development… good or bad… into your plans. So watching what is currently going on in Iran, I can't help but wonder how this development, relatively out of the blue, can potentially change the dynamics of our entire geopolitical puzzle. Obviously the situation remains tense… with an outcome far from certain. But the very fact that one of the last remaining authoritarian regimes in the world (in this case, a religious one), can be brought politically to its knees overnight in front of the world by a bunch of idealistic miscreants… is certainly fascinating to watch. As always… I have no idea how it will all be resolved, I only know that the process of and willingness to stand up and question authority is a good thing… far better than mere silence and obedience.

OK… on to markets. The end of this week will bring me to the point where I will end my 3-week non-participation in these markets. We are currently on our 14th trading day since our minor corrective period began. The April correction lasted about 21 days. If the counter-trend, pain-probing predators cannot find satisfaction in price direction by the end of this week into the start of the next, I'm thinking its not going to happen at all. They will then find themselves under invested and with the weak hand. We will have expended the time without getting corrective price satisfaction. That will demonstrate greater underlying resilience in all these markets. For now, the jury is still out, but there are some very encouraging signs out there for our side. We have stocks rolling back over this morning and I think looking to test the lows of last week. There is great potential in stocks to cause additional pain. They are a major catalyst. Bulls have a huge vested interest in defending and buying against the 200-day moving averages. Bears have a tremendous stake in seeing these levels violated. The two camps remain sharply polarized on the economy, the banking system, and corporate outlook. It's that dichotomy that provides the opportunity. If there were little debate on where things were headed, the case for a sideways market would be much stronger. But that is not, nor has it been, the environment we are in. I have remained in the middle of the road as far as the economic fundamentals including the outlook for inflation, but I am in the minority.

My levels of interest remain the same and I remain of the view that these are not markets that will reward you for buying breakouts and selling breakdowns. I think one needs to be prepared to step right out in front of emotional moves, fading excessive optimism on strength and excessive pessimism on weakness. If stocks break to new, near-term lows, that is the rally one sells in both the Dollar and longer Treasuries. You can buy gold on that one too. And once that big whoosh of bailing-out subsides, you probably can get long stocks as well. Oil also remains part of that whole package. But all of that remains in the future and still unconfirmed. If there is no downside satisfaction, I will probably have to step up to the plate anyway. For better or worse, my wait is almost over.

7:00AM New York time. I was reading Dave Lewis' latest piece about zombie economics. Indeed a lot of people I hear in the media lament the loss of free market capitalism. But in Wall Street's typical econo-centric fashion… of believing the world revolves around them… they seem to have forgotten that regulation has been running amok in America long before it attached itself to the financial industry. Welcome to the club. The financial industry is simply the latest business line to attract attention. As an oyster farmer, I could go on for hours about burdensome yet ineffectual or pointless FDA food safety policy generally… and shellfish sanitation specifically. I used to rail about it quite frequently in this column. Have you noticed I don't do that anymore? I've become anesthetized. It is what it is. Why do you think much of the US manufacturing base fled the country decades ago anyway? Between the EPA, OSHA and the FDA alone, the cost of doing business went through the roof for all manner of goods producers. And I'm not saying it was a bad thing. Everybody wants clean water and air. Everybody knows having a safe workplace is important. Everybody wants safe products going out to consumers. Have any doubts? Look at China. Does anybody here want to hop on a plane and go live in a big manufacturing city in China? Horror stories about product safety abound. Who knows what working conditions are like? China has paid a huge price for its manufacturing dominance. The financial services industry was simply the latest (and probably not the last) bastion of totally unfettered operations to fall under scrutiny. And like all the other industries before it, it was the misdeeds done by the industry itself that attracted the attention of regulators. So rather that whine like so many others about the threat and effects thereof from impending regulation, I would prefer to take all this as a lesson. And unfortunately, the lesson continues to be that we as a society DON'T learn our lessons. Greed and hubris it seems, will always in the end, get the best of us. We can't help it. And if we want to know how all this is going to effect the financial industry, perhaps a look at how other industries have coped will help. Naturally, the single biggest solution for businesses was/is to move abroad… to where regulations are less stringent. I do not know if this will be the case for financial services. Each industry case has its own dynamics. I DO know that regardless of what solutions each industry group comes up with, the result without exception has been a smaller domestic industry base here in the US. So long as there are countries and territories willing to take these industries in, there will be the tendency to take advantage of that option, and reduce or negate the effect of regulation by management. We will see.

OK… now for markets. I am starting to get an itchy trigger finger. I have been trying to stand aside and let time and price action cure the position skew that existed/exists in the big four of our capital markets. I have been looking to the stock market for overall changes in price action and behavior. We have talked about that at some length. But I have also begun to look at the Dollar for some indication of the amount of time that will be required to complete the process. The current correction in the Dollar Index is on its 14th (or so) trading day. The current correction looks very similar to the one we had back in April. That correction lasted 22 (or so) trading days. So at this point, while I am starting to adjust my thinking toward getting back involved, I also understand that we could be another 2 weeks in development. And, if recent history is any guide, the later stages of our current correction could contain some of the more violent corrective price action. The last week of Dollar Index rally back in April saw that index climb to new, near-term highs, with a sharp 200-point rally over its final 3 days. That is exactly why it was a good place to get back involved. It was that final "panic" back in (or out as the case may be) that cleared the tables and made the short side a better risk/reward trade once again. It's not a matter if IF for me… it's a matter of WHEN. I would love to see 10-year notes with a 3.5-something handle. I would love to see the Dollar Index trading up between .82 and .83. I would love to see gold below $900. And most of all, I would love to see all this happen as the S&P 500 breaks its 200-day moving average. Will any of that come to pass? I don't know. I simply know I have been rewarded by being patient. I further know that all these markets have been pretty decent at telegraphing their impending down moves, in conjunction with the analytical coverage. I am going to stay with what has been working.

5:00PM New York time. It's Tuesday afternoon, about 3:30, I've got to get a first-light start tomorrow on my oyster seed chores. That farmin' thing ya know? So in a way… this is the closest you'll ever see this column getting to "real-time". As I sit here, stocks (the Dow) are down 75. S&Ps are down 8 ½. I remain of the view that we are moving through the "pain" phase of the counter-trend move in the secular trends of long-stocks, short-bonds, short-Dollar, long-gold/commodities trade. Lots of people have the whole thing on. By the time it had exhausted, the US Dollar was no longer the world's reserve currency, and 10-year yields at 4% were going to choke off the recovery. Green shoots were springing up everywhere. Lots of those folks are short above 3.70 in 10s, 1.40 in the Euro, and who knows where in gold. Where are things now? Oops. I'm just glad it's somebody else this time. I heard Citi is now forecasting a move back to 1.33 in the Euro. Who cares… all it shows is the weakest hands are already getting nervous and hedging. As that becomes more pervasive, I will actually start looking for a place to reload on all those trades. Ohhh… I just heard the phrase "strong dollar" in the background on CNBC. What else did I hear today; "green shoots being poison ivy". Good one. That'll sell subscriptions. I have no idea how far any of these markets will back up. I only know what I will need to see before I start getting excited again.

Stocks are the key. They are the big-rudder on the good ship capital markets these days. Of course you can go back and forth with the chicken-or-the-egg thing between stocks and bonds… but the reality is, stocks bottomed first. Everything else followed. I think stocks could come off a good bit still. Gains in May and June forced a lot of people in over the past three weeks. Hedge funds had two great months. It ain't all one way.

I'm going to make sure I hang on through the close. It's now 3:50. I'd give you 3 to 1 we close closer to the lows of the day than back to unch. What else can I say… dum… dee… dum… dee… dum. Seen any good movies lately? Participant selling the close is a new development over the past week of trading by the way. OK… ding ding ding. There's the close… on the lows down 107. S&Ps down 11. 10-year yields now at 3.75, also the low of the day. Closes would indicate more to come. As the song says "… hang it up and see what tomorrow brings…"

7:00AM New York time. After watching Friday's market action and seeing the follow through this morning, I am feeling a bit more vindicated. I had a phone conversation with a market associate on Thursday that really sold me. We were talking about market stuff and he made the comment about the Dollar getting crushed again. I asked if the Dollar Index had made a new low? He thought so… and since I had been out in the field, I'm thinking… oh shit… better get back to check on that. I had my suspicions, and when I got home, they were confirmed. The Dollar Index was nowhere near a new low! The point is… this fellow… and he's no sap… was totally sold on the idea that things were going to hell in a hand basket. (They may be, but certainly not in a straight line.) This guy has been in the markets for a very long time, but the perception that had been building up over the past few months had even gotten to him. But even as the "perception" was intensifying over the past few weeks, the dollar is losing reserve currency status, the Chinese are boycotting our bonds, we're not going to be able to finance our expanding debt, oil and other commodity prices are going through the roof… the reality was… prices had ALREADY begun to withdraw confirmation. All these fundamental negatives were weighing on my friend. But just like Thursday. The proof was NOT in the pudding. The Dollar Index had NOT made a new low. There it all is in a nutshell. Perception… reality.

We are where we were in reverse. We have a tremendous amount of negative sentiment out there on interest rates and the currency, yet we have all manner of talk about "green shoots" in the economy being used to justify bullishness in stocks. Despite it all, prices are and have been increasingly, over the near term, not confirming. We have a decently positive sentiment in stocks. It's all part of the package. We have Jim Cramer bullish. We have talk that the lower Dollar is good for our exports. We have lots of talk that higher long rates are reflecting improvement in the economy. It's funny how the rationale can be skewed, positive or negative, depending on the market. Higher long rates make financial market watchers nervous but can also be used to justify a long position in equities. At what point do we cross the line where higher long rates go from good to bad? Tell you what… its not a number… it's a matter of convenience.

Here's the gig as I see it. We still have generally reduced participation in the capital markets. There are a finite number of market participants playing the game. The hedge fund universe is much reduced. There is still a lot of passive capital sitting things out. So once (as always) the critical mass of active participants have "the trade" on, conditions increasingly favor a move back the other way. There just isn't enough capital flowing to drive the markets for that big, macro, major trend move. In fact… lately… it looks like we have enough capital to sustain things for about a quarter… start to finish.

Lets also remember where things started. It was the stock market bottoming on March 9th that got the ball rolling. So long as stocks were flat-to-rising, we could sustain all the other arguments of a weaker Dollar, higher long rates, higher commodities. The game changes as stocks weaken… and it looks to me like stocks are starting to roll over. If I were a real wise guy, I might try to catch some of that trade. We've got a lot of people now positive on stocks, many that simply HAD to get on the bandwagon, and now prices are failing and many of these guys are trapped above… either with actual positions or a market call. The green shoots are about to shoot somewhere else if you know what I mean. In fact… my read is that this will be the first week where the counter-trend move will actually get people to sit up and say… uhhh ohhh. There has been little pain to date. We need to generate some pain. I think pain starts this week.

I continue to stand aside flat. I want to see the markets progress through the denial… then through the pain… then back out the other side, when they start to warn of green shoots dying, stocks revisiting the March lows, unemployment not improving… all that stuff… the very things that will put downward pressure on rates, a bid under the Dollar, and scare flighty capital out of commodities again. And when we reach that point where the heads on TV once again try to convince me how bad things are… just opposite of where we were two/three weeks ago… THEN I will look to reestablish my shorts… the Dollar, and bonds. Who knows, maybe have a chance to buy some stocks… or gold too. It's all the same trade. I think it's all part of the basic, understandable, makes-perfect-sense-to-me, big macro path we are on. It's largely not about WHAT trades to put on… its more about WHEN to have them on. It's about timing and patience.

7:00AM New York time. I don't feel well this morning. I worked on Long Island Tuesday helping out in the hatchery over there. Our hatchery manager, Karen, her husband brews his own beer. He's up to about 100 gallons so far this year. Some of the varietals he puts together are awesome. She sent me home with a big bottle on Tuesday and I drank it last night. It smelled like Champagne. Not your grocery store alcohol content I can tell you that too. So I'm trying to type with one eye closed… if you know what I mean.

Yesterday in all of the 5 minutes I listened to CNBC I managed to hear one of their fast money crowd talking about the contract roll trade of several of the energy ETFs. A while back (I don't remember when and I couldn't find it) I mentioned this phenomenon. My friend (we'll call him Jim) first told me about it. The USO energy commodity ETF lists in their on-line documentation, how many energy futures contracts they own along with when they are scheduled to roll the position forward. They are not the only energy ETF to do this. Obviously if you know when these rolls are going to occur, you can position for them right to the day. So traders were loading up, buying the calendar spreads, knowing these massive long-only players were going to be in near the last trading day selling their nearby contracts and buying the next. These spreads were moving in dollar increments over very short periods of time. It was a huge cash cow for many of those playing the game. You make the ETF reach and then sell it to em' when they do. He along with a whole bunch of energy traders he knew were doing it regularly every month. So now the cats out of the bag in a public forum. How long do you think it will be before some irate (or group of irate) ETF owners start squawking about disclosure or manipulation? Or better yet… some CFTC official looking to make his/her marks points it out as a speculative abuse. Markets don't like it when regulators threaten their speculative participant base.

I am growing more confident that a counter trend move is coming. The current Dollar Index correction looks very much like the one back in mid-March through mid-April. That would mean a fresh new short-term high and probably a couple more weeks of trading before the position skew gets refreshed and the downtrend could resume. I have not decided if I'm going to test my theory with the ultimate wise-guy trade… going long the Dollar… but the prospect is slightly exciting. Ten-year notes are trading back to 3.80 after staging a minor reversal post 30-year auction yesterday afternoon.

And lets not forget the stock market's role in all this. Through all the recent talk about shifting Chinese reserve assets, we seem to have forgotten that for a long time, a huge driver of the other capital markets were stocks. They too have more recently been coming under selling pressure at the close. That's a change in price behavior. They almost reversed on the close yesterday on more "green shoot" news. The last place you want to be is holding a fresh new long position in equities AFTER all these passive, real-money managers have bitten the bullet and caught up to their bogey… while the predators who initiated the whole thing back on March 9, start to go the other way. Let's fu&% over the small investor one more time shall we?

6:00AM New York time. I'm still sitting out the markets and agonizing every day as to whether or not I should be. I was feeling OK as of yesterday morning, when the Euro was backing off to under 1.39. Obviously it now trades back with a 1.41 handle. 10-year Treasury yields are sitting at their recent highs and the S&P 500 looks to open about 10 points higher… or right back at its recent contract highs. I keep telling myself, I must be patient. The moves in both Treasuries and the Dollar over the past two months took time to evolve (they are STILL evolving) and get to where they are now. 10-year Treasuries started the journey more concerned about the risk of the Fed buying bonds then they did about the Chinese not buying them. There were more than a few currency strategists bullish the Dollar. Now, Dollar bulls are more rare than hen's teeth. The financial press won't go near them. And when was the last time you heard anyone forecast LOWER long rates. Not two months from when we saw 10-year yields spike down to 2.50 on the Fed stating they were prepared to buy ADDITIONAL paper, we are trading 135 basis points higher, and we are (collectively) laughing at the Fed's impotence. Think about THAT as a percentage move and swing in market sentiment!

As far as my own trading, all I can say is, there were days back at the beginning of this, when I had to cover pieces of my positions because prices just weren't ready to go. I was the outlier back then. Now, several times a day, I hear stories about China and the "safety" of their Dollar assets. Higher long rates and the weaker Dollar are all over the financial news. These are no longer "novel" trade ideas. They are mainstream and very well participated in. I am the outlier again. I can imagine what it would feel like if I were trying to pick a bottom in these markets. It would suck. I am NOT trying to do that. I AM trying to preserve trading gains and look for new and better entry points into trades that I read as currently, a bit crowded. For now, I will continue to be patient. My core faith… that the underlying tendency of cyclicality will reassert itself remains. But I DO acknowledge that my own personal sensitivity to that cyclicality will demonstrate it's typical leads and lags. It always does… no matter how much I work to change it (it is a painfully slow process).

In light of my current situation… I'm going to change the subject. I have become a bit friendly with the up and coming author Rowan Jacobsen. He has recently published "Fruitless Fall The Collapse of the Honey Bee and the Coming Agricultural Crisis" and also "A Geography of Oysters The Connoisseur's Guide to Oyster Eating in North America". He is an avid proponent of sustainable agriculture and sustainable living generally. He is also (obviously) quite the bivalve connoisseur. He is coming out with a new book… "The Living Shore", which I was honored to have an advanced copy of. In it Mr. Jacobson raises some interesting questions about our human pre-history, and our origins as a "thinking species". And he raises some interesting questions about the way we currently live… our loss of connection to the natural world and what that means. I only bring this up because sometimes… it takes a creative mind, operating without boundaries, to envision future possibilities for us that are well off the path that we are currently on. I say this because it is also an appropriate time economically. We are all wondering how we will get out of our current economic morass. Further, we are wondering what all this means for our future… and our children's future. Yet after reading people like Mr. Jacobsen… I would suggest that the future is in fact wide open. And that perhaps, the thing we need most is in fact a forced change of direction. Bigger better faster is not always the best option. Lower growth is more in line with sustainability and a greener existence. And bigger better faster has certainly not led us to a happier, healthier population. So while many are worried about what will become of us a country, I say… as long as we have people here like Mr. Jacobson, and Dave Lewis, and my friend (we'll call him Jim)… and hopefully myself… I remain of the view that change, while scary, can result in good things.

5:00PM New York time. It's Sunday afternoon. I really want to go fishing tonight. But if I do, I won't be worth crap at 5AM for this column tomorrow morning. There's a "worm hatch" on in one of my local coves. Which means, striped bass of all sizes, line up in the current outflow of the cove to gorge on thousands of little marine worms as they are carried out by the falling tide, swarming about in their annual mating ritual. I was there for a bit last night… unprepared mind you… and was treated by one of those outings where fish were splashing all around me, but wouldn't hit any lure I had. Worm hatches are infrequent events, occurring only during small windows of time, tide and moon… always at night… and requiring special techniques to successfully catch fish during them. It's one of the few times in the marine environment when a fly rod is actually your ONLY chance at a fish. Fishing a worm hatch is more akin to trout fishing with a nymph on a stream… except at night… and in salt water… fishing very small flies, in the dark, upstream from you, using a "dead-drift" retrieve back toward you.

OK… but on to Friday's market action. As more than just occasionally happens, the monthly Non-Farm Payroll report proved to be a potential, major price pivot point, and ultimate "sell the news" number. The Dollar soared. Stocks gave up big early gains. If there weren't so many passive/low-leverage equity money managers out there behind their bogeys… stocks might have gotten crushed too. But the reversal was not universal. Bond yields continued to rise… and sharply. Still… we have come a very long way in the dollar, equites, and higher long rates, in a very short time. And if there was ever a day, or point in time, to take a flier on the idea that a correction was either imminent, or was already in process of beginning, it was Friday. I don't think bonds and the Dollar are going to go in opposite directions for very long. And depending of which one wins, the other one is going to be in store for a very big move. For all those who need a true fundamental excuse, I think the problem is that the Payroll number functions frequently as the final lagging indicator along the economic indicator timeline, and will reflect when participants finally and fully (near term anyway) have discounted the current direction in the economy. By the time Payrolls points to "green shoots"… everybody already has the trade on. All the other numbers turn up first… starting with anecdotal information, to the private and forward looking surveys and diffusion indices of Consumer Confidence, PMI and Philly Fed, then showing up in sample consumer surveys like Retail and Chain Store Sales. Labor changes last. That's OK. It's a valuable tool if we realize that we have every month in Payrolls a potential participant capitulation indicator. It's a regular monthly trading sentiment thermometer… stuck in the market's ass every first Friday of the month… always with the possibility of signaling that every Tom Dick and Harry has the same position on that you do. And if that is the case, you might want to think about being one of the first to sniff that out and head for the exits. Is that the case with Friday's number? Who knows? At this point I'm crossing my fingers, hoping my recent exit from the Big Three Trades will be vindicated by price action. I would love to re-load on my terms, rather than have to make that decision under duress and without much correction to market skew.

6:00AM New York time. It's now 12 hours later. Fishing was just OK. I managed half-a-dozen stripers even though I didn't discover until late that they were eating grass shrimp instead of "cinder worms". I still managed to hang a few on the worm fly. The current was much weaker than the prior night's tide and as a result the feeding activity was way off too. Oh well. Sometimes fishing is a lot like trading… you think you have all the ducks lined up, but it still doesn't work. There are so many undercurrents and unknown factors within the invisible environments, I need to realize that my decisions are based on incomplete information right from the get-go. As for markets… the Dollar bounce continues and stocks are looking to open weaker as well. The bond market is becoming the only unaffected leg of this capital market tripod. Even oil is lower this morning. I have no intention of trying to play the bounce. I'm simply hoping we now can get something more like a normal correction, in both price and time, so I can reload under the luxury of the position skew having been unwound a bit… rather than having to act "early" and hope "new" money can carry the trends further. I am currently flat and have to say… after the last couple of months… I feel a bit underdressed. Anybody hearing anything about the Chinese selling Treasuries?

6:00AM New York time. No comment today. I'm taking the morning off. I have gone to the sidelines on all my positions. It has been a very good run this past month and in a way… I'm kind of trading my own P&L a bit. I was also starting to see the start of some reckless trading (and thought process) behaviors in myself that were a cause for concern. The capper was my friend Jim sending me a batch of his sentiment work, confirming that some of our recent market trends are getting a little frothy. And to tell you the truth… getting a look at how all these markets react to Payrolls will be a good thing. Back on Monday.

5:00AM New York time. I don't have a lot of time this morning but I want to mention a couple of things quickly. Yesterday I was in the FXA office all day. So at one point CNBC does a quick bit with their "Fast Money Five", or whatever they call it. I guess it's kind of their stock trade of the day. 4 of 5 of these "experts" were short the equity market, thinking a pullback was imminent. The only one NOT short was simply flat… also thinking a pullback was imminent. Oh yes… and by the way… they all wanted to buy the market AFTER the dip. All I will say about stocks is that the majority of opinion I hear remains cautious if not negative. And yet prices closed at another new seven-month high yesterday. The financial press remains worried about Dollar weakness and higher bond yields. I could make the case that a weaker dollar is actually good for equities and the economy. And, I really don't think that 10-year yields still below 4% are all that prohibitive to the economy. 15 points in Consumer Confidence is worth a lot more than 50 basis points on the curve. As soon as I start hearing analysts saying stuff like that, I'll be looking for the door. Until then…

I also heard a guest on CNBC yesterday lamenting the woes of GM, asking what is going to replace them as a comparable bastion of American manufacturing? I sympathize. Change sucks. We humans hate it. Yet it goes on. We no longer use the telegraph. We no longer have trains as our primary transportation (though that may change again too). Radio has been replaced by video. All of these have been tumultuous events economically. Yet we are still here, our standards of living continue to rise, we live longer than ever, and our kids are smarter for their age than we were, and we are (hopefully) smarter than our parents for our age. So how can anybody possibly make a statement like that? He sounded like one of those idiots who said computers would never be in every home, or (even farther back) if man were meant to fly he'd have wings. All you have to do is look at energy to see the tremendous potential to be explored and exploited. Where do you think those innovations are going to come from? I work on the coast, so I tend to think in terms of salt water. How about environmentally benign deep-sea mining, or sustainable marine farming? Three quarters of the planet is covered by ocean… no potential there I guess. If it sounds stupid when I put it that way… good… it was meant to. I actually feel sorry for those who think the economic future ends with the loss of GM. (and I'm not sure GM is actually "lost", my guess is they will eventually restructure and start operations again under a much more flexible market/labor cost environment). Those people have already given up. They have stopped using the vast untapped potential of their imagination. Too bad. Because that's what got us out of the cave in the first place. That's what helped us harness fire, and the wheel, and helped us start to grow crops and livestock. It sure as shit wasn't the asshole who gave up because the last mammoth finally croaked.

6:00AM New York time. I want to go back to my "unlikely S&P" trade talk from Friday. Here's some additional meat on the bones of the thought process… more of the mechanics. Why would it make a difference that a majority of guests on CNBC, or in the financial media generally, are either negative or cautious on stocks? If that is a reflection of the collective view of all participants, what value could it possibly have as a "contrary" indicator?

Here's why… the majority of people who show up on CNBC to express their market views are NOT the guys running big, aggressive, predatory hedge funds. Certainly… they DO interview their share of money managers… most of them being passive managers of unleveraged, long-only stock and bond mutual funds. But from years of watching, the majority or guests are trying to sell you something... either their firm… or themselves. They are investment bank and private firm analysts and strategists. Have you ever see Louis Bacon on CNBC? Or Bruce Covner? Or Paul Jones? Or any of the really big hedge fund guys who use a lot of leverage in their trading. Bill Gross is actually one of the few really big guys who appear and are quoted fairly frequently. And of course there has been a bit of Buffet-mania over the past six months as well. Lord knows, when CNBC DOES interview one of these financial celebrities, they run adds for the piece days ahead of time and constantly. There is also the occasional one-off. I remember one morning when they had Michael Steinhart on with Mario Gabelli. Man… I couldn't turn that show off! Those are two giants in the industry, albeit from different sides of the street… Mario being HUGE in the passive money side through GAMCO and Steinhart being one of the early pioneers (1967 by the way!) in hedge funds…. with a history of ungodly returns by using big, leveraged bets. Still, those times are rare. The bottom line is that 20% of the regular guests consume 80% of the analytical opinion time. Right now they have Vince Farrell on, from Soleil Securities. He must be on 3 times a week. Who can blame him… it's great exposure for him personally and his firm. By the way… he's saying recently higher bond yields are going to put a crimp in the recovery.

Anyway… back to the point I'm making… I tell you all the time about trying to determine sentiment from the financial press. The question you should be asking is… if the financial press is always late to the party, getting on moves late, buying the highs and selling the lows, who's on the other side of the trade. And my answer would be those big guys mentioned above… and countless others… who know the game, make money by putting up P&L… and don't tell ANYBODY else what they're thinking or doing in the markets. The last place they want to discuss their views is on CNBC in front of an audience. Those are the two sides of the trade.

The predators don't need to sell you anything. They make money in the markets. They know the harsh reality of P&L. They have neither loyalty to trades, or correlations, or to the country at large. They are pure profit motive, and that motive is pure animal. Right out of the cave. Kill or be killed. And THEY are always searching for weakness. Weakness in positions… weakness in participants. Do you have the money to defend and hold that position or not? They don't give a shit about "the right thing to do". So if you're short the dollar, because the US needs to change its ways… and get its fiscal/monetary house in order… but that trade is played out… and the predators know that, and they suspect that you have overstayed your welcome… they WILL come to take you out. And since a strategist for a major investment bank or brokerage house can't change his/her tune at the drop of a hat, and their customers have taken their advice by the way… so they all remain short. What do you think the predators are going to do with that? What's that smell? That's the smell of sheep… and they smell nervous.

I remain short a small Dollar Index position and a short bond position. I am now long a decent sized long S&P position. I am long simply BECAUSE it is a position most people on CNBC/Bloomberg News are nervous about being on board. I think the predators are out there buying equities. I think they are going to drag the performance-driven passive money equity managers back into this market DESPITE all the bad news and downbeat outlook for the economy. And I don't disagree with all that economic stuff. I have actually seen more negative anecdotal evidence recently than I did a year ago. But that doesn't matter. This is not a philosophical debate. The only thing that matters is that a bunch of guys who get paid to run equity capital are behind their benchmarks, and they need to keep up with that bogey. THAT is all that matters.

7:00AM New York time. Life is deliciously complex. Here's an example. I check the NOAA (National Oceanic and Atmospheric Administration) web site every day for the Coastal Marine Forecast. The report is produced by the rocket scientists who are also part of the National Weather Service. I need to know what the winds will be doing every day. In the winter it's an issue of survival. But on that site, there is never a mention of the air temperature. Now I'm NOT a rocket scientist, but like everybody else, at one time or another, I may have left an empty gasoline jug in the back of my truck, sitting in the sun. When I get back to it, the heat has expanded the gas within and the sides of the jug have been pushed out. I have a roly-poly jug. When I crack the lid, air escapes with a hiss. Conversely, when I leave that same jug overnight and the temperatures go down, the jug is all sucked in. This time, when I crack the seal, air rushes in. Both effects are caused by the gas inside the sealed jug expanding and contracting due to temperature, and changing the pressure in the vessel relative to the ambient air pressure outside.

So imagine what happens with the air around us, changes in temperatures must be having the same effect, except, rather than changing the pressure, the effect to change the density of the gas. It's not a sealed environment. And when you think about it, the range to which that plastic gas jug can expand or contract is pretty extreme. I would guess that the degree of expansion or contraction is probably 40% of volume at a temperature range of say… between 100 degrees F and 30 degrees F. So lets go back to the NOAA weather forecast. They tell you what the winds will be and then tell you what their wave predictions are based on that wind. Once again… there is no mention of air temperature. But if we observe ourselves that the density of the air can change quite a bit depending on the temperature, as demonstrated by our plastic gasoline jug, doesn't it follow that the density of the air should figure into the calculation of wave height? Wind drives wave action. And if the air (gas) comprising that wind is 40% more dense, doesn't is make sense that a higher density air condition will have a great deal more punch than lower density air of the same speed? So a 30kt easterly in February when it's 26 degrees F generates a bigger wave that a 30kt easterly in August, when the air temp is 85 degrees F. This is a phenomenon I have grown accustomed to as someone on the water year-round. Yet there does not seem to be the same consideration from the scientists at NOAA.

My point is… here is a very basic concept. It's just the weather. There is a single goal of the analysis… forecast the wave height and direction for mariners. There is no human interaction factor needed in the calculation. And yet… in reality… the measurement is far more complex than a simple; if A then B. If the brightest minds in the country can't get this right, how can WE possibly account for all the possibilities in an infinitely more complex natural system such as the financial markets?

Ooguay, the wise old turtle in Kung Fu Panda tells us nothing is impossible. I won't go that far. But I will say that frequently, especially in markets, that which was unlikely, does indeed come to pass. We have recently come out of a period of intense intermarket correlation. And I suspect that the majority of participants have still not embraced the current reality that those correlations have broken down… completely… in a very short period of time. So all manner of combinations of movement are now possible. And since a great many participants remain positioned according to these correlations, which were in effect for many months, the price moves that we see from here on out will be the RESULT of these correlations having broken down. They will be position driven. So price moves (and combinations) that were very unlikely while the correlations were in effect… now become increasingly LIKELY BECAUSE the correlations are no more. What I'm saying is that every market is on it's own now! So I can remain short the dollar… and bonds… AND STILL feel comfortable being long stocks! And so I am. Yeah… I know there is a huge philosophical gap in those three trades. To make matters worse… the short dollar/short bond trade is SUCH an emotional trade. It strikes at the heart of what SO many participants feel is WRONG with the US today…. excess consumption, debt, etc. So HOW… HOW… at the same time, can I be long equities? My answer… the very fact that it is an unlikely combination… makes it all the MORE possible. There is no secret ingredient. The more we feel adamantly that a trade combination CANNOT happen… the greater the likelihood that it actually can. Why… because we all position for gratification. And financial gratification is different from philosophical gratification. Life in actuality is not what WE THINK it is. And there is always something… some factor… that we haven't considered. Like our empty gasoline jug. And ultimately… since profit or loss among participants is the ultimate determiner of where prices go, whenever there IS a big gap between what we feel SHOULD happen, versus what actually IS happening… there is explosive price potential. I have been building a long S&P position on weakness. I think the majority of opinion in equities is bearish at worst, and overly cautious at best. Yet my guess is that most equity managers, especially the passive ones (mutual funds, trusts, insurance funds) are behind their bogy. They see the litany of factors stacked against stocks. They have remained cautious… and under invested. Have stocks gone down? The best they can do is go sideways. Once again… that is all I need to say.

5:00AM New York time. I have to say… If President Obama is TRYING to get under Republican's skin… he is certainly doing a good job of it. I can only imagine what Rush Limbaugh will have to say about our new Supreme Court nominee. The entertainment value along will be worth the price of admission. But as I have told my dad… who is a big Rush listener… whatever is happening now is purely a reaction to what the Republican party has done in the recent past, and whatever swing to the left we are getting, they have brought it down upon themselves. You can't bitch about the pendulum coming back at you when it was your own effort that pushed it so far off center in the first place. Ahhh well… on to more pertinent matters.

I have trimmed my bond and dollar short even further over the last couple of days. The combined position is about 25% of what it was last week at this time, though I do remain short both markets. From my vantage point, there are just too many things pointing to a bit of excess in both these moves. But… the beauty of having decent size on from the start, is having enough of a position such that I can take off several pieces along the way, satisfy my contrarian urge to buy… and still be left with enough on to maintain decent exposure. I can get safely out and still say I'm bearish. I am making sure I take money off the table this time around. That has been my downfall this year. This is my third decent trade set this year, and I am bound and determined to book profits. I was up 4% at one point this year and gave it all back… then up 6% and gave THAT all back. These are not the never-ending trending markets we saw in the eighties, so it is important to monitor one's own emotions (along with everyone else's) as your trades evolve.

As far as the things lining up to make me nervous… chief among them is the Bill Gross reversal. The Bond King has been getting whipsawed by this market and I'm going to stay with that as long as it holds. Hey… it happens to EVERYBODY from time to time. In two months he's gone from "I think bonds are in a bull market", to more recently; "I think Treasuries are the most overvalued asset in the world, bar none." Thanks for that Bill. I also think our Wall Street dealer friends are playing games in and around these Treasury auctions… setting up for them such that they (and their customers) will have room to buy when they are finally auctioned… making underlying demand appear strong as ever. Hey… you've got to keep up appearances when you're still basically beholden to the powers at Treasury and the Fed. I would not be surprised to see decent foreign participation too. That's a similar game but with a different motivation. All of it works to help create the illusion of good underlying demand when in fact I believe net demand for Treasuries is down. My point is simply to acknowledge the observation that under current market conditions, and unlike so many other bond bear markets, supply in this one will be tend to be bullish. The contrarian case is far easier to make in currencies. Is anyone going to tell me the fundamentals for the Euro are that much better than for the Dollar? C'mon. Oh that's right… it's an issue of international diversification and loss of reserve currency status. Please… those are HUGE macro issues and will take years to resolve. The point is simply to be cautious when the crowd has swayed back toward thinking too much of the Dollar and conversely, when they have become too enamored of the Euro. And… with some of our established correlations having broken down recently, the playing field is even MORE wide open to swings in opinion.

And now to really get my long-term Dollar bear readers REALLY ticked off at me… I'll admit that I put on a long S&P trade on Friday. I did it for exactly the same reason that I took off Dollar and Treasury exposure. The arguments against stocks have taken front stage again yet price action has grown increasingly sticky to the downside in the face of that. I have said many times over the past year… these markets (or, I should say the net of participants as reflected in the views of the financial press) continue to wear their emotions on their collective sleeves. On top of that… it was a pretty good risk reward skew. We traded back down to that 875-877 level in the June futures and held. That has been a short-term trading range bottom. So my stop was below there, and as long as the market held, I figured I would see if it was ready to go. For yesterday anyway… it was. It would be the purest of luck from here if we were to get a swing back toward the positive in terms of equity market sentiment. I'd still take it. Better to be lucky than good any day.

6:00AM New York time. So after finding my little contrary FX indicator site on Tuesday… and playing against it… I revisited my sample analyst group Thursday morning, after Wednesday's big dollar move. What do you think was there? How about a fresh batch of trade recommendations! There was no mention of getting stopped out of what turned out to be a DISASTEROUS short Euro trade, there was no discussion about what went wrong or how to fix it, or what the results might be an indication of, or… has anything changed in the big picture in regard to the dollar… NOTHING… just business as usual. Un-fuc%ing believable!! "You lost money?" "Too bad." "On something I said?" "Refresh my memory… what did I say anyway?"

This is the problem with a great many analysts. They shoot they're mouth off with no consequence. They leave you hanging. They recommend a trade, get it wrong, and then, with no apology or even explanation, move on to the next, as if nothing happened. How much did it cost? Did you have a stop? What should I do now? It is the harsh reality of P&L that provides the discipline that keeps us on track… that keeps us from flitting from one idea to the next like some drunken butterfly with a make-believe currency trading account. It's not about what trades to put on specifically… its about helping people… your accounts for God's sake… deal with moves like this. This is why I tell you guys, again and again, you must constantly work to develop YOUR OWN trading methodology. And it must be in harmony with your own personal risk/reward tolerances. Gee… you mean one of the guys you regularly read had a dentist appointment, but needed to throw something up on the screen, so he recommended a trade that you put on and lost money? BIG EFFING SURPRISE!

Now I want to talk about bonds for a few minutes. I actually wrote this section on Thursday morning… so now it's more of a recap than view on what's going to happen today, though some of it is still clearly in force.

So lets see… the Fed performed one of it's long anticipated purchases of notes on Wednesday… QA in practice. What did prices do? Then they announced through the Fed statement later that day, that they could do more down the road. Yields did fall 5 basis points on that one. Anyone see where they are now? They are back above 3.20. I tell you this; when the authorities intervene in the markets in an attempt in influence them one way or the other… and there is no meaningful effect… you had better watch out.

The above observation is basically the crux of what I focus on. This is MY methodology, and it has been a VERY effective tool in getting me in on the right trades. Everything that happened in the bond market this week, up until Thursday midday, should have been bullish Treasuries. The Fed purchases, the Fed statement, the weak stock market, weaker unemployment claims. What happened… nothing… no upside at all. Then you get a couple of pieces of bad news… the S&P statement on the UK… new Treasury supply… and the market falls apart. This type of behavior is an apex example of a vulnerable market… unable to rally on good news… poor performance on bad, still a good percentage of participants talking bullish… and the authorities trying to "intervene" to hold back the storm. I tell you now… these are the types of market behaviors that I (and maybe you too) need to recognize and go after. Oh… and by the way. What happened to the correlation with stocks? That's what I mean by correlations working until they don't. The best trades sometimes are the ones where they DO break away from "established" correlations. That's because people (and lets use bonds as an example), either buy the market, because of course… stocks are down, or… simply don't sell, well… because once again, stocks are down.

Anyway… back to the critical importance of recognizing weakness in markets… there are times to be cautious, which is most of the time. Then, there are those few choice occasions (like yesterday… and probably still for a bit) when you need to attack and go for the jugular. George used to say, "twist the knife"… when you need to use the power of leverage, take the risk, and go after it. I'm not going to discuss P&L… but having been watching the behavioral build in bonds the past few weeks, suffice it to say, I had on one of my biggest positions, percentage-wise, I have ever had. I am gratified more because FINALLY, I played one of these moves properly. I added at the right time, and I have taken some money off the table already this morning. I do NOT however, think bonds are quite done yet, and I still have a good-sized short on.

As far as strategy from here on out goes… I think it finally dawned on the reluctant half of market participants yesterday… that the bond market is rolling over and may now be in bear phase. That is, however, still a recent development. One of the characteristics of professional market opinion I have noticed lately, is that it is highly polarized. You have people who think inflation will move sharply higher… and others who think the risk is deflation. There are plenty who think stocks go a lot lower, and plenty who say a lot higher. My personal view lies somewhere in the middle. How about inflation being a mixed bag? How about stocks going basically nowhere for the next six months? My point is… this polarization can be the fuel for a big move, as one side starts to realize losses and the other side gains. Bullish participants are now being forced to toss in the towel. Look at Bill Gross. He was a catalyst for me when he came out bullish Treasuries back six weeks ago (early April I think). All of a sudden yesterday he's talking about risks to the US debt rating. Did he NOT know what effect that would have? Talk about full circle! But still… that was only yesterday. I still think the break of the yield highs and the trading range price lows (look at the chart of June 10-year futures) lies ahead. THEN I think we will have turned most of the market. THEN… just as yields exhaust their current run to the upside, we will finally start to hear the bulls capitulate… and tell us how they we're actually bearish all along. "You mean you lost money"? "On something I said?" "What did I say anyway… refresh my memory".

6:00AM New York time. I was in the FXA office yesterday. We're trying to figure out how to re-adapt the firm to survive and even thrive in this environment. One of our ideas is to target a more retail clientele… particularly high net worth individuals and family trusts. The idea being that this group is not only better equipped than ever to trade the capital markets through web based info, but they are also looking outside of the traditional Wall Street bank and investment bank dominated environment for analysis and opinion. So in scouting around for sources that this category of FX investor would gravitate toward, I came across some interesting information for myself. It's one of the larger retail-targeted FX portals. I'm not going to tell you which one. They offer the typical variety of services… free demo accounts, execution services, P&L and account services, along with a battery of fundamental and technical analysis. On one of their technical commentary pages, they offer recommendations from their stable of currency strategists. Now look… despite my years in the business… I'd be the last one to consider myself an "expert". In fact, my view tends to be toward the reality that there "ARE NO EXPERTS". But its almost comical on this site… each strategist has an area of "expertise". Yet there is no link that I have yet found that tells me where these "strategists" have worked prior, or for whom, or what would even lead one to think that they are in fact "experts". "Hey… nice to see you… no… things are great now… I got a job as a currency strategist."

I am always fascinated in dealing with FX Analytics free trailers. They will stumble across the FXA site, ask for a free trial, and then be all in a panic when their free trial takes more than a day or two to process. Which makes me think… what were you looking at before? And will getting access to FXA one day faster make that much of a difference to your trading results? Besides… why would you immediately give credibility to ANYONE providing advise in the markets that you didn't have some experience with over time… or really know very much about?

I think this mindset follows from what is really a bad way to approach the markets. It is an incorrect premise right from the start. Most people simply want to make money. They don't have a first goal of understanding the markets. It is the mistaken premise, that the answer to where the markets are going, or, more importantly, how one interacts with them and makes money by speculating… resides OUTSIDE OF ONESELF. "If only I had a reliable advisory service… I could make some money in this market." NO! NO! NO! That is NOT the answer. OK… maybe it is for some people. Never say never. But I think, in the long run, that answer holds nothing but disappointment for the vast majority. And participants who are searching for the "Holy Grail" of advisors will, like so many searching for other "Holy Grails", eventually wear themselves out looking… and losing money in the process… and will never achieve what should be the true objective… that of evolving one's own personal, flexible, harmonious, consistent methodology that allows one to prosper in the markets over time.

OK… so back to the more nuts and bolts of finding this site, and why I made you read all this crap before getting to the point. They list 8 of these FX Strategists and their current trade recommendations, most of them having a trading time frame of anywhere from a couple of days to a couple of weeks. And while 8 analysts is a very small subset of total net market opinion, as long as those same 8 people are followed regularly, they can provide a moving barometer of success or failure, and of course, those that follow their advise. I am always looking for new sources of statistically valid market opinion… largely because there is always the potential that it will be a microcosm for a larger group of participants. So here's the rub… 7 of 8 of these analysts are advising readers to be short the Euro here! Of those bears, all think 1.37 was/is an intermediate top, and the currency could trade down to anywhere from 1.34 to 1.30. The only analyst not short, was neutral. So not a single one of these "experts" was positive the Euro right here, though I prefer to voice it as them not being negative the Dollar. I am not trying to be a wise guy. I am not saying these people are wrong nor that I am right. But here's what I do know. The job of markets is to inflict as much pain as possible on the greatest number of participants as it can, at any one time. And if one could have a "fantasy" trading tool… mine would be a statement on net participants' positions by time frame including average prices. So here are a bunch of short-term traders, of questionable experience, all with the same trade on, with the market near its highs, looking for a move back to levels that most longer-term participants would view as insignificant. That do anything for you? I added to my Dollar Index short yesterday.

6:00AM New York time. Not much to say this morning. Markets continue to correct counter to what I hope is the "new" primary direction. Daily price action among stocks, bonds, the dollar, oil and gold have been leapfrogging each other and playing a revolving game of catch-up, but the overall correlation does seem to be holding. If it were not for this correlation, I might think that some of these markets… 10-year notes specifically… have corrected far enough. But given my natural weakness to want to get back in too early, perhaps my nervousness over the stock market being done going down is not such a bad thing. For better or worse, stocks remain a big driver of these other price moves. I am really trying to trade these evolving trends well this time around. That means trimming to core position size at the proper time, as well as leveraging up and adding risk at the proper time, giving back a portion of P&L with the idea that a fresh opportunity will come along and allow my results to reach a new plateau. Two steps forward, one step back. I remain with a core Dollar Index short and a core short 10-year position. Trading displays the paradox of life as well as anything. You are rewarded for long periods of time for doing very little. But these times are punctuated by short bursts of intense activity that one needs to take full advantage of, both in timing and position size.

My thinking generally is that 10-year notes might trade back down to 3%… but that we have basically established a new floor to rates. Provided equities and the economy don't fly apart at the seams again… I think we have seen the last two handle on 10-year notes for a very long time. As for the Dollar Index… it would not be a stretch to perhaps trade back up toward 85, and still stay within the confines of a lower trending market. Obviously, the weaker both these markets remain, staying away from these levels, the better will be the underlying indication of bearishness.

We are moving into the latter half of the month, which means fewer economic numbers of import for the next couple of weeks. I find those to be good periods to gauge the natural capital flow propensity among participants. Where are they putting their money when there is no specific stimulus driving it?

I watched an interesting show yesterday on PBS. It was a documentary on the months leading up to the 29 stock market crash. Some of the speculative signposts were eerily similar… speculation on low margin, rapid price moves as investors piled into all things Radio. Even Florida real Estate. I guess the similarity should not be unexpected, after all, while the specifics of a boom might change, the mechanism stays the same. Euphoria and excessive optimism are always going to be present at the tops.

7:00AM New York time. It continues to be a stellar May for me on the angling front. I took the day off from Oyster Land yesterday and traveled north about 45 minutes to a beautiful little spot on the map… a brook that the State DEP says is full of indigenous wild trout. After a couple hours of wading and casting, having handled and released two beautiful little jewels of nature, and getting whacked by numerous more (they're hard to catch when regulations call for a single barbless hook), I decided to explore downstream from my entry point. Only 50 meters down I ran across a section of another, larger river that the State has designated Trophy Trout Water. Instead of a wild population… that means the hatchery guys stock it with lots of big trout. But it was getting late and after checking the place out, I decided to work my way back to the car by way of the feeder brook I had walked in through. But I guess hatchery trout don't always stay where the truck puts them, because there under road bridge, right under where my car was parked was a big group of these trophy trout nosing there way up this feeder creek. There had to be a hundred of them all lined up back to back to back, all the way across this stream that was only about 15 feet across! So… after catching perhaps 20 of these 20-inch rainbow trout on 20 casts, I decided enough was enough, and headed home. If this whole season turns out to be like May has started, it's going to be hard to concentrate on serious matters. Though I'm thrilled that my ju-ju level this year seems to be running high.

And speaking of serious matters… I've been doing a lot of thinking on trading strategy and patience lately. As I said on Monday, I took half my position off after the big moves of last week to 1.37 in the Euro and 3.3% in the 10-year. What I didn't say Wednesday was that I re-established the bond short when it looked like things were just going to have a momentary pause and then resume. I have since stopped myself out of that addition… but not before it cost me half a percent. Still it made me think about the emotional symmetry of markets and giving both sides of my trades time to develop. Life is about symmetry. We all take part in a gigantic, cyclical, reversion to mean system that takes the shape of an oscillating normal curve. And while there is great variation on the micro level in general, the time it takes to push to one end of the curve is roughly balanced with the time it takes to work its way back. So I started asking myself, if it took (lets say) the short dollar trade a month to evolve, from mid-April when we touched 87 in the Dollar Index, to the recent lows at 82, when the popular financial press was once again focusing on people whose views were negative the fiat dollar and pro-commodity, then why would such a temporary excess get worked off and the directional trade refreshed in just a couple of days?

The answer is… it doesn't. So in the same way as having to wait and be patient for my generally (shorter-term) contrarian views to get realized, so too, when the corrective phase to that desired move starts, I once again have to be patient and let that side of the trade develop as well. As long as I still have exposure to the trade, I needn't worry about MISSING it. That decision is the paradox all traders wrestle with. Am I missing something… or is it still too early? It took 10-year notes about 8 weeks to move from the recent low yields of 2.5% on the March Fed Statement to 3.3% on a diet of "green shoots". Why would I think that a correction would be complete and resumption imminent in just 1 week? Balance and symmetry. High tide… low tide. Summer and winter.

I am sitting patiently and watching. Sure enough… there is fresh negative view creeping back this week as the stock market gives back recent gains, aided by weaker than expected Retail Sales… and certain finance ministers who mock recent US bank stress tests. Its all part of the natural cycle of what we pay attention to and when. When the capital currently at work has already fully sloshed to one side of the boat, there is simply no way to get further roll without more capital. Instead, the existing capital retreats and starts sloshing back. The roll loses momentum and the boat starts to come back to even keel. We will see how far back the roll takes us. In that time I will try and enjoy the reduced risk of smaller positions, but all the while knowing and keeping senses tuned to the eventual fade that way, when the time will be right to go after the larger direction again.

6:00AM New York time. It's an hour earlier than normal this morning. I wrote most of this piece Tuesday evening, after a day of oystering and the market close. We're getting to that time of year when fish start to move in, and this column competes for the few hours of first light when fish bite best. So… more than once, with this being the first of the season, I'll be flying out the door within moments of posting. For the record… I put a 36 inch stripped bass in the boat on Monday.

A reader asked me the other day, how could I be both bearish equities (as I was about three weeks ago), AND bearish bonds and the dollar at the same time. He correctly pointed out that all three markets bottomed on the same day in March, and have traded in lock step (open for debate) since then. My answer to him was that indeed, and in hindsight, it was a bad idea trying to short the stock market, but… my fear was NOT the high correlation. It has long been my view that correlations work until they don't. That sounds pretty obvious, but I can't even guess how many man-hours I spent at Moore Capital looking for the holy grail of correlations, those that hold up over time and through a variety of conditions, those that you can actually use to model, and trade on. The conclusion I came away with after over a year of day-in and day-out trying, and that I have since come to understand, it that the perfect model… the perfect correlation, doesn't exist. There ain't no secret ingredient! And… what I have since come to understand and believe, is that, just like Heisenberg's uncertainty principle, the activities of participants in the market create a dynamic interaction that is constantly changing the conditions of the experiment. Not only isn't there a holy grail, but there will never be a holy grail. It is physically impossible.

Lets back up a moment. There is no doubt that correlations pop up regularly and frequently. But it is their longevity and resilience that I find too unpredictable to rely on. Am I glad when they are on my right side in a trading situation, and I will enjoy their benefits as long as I can… sure. But I also understand the downside. And I am constantly on the lookout for their breakdown. And I would never simply rely on their continuation to stay in a trade. Taking that to the real-time trading level, while I am not long stocks, I AM long it's close surrogates, short bonds and the dollar. And while I am not calling anything like a top in the stock market, I am watching very closely for both the Dollar and the long end of the Treasury curve to start taking on a directional life of their own. Look at the last three days action in all three markets. We had weakness in stocks on Monday and the other two followed. But Tuesday morning the Euro was back up despite a weaker opening call in equities. Bond yields, in contrast, continued to fall. Then yesterday, while it was far from clear if equities were going to recover, they were already fading from an up opening, the Euro traded up to 1.27. Bond yields had stabilized. If stocks go down 2 but the Dollar only goes up 1, that's great, and its even better if going the other way, stocks go up 2 and the Dollar goes down 2+. Yes… there's correlation… but the correlation is stretching and changing in a favorable direction.

My point in all this is to not pick nits, but to point out that one should pick trades on the merits of THAT trade itself, not because of some momentary correlation with another market. And also, one should constantly be aware of how that correlation is holding up… or breaking down. Some of the best trades I've had are those that were sharply correlated to another market but then struck out on their own. They are yet another example of market moves that take participants by surprise. In case you haven't noticed… markets that take the majority of participants by surprise are ALWAYS the best ones. If stocks go higher today and help take the dollar down and bond yields up, that will be wonderful. But I am even more watchful for those days when equities get whacked, but it fails to bring yields down or rescue the Dollar.

7:00 New York time. Friday's price action was certainly interesting. The monthly Non-Farm Payroll report was slightly better than expected. Equities took the ball and ran with it. There wasn't any hint of blow-off or impending reversal in evidence. The dollar accelerated to the downside. The only market to buck the trend was the bond market, which generally rose in price. As I mentioned in this piece Friday morning, I took a third of my position off in front of the release. That was a good thing in the 10-year and a less good thing in the Dollar Index. I will probably take a little more off this morning. I am thinking it makes sense to cut my positions in half. I have had a decent run lately, so the move to take profits is as much trading my own P&L… and propensity this year to give back gains… as it is trading the actual markets. If these markets correct, I will be there to get back in. If these markets continue to run, I will still be involved. Equities continue to be THE major driving force in both these trades, with the perception of returning risk appetite fueling capital movement both out of safe-have Treasuries and the dollar. Stocks for their part are staying with the pattern this morning, which is a modestly lower opening. The wall of worry goes up brick by brick. Of all the things out there to watch, it is equity price action that is the most critical. I have no idea how long this current rally is going to last. I DO know that it would indeed be unusual for the market to NOT retest/correct at some point. The problem is… history tells us we could get upwards of a 60% rally off the bottom over almost a year's time before that retest comes. It could also start tomorrow.

I think the best course of action in trying to time equities is to follow a basic rule of physics. "Objects in motion tend to stay in motion unless acted upon by an unbalanced force". Professionals have grown increasingly skeptical of this rally while passive money, "forced" participation has broadened. That pool of global passive capital is so broad and deep, it is very dangerous to try and forecast how long the spigot will stay open. The NY Times did a story this morning on the return of risk appetite and the recovery in emerging markets. Perhaps, such stories in the popular press are an indication that we are finally getting closer to exhaustion… perhaps not. It IS yet another great real-time test for me to work on my patience. And not having a position directly in the target market helps. There is that little buffer of muted reaction and magnitude by being one step removed that makes the whole thing easier to sit through. Here's the bottom line; the major indices continue to act well on good news, and either do the same or simply shrug off bad news. The first thing then, will be simply recognizing that they are no longer behaving that way. It sounds simple, and it is. There may also be a catalytic event or piece of news that stocks are unable to shrug off. That would be the same thing. In the meanwhile… my advice is just to sit tight and assume nothing has changed. I'm going to try to ride this thing for as long as I can but keep in the back of my mind that the farther all this goes, the larger will be the contrary opportunity when things finally turn back.

7:00 New York time. Today is another Payroll Friday. Seems like we had one of these just a month ago. The Payroll report is a double-edged sword. As an economic indicator, it is the tail of the dog. If we want final confirmation of an economic contraction… or recovery, we should look to Payrolls. It will be the last indicator to show decline… or improvement. The paradox of that characteristic is that Payrolls are also, frequently, a "sell the news" event. Stocks put in their bottom on March 9th after the abysmal February Payroll report. While I have no data to prove it… anecdotally, the number of market reversals that have occurred on the heels of Non-Farm Payrolls is not insignificant. So every time they come around, they give me pause to think about my positions and my strategy. And obviously, it makes a big difference depending on whether one is looking to enter a trade, or already has one on.

I have been at this same point two previous times already this year. I have built up a decent sized short position in both the US 10-year and the Dollar Index. Both trades are comfortably in the black. I have clawed back a 3% gain in just the past month on these trades. But in my two previous episodes of P&L success, this is about the time I started to give it all back. At one point in late February, having been long a decent-sized gold position, I was up 6%! Before that disaster was over, I was back to scratch. Being there before two times before, I have no interest in seeing my gains evaporate for a third time.

I will always caution fellow traders; keep your finger closely on the pulse of your own emotion. Try to recognize when your own feelings of invulnerability with a trade reach a danger point. When all seems to be going well and it seems nothing can keep your positions from building further profits… that's when you are vulnerable. "Cause when life looks like easy street, there is danger at your door". This does NOT mean one should run right out and liquidate profitable positions simply because they are so. But there is a prudent middle ground that one can retreat to when it seems a little excess might be building in the very trades we are participating in.

Lets examine bonds for a second. As the stock market has rallied and participants have tentatively gone back to taking on risk, yields have risen from a low of 2.50 (on the Fed announcement of long Treasury purchases) to 3.35 as of this morning. That's a big move. And yet, as I examine my own feelings on the trade, I think I am more bearish now than I was at 2.50. And yet… it was at 2.50… that bonds were a far better risk/reward opportunity than they are currently. Ask yourself if you would feel comfortable initiating a new short at 3.35? Granted… all of what I look at continues to tell me to stay bearish. Long rates are reacting as they should given better than expected economic stats and a rising equity market. New supply, despite recent decently received auctions (the 10-year anyway) are being treated bearishly. And still there is very little bearish commentary from the financial press. The risk of Fed intervention still seems to be viewed as an underlying bullish factor and ongoing risk to being short. All those are good things. I am in no way changing my long-term bearish stance. The multi-decade bull market in interest rates is coming to a close. The era of cheap money is over. And yet, nothing moves in a straight line, and there will be counter-trend trades and corrections that are both painful to trend-followers and tradable for short-term opportunists.

So as I take this around to today's Payroll report, I think there are two possibilities, and both revolve around reversals. If we get a bigger than expected decline, I think we get an initial down move in stocks but that will meet with buying and the market recovers. The effect for Treasuries would be the inverse. They would initially rally but that rally would get sold into. The other option, and one that I am both more worried about… and think more likely from a sentiment standpoint, would be to get a better than expected number, which would push up stocks initially, but would then risk a reversal to the downside. Again… the inverse action would be seen in bonds (and the dollar and gold and oil).

All that said, what do I want to do… or think I NEED to do in the interest of prudence, is to lighten the load just a bit in front of the number. Give myself a little room to take advantage of the POSSIBILITY of such a reversal event. If it is in the direction I am already set up, then I do nothing. But if it is in the upside direction, then I am in a position to put the original size back on… and perhaps even a little more. The idea is to keep myself both in a conservative position regarding gains, while at the same time, having some powder dry in the event that this morning's report does in fact prove to be a short-term pivot point in price action.

7:00 New York time. It's one of those mornings that have come around all too infrequently lately. The kind of day where there is little to say because everything is working. Perhaps saying that will be the kiss of death but I'm willing to risk it. If things are that fragile then I should know anyway and face the music. Part of the reason this has been able to happen is that I have stopped trying to trade the S&Ps. Good riddance. Despite talking about how well stocks behave, no doubt, I still would have been trying to short them. Instead, over the last two weeks I have continued to add dribs and drabs to my short 10-year and short Dollar Index positions. I have… finally… a couple of decent size positions on. The average prices are in the black… and I believe both continue to defy conventional wisdom and thinking, and thus have more than their share of participants trapped the wrong way. Those are "early stage" signs and there is no better place to be than the right way as things start to turn.

About three weeks ago, I heard Bill Gross on Bloomberg Radio say he was bullish Treasuries. A couple days ago, an increasingly squirmy Gross said, "We don't own Treasuries, but we're long mortgages". And yesterday Gilmore pointed me to Gross' May Investment Outlook where he voiced his disappointment with recent anti-market moves by an increasingly populist Obama administration. If I didn't know better, it would appear that Mr. Gross is not getting his way… and would perhaps like to take his ball and go home. Not that his (PIMCO's) trade means anything one way or another by itself. It's just that his thinking represents a majority opinion in the Treasury market. That you have to be long Treasuries so long as the Fed is going to be in buying them. It helped me that the whole idea built up a life of it own to the point where participants were actually expecting the Fed to announce in their latest statement, that they would actually INCREASE the amount they were planning on buying. The Fed did nothing of the sort and went further, indicating they would NOT increase their planned purchases. Dave Lewis likes to quote my old boss by saying… "Find a premise that is wrong and bet against it."

As for the Dollar, while there is no specific fundamental to bet against, I think that whole argument from the net FX analytical community that the dollar will go down eventually, but will probably rise near term, is a major position related factor to its current weakness. The majority of participants are in fact, still long dollars. And just as the stock market strength and resilience has taken many participants by surprise, so too is Dollar weakness among professional participants who trade FX.

Today we get the results of the banks stress tests. I am already surprised that the results have not been gussied up more. CNBC is saying this morning that Bank of America needs to raise an additional 35 billion dollars. We will see what the reaction is from markets from the announcement later today. We have been seeing some economic numbers saying things are "less" bad. And we get a fresh Payroll number on Friday. As always… the reaction to each stimulant will be assessed and contemplated. Perhaps a week from now, I will have been stopped out and things will look different. But for now, I am content to enjoy this moment in time of relative calm and satisfaction.

7:00 New York time. Well… it finally happened. We saw the news late last week that the Obama Administration was allowing Chrysler Motors to slip into chapter 11 bankruptcy. The news is interesting on many levels. Is this a way to test the waters of a major auto company bankruptcy without actually doing it to GM? Bankruptcy lite? Or was it a bone thrown by the administration to its countless "free-market" detractors who say we have stripped the capitalist system of its critical "creative destruction role". For myself, the news has deeper meaning. Cerberus Capital buying Chrysler was one of my early warning flags back in the summer of 2007. To me, it was a sign that the ebullience in private equity capital and hedge funds was pushing stock prices to a point of extreme. Here's the original paragraph:

So here we are, almost two years later and at the opposite end of the seesaw. Perhaps… had our markets been as "free market" going down as they were going up, this bankruptcy might have come at a real price bottom in stocks. But since we humans (as a group) don't tend to see the same lesson value in lows as we do highs, I guess it would have been silly to expect both sides of the Chrysler deal to mark so perfectly both ends of the most significant move in the US equity markets in a generation. Still… the value of the news is there if for no other reason than to put on display the paradox of markets under which we function. Under which we play out our emotional responses. And, under which we think we exercise our "control" of the "system".

We recently picked up the movie Kung Fu Panda for our little Sydney. And just like the song says… "once in a while you get shown the light, in the strangest of places if you look at it right"… I have grown to love that movie. It's a kid's movie with some timeless and very adult pearls of wisdom. I like the part where Master Ooguay tells Shifu that he will never fulfill his destiny until he gives up the illusion of control. Shifu needs to open his mind to new possibilities, and see that there is more than one way to train a big, fat panda to be a Kung Fu master. As that translates this morning… regardless of what the market has done so far, or up to this point in terms of a bounce off the lows, we need to observe and take to heart THE SIMPLE OBSERVATION of what has happened to Chrysler. We don't need to pick it apart. There was endless commentary on Friday from dozens of analysts as to how the bankruptcy was all going to work out. That's important if you're an arb trading GM bonds or preferred against the common. But for 99% of us, we don't need to wait to see how it will all work out. It doesn't matter. All we need to know is that the confluence of bullishness that originally put this deal together, and came just months before the actual, all-time high in equity prices, has come apart… full circle. And now… as unemployment reaches toward 9% (or higher), GNP contracts at a staggering 6% per annum, and all manner of economic statistics and anecdotal evidence point to an economy in the direst of straits… what we actually need to do is sit back, close our eyes, and take a deep breath. We need to embrace the paradox that is our existence… we need to learn to see it for what it is. We cannot control it. We need to simply be open to its possibilities. And the possibility I have been entertaining, and continue to entertain, is that just as it was unwise to be overly bullish back in July of 07, so too I think it is unwise to be too bearish at this point in history.

7:00 New York time. I tend to be somewhat unconventional in how I approach markets. My methods are motivated by the core belief that it is the FLOW of capital that drives market prices. And that frequently, it is more important to notice changes in HOW and WHERE capital is moving, rather than what is being implied by news or data. So as we come up on the second anniversary, of the first cracks the mortgage market, when those two Bear Stearns mortgage based hedge funds started to come apart back in the summer of 07, initiating this recent period of financial turmoil, I want to talk for a minute on volatility. Bloomberg is always quoting the VIX on the CBOE. We have recently moved from a high in the VIX of nearly 80 to about 40 currently.

The ability among participants to hold positions is a huge precondition toward the ability of markets to trend. And the ability to hold positions itself goes back to volatility. Volatility in stocks has been so high the past couple of years, that it has driven a large percentage of equity analysts and strategists to publicly question what had been the mantra of the long term investor for the past few decades… that being the "buy and hold" philosophy. Now, more than ever, you hear "experts" expounding on the benefits of being "flexible", and advocating trading around positions and between sectors. While this is primarily a stock market phenomenon… it translates into the more professionally dominated markets such as currencies and bonds. So in the spirit of the markets fuc%$# the most number of people as possible at one time, wouldn't it be ironic if just as so many pundits get around to telling people that these markets are purely trading affairs, that the major markets, stocks, bonds and currencies, actually embark on lower volatility, more directional price action. I don't keep volatility figures on bonds or currencies. But I know their volatilities are down simply from having positions in my account, and seeing that I can get away with carrying more risk, at less and less average daily swing in P&L. I see way less intraday volatility on an anecdotal basis too. Lately… I can be in oyster land, largely out of touch, and yet have very little concern about coming back to huge changes in price.

Likewise, just as 90% of bond participants get acclimated to trading a range of 2.50 to 3.0 percent in 10-year yields, betting that the Fed will buy as many securities as needed to keep rates in that range, go figure what happens? Bonds trade up through 3%. My point is… just as stocks have snuck up on people to the upside, leaving behind those that were too nervous over the prospects for the economy, earnings and bank balance sheets, to hold on to their long "trading" positions, why can't bond yields continue to grind higher, leaving behind those that remain too nervous over the economy and prospects for Fed intervention to jump in and get short? Aren't those in fact the best conditions to build a trend on? Disbelief? Doubt? Skepticism? In my book… that's the best scenario a bond bear (or a dollar bear) can have. A majority of fixed income strategists will tell you that eventually, bond yields have to rise, as the economy recovers and the Fed is forced to remove accommodation, and the implications of the massive Federal borrowing are fully realized. Those same analysts will also tell you however… that it is still too early for that rise in yields to occur. Is it? How do they know? Perhaps it's not too early?

Likewise… most currency strategists will tell you that eventually the Dollar has to fall, but near term, conditions are in place, which actually support a stronger dollar. It that so (sarcasm)? Is that what the price action or price level is saying? The Dollar Index is trading just above where it started 2009… and well off its early March highs.

The best trades are the ones that leave participants behind. The best trades are the ones fueled by doubt and uncertainty. The best trades are the ones that "are not supposed to happen yet". Instead of simply listening to what the "experts" say, listen to what the experts say, and then ask yourself if that majority view is being supported by what you yourself see in price action. When those two do not agree, or even better… when they seem to be moving in opposite directions… forget the experts… go with prices. The "experts" will eventually be forced (kicking and screaming) to come around.

7:00 New York time. Watching the bond market the last couple of days I was somewhat surprised at how poorly they have traded. I have been saying since late last week (when I covered half my short position) that I expected Treasuries, especially the long end, to rally into supply this week. While the auction results have been OK, some interesting and better than expected economic numbers have kept the market under selling pressure. The rebound in consumer confidence was the big one. Whether you believe the validity of these numbers and their meaning or not, you can't deny the price action. I actually tend to be more optimistic on the economy than most. Long ago I stopped relaying my stream of anecdotal information but the ongoing more positive tone is still there. Yesterday I heard a disgruntled bond bull saying, if yields move much higher than 3%, the Fed will announce an even bigger re-purchase plan. I would counter by saying, if the numbers justify yields north of 3%; perhaps we have less of a NEED for a Fed repurchase plan!

Today we have the 7-year note auction. We also get the Fed's latest rate announcement along with their policy statement. I'm debating letting these two events pass before diving back into the short side of bonds (or maybe not). The problem is, if the Fed statement ends up being more optimistic than expected… green shoots and all… we could make a nice move above 3% before I have a chance to get back involved. I REALLY don't want to miss the short bond trade. I've been talking about it all year. It would be painfully ironic if I were to trade myself out of it before the real action sets in. In the final analysis, bonds are for sale either way… it's just a question of price and timing. Perhaps the way to handle this is to sell some here, but keep some powder dry for later today as well. I was pretty excited the other day and I may have crossed the line a bit toward the conspiracy theory side and I may be giving the authorities too much credit to manipulate the flow of information and their ability to manage interest rate market levels. For the record, I was surprised also to see as much negative news about Citi and BOA come out regarding the stress test. I expected news to get skewed to the rosy side. For its part, the stock market continues to be amazingly resilient in the face of all that.

All this stuff… the rise in yields… the stability in stocks… I think are all starting to encourage a bit more movement out of the dollar. The recent sharp rally in the Dollar Index had no legs at all. The only thing that bothers me is how many strategists have a lower dollar in their longer-term forecasts. Oh well… sometimes you have to go with the "popular" trades anyway. And once in a while the guys who get paid for their opinion actually get it right. It may also end up being the case in the dollar… just like stocks… where the move starts before people actually think it should, and it ends up creating a whole pool of doubters who normally might be on board. Who knows… it's a complicated world when you try to figure out the net of what a whole bunch of people you don't know are doing.

April 27, 2009 And I Was Wondering What I Was Going To Talk About This Morning!

7:00 New York time. As of early this morning… making coffee… I was wondering what I was going to talk about today. And then, bingo… I turn on the news and find that markets (and everybody else) it seems, are worried about a new potential pandemic in the swine flu AH1N1 virus. The World Health Organization has said the current situation constitutes a public health emergency of international concern. And there's nothing like pictures of people walking around cities and through airports in surgical masks to get things bubbling. I'll tell ya… markets certainly do find ways to go the directions they want/need to go. Bonds are up half a point. Stocks are lower. My suspicion is, we will have just enough worry over swine flu over the next week or so to allow the Treasury auctions to go well this week, and (perhaps) allow (finally) some sort of correction in stocks. The Dollar can bounce from recent losses. Gold corrects.

Lets talk about swine flu for a minute. I remember SARS. I remember bird flu. There have been many such outbreaks prior to these, before my time, of potentially devastating influenzas within the last 50 years. Of the more recent cases that I've watched develop, in each, the global press coverage created mini short-term panics that caused people and policy to radically change behavior over the short term. I remember SARS when FXA clients in Toronto were on shifts every other day to keep contact among people down. Illness outbreaks are an even greater example of how a fundamental factor, in conjunction with media coverage, can affect crowd psychology to a far greater degree than the actual causal factor that started to whole thing in the first place.

3000 people A MONTH die in the United States in automobile accidents. Many times that number are injured. That's 100 per DAY! And that's down from 135 a day 10 years ago! Swine flu has killed 100 people so far since April 13th. Yes… yes… yes… I know… many more people than that were actually affected. I guess 2000 people are suspected so far of being sickened by the disease. My point is simply that there are people all across this country, now walking around wearing surgical masks, washing their hands 14 times a day, and trying like the dickens to avoid contact with anyone who looks even remotely ill. Governments are stockpiling Tamiflu vaccine. Yet all these people think nothing of getting in their cars (or someone else's car) every day to head off to work, school, and errands. IT'S ALL A MATTER OF PERCEPTION!!! Public health officials HAVE to make a big deal about this stuff. It's their job. Look at how much trouble they'd get in if they said nothing and a major outbreak DID occur! And besides, it's so RARE that their mundane jobs become a big deal, they really take it seriously the few times in their careers when it actually happens. That's a natural human reaction. It's like volunteer EMS people who get to turn on their blue lights and possibly help someone, or weather channel anchor-people who bathe in the excitement surrounding an approaching big storm. Its who we are.

I find the irony in the whole thing incredibly irresistible. A whole population of statistically sedentary, out of shape, overweight people, with a whole list of health related issues, panicking over a potential global pandemic, that has actually affected a statistically insignificant number of people. I'm not saying we shouldn't be concerned. I'm saying we should keep things in perspective… ESPECIALLY in how we deal with the situation as it affects markets. We want to stay rational… but we stray SO EASILY to the irrational.

I am going to use the current flight to safety and new supply in Treasuries… which will be bullish… now for sure… to reposition in short bonds and short the dollar. With my recent track record, I plan to do nothing in stocks. Stay well… but just to be safe… don't go outside.

7:00 New York time. I'm going to try and work from a different approach to the markets. The latest information out of Andrew Cuomo's office in NY State is to say the lease… concerning. And while that was technically, along with Bernanke… the prior administration… it is hard to imagine that Obama's financial transition team, including Gheitner, was not aware of what was happening. Suffice it to say that it is simply another piece of evidence in a growing list of bits and pieces. When Barak Obama was first elected I reassured my market-friends that his intrusion on the "free" capital markets would be minimal. But lately, I've been detecting vibes on a number of fronts that say otherwise, the news revelation form the NYAG's office is just the latest. The other day I was talking to my broker, and he was of the view that the bank stress tests would go fine… as there was no way Geithner was going to bring out anything that the market could construe as negative. The quintessential pot-stirrer, CNBC's Charlie Gasparino has been nowhere to be found in all this.

I am not a big conspiracy theorist. And as someone who has sat in the chair of a sinking ship (or at times been sinking myself) I understand the risk of making split second decisions. You will always leave yourself open to the second-guess crowd. Lets get this right out front, I do not think anything was done or is being done with any intent to harm one party or another. Tough choices were made to try and rescue the "system". Even now, actions are being taken with the best of intent.

The problem is essentially my own. I have been denying the evidence and the reality of the situation. I have been approaching the markets as if they were truly two-sided affairs. That is/was MY mistake. I did not pay enough respect to the reality that the political structure, including the new administration, has a huge vested interest in the recovery of the capital markets. If stocks do better and long-term rates stay down, the prospects for economic recovery go up. And while I am not saying the government is DIRECTLY intervening in the stock market, they are looking at policy changes that essentially make it easier to be long, whether its easing mark to market accounting rules or increasing restrictions on short selling. And lets face it… they ARE intervening directly in the Treasury market!

On that note… we have some big Treasury note auctions coming next week. Should I have any doubt that these auctions will go well? In prior bull markets in bonds I have been involved with, new Treasury supply is typically bullish, often igniting a new leg higher. In bear markets supply is typically bearish. Since the price top in Treasuries back in December, and the projected massive swelling of US deficits, the long Treasury market has been able to rally into supply, but then fades once the auctions are over. I'm not saying we are now experiencing the effects of intervention by the authorities. And I'm not saying that the primary dealers now have an unspoken mandate to make sure the auctions go well. All I know is, I see behavior that is outside the historical norm… neither bullish nor bearish… simply different… a hybrid. Acknowledging this, what is my strategy? Well… I covered some of my bond short yesterday. We made a minor new low through the early April lows and rallied back. That by itself does not mean anything. It was simply a point the market seemed able to bounce off of that was close enough to the recent range highs to make it work for me. It is my view that 10-year notes will trade up into and through next weeks Treasury auctions, but once that is completed, I will reinitiate my position and then some.

How about the Dollar? Certainly, yesterday's revelation whacked the Dollar, helping gold in the process. Truthfully, I don't think the US authorities would mind a lower Dollar, so long as it did not get out of hand. So basically, the dollar is a non-event for them… a side show. That means I can trade it based more on straight price action and news rather than having to factor in the "official desired outcome". Perhaps this WILL eventually become one of those intervention markets, where participants will just have to stay out of the governments way when they are performing "operations", but will be able to go right back after these trades once they are done. Who knows? What I do know is that I've been fighting these markets (especially stocks) for some time now. Perhaps that's because I've been taking the wrong approach all along. That's my advise to myself. As for my advise to the authorities… if you think you can manipulate the markets in a long-term, sustained way, think again. If anything, such actions will only light the fires of speculative fervor and ultimately bring on your worst nightmare.

7:00 New York time. Sorry about the late post on Monday/Tuesday. I wrote the piece and then forgot to FTP it. I'm not sure it matters. I heard somebody else on the radio yesterday refer to the markets as bi-polar. Here here! One day the banks are doing swell… paying back TARP and beating earnings expectations. The next day there are fresh concerns over capital levels and loan losses. It wouldn't be so bad except participants are trading on these swings. I guess that's how we can maintain a 40% volatility level. And that doesn't even take it intraday volatility. I heard that the Dow crossed the flat line 32 times yesterday.

There are only two choices in these conditions; adapt oneself to the reality or sit the markets out altogether. I have been trying the former. That has meant trading smaller and giving myself a little more room with stops. Even those strategies have had little success. I am up on the year by a thread as of this morning. It has been a slow bleed for the past couple of weeks. I was up as much as 6% twice this year and down 4% once. I guess that says it all doesn't it… the harsh reality of ones P&L swing.

I have been trying to maintain a view and positions in three markets; 10-year notes, the S&P 500, and the Dollar Index. The 10-year position has managed to hang in the best but has not really given me much on a realized basis. Unless I trade around the position, which means getting bigger than might be prudent at the lower yield levels and then trading out of them in the 2.90s. Without taking that strategy, the position simply gives money one week and then takes it back the next. The Dollar… well… I'm down a bit on the trade, but I still think from looking at the charts that I'm supposed to get short at current levels. Fundamentally, there IS a good case for a weaker dollar even if the market chooses not to focus on it right now. Participants can continue to ignore bearish arguments indefinitely… or they can switch focus starting later today. It is a contrarian trade that simply has the technical potential, but has not made the leap to the next… and most critical stage yet.

Lastly… there's that pesky stock market. Of my three markets, stocks are giving me the hardest time. I'm sure I'm not alone. But again… because of their impact on other markets, I think you ignore equities at your peril. Lets take a fresh look at factors affecting equities right now. Six weeks ago in early March, when all was bleak and black and we had just had reported a 600k plus Non-Farm Payroll loss, the market put in a bottom. I tried and ultimately failed to buy that bottom. But I think THAT bottom was a good contrarian play. Here we are, 6 weeks later. The S&Ps have rallied almost 30% from that low. That contrarian play has morphed into a bullish argument supported by "green shoots" in the economy, a slowing in the decline of housing, and perceptions of improved balance sheets for financial institutions. So right off the bat, the position skew among participants from where they were 6 weeks ago has radically shifted. By friend Jim's non-price position oscillator has the S&P above its upper boundary… in sell territory. And while the fundamentals may have slowed their decent, have they started to turn up yet? I am the first one to say that capital markets LEAD future economic activity and turns in consumer behavior… but now we have already had a big move which… as yet… has had no fundamental validation… unless of course you consider recent bank earnings as such. So the question this leaves me with is; can the market continue to move higher without fresh signs of validation?

This is where the contrarian in me would say no (or at best… who cares), and start to look to fade the recent move. But as I have warned countless times. This is the stock market. It can go farther and for longer than many of us give it credit for. So that drops everything back into the arena of timing, price action and technicals. In a directional sense, stocks have clearly slowed to the upside. But it that a running sideways correction or topping action? No one can know. But such spots at least offer the opportunity to position and at least have a chance to place stops at important price points without getting taken out later that day. So all of this leads me back to selling the market and putting a stop at the recent highs and telling the market to… go ahead… take me out. I must take the leap of faith that stimulus will either prove disappointing or will in fact catalyze those newly bullish participants to rethink their strategy, while revitalizing the bears. Ahhhhh…. here we go again.

6:30 New York time. It's a new day and a new week. Another chance to get on track and renew my trading vows and promises. With my recent S&P experiences, I'm about ready to be one of those guys who tapes trading rules to the screen to make sure that each is acknowledged before initiating ANYTHING. We have yet another down opening in stocks this morning. We have Bank of America earnings today. Does anybody doubt BA is going to report anything different from any of the other banks? I don't. And what has been the pattern on recent better-than-expected bank earnings? We get a down opening with a tentative start, followed by a resurgence in buying interest as the day wears on, with a bullish close. Before any contemplation of fading or selling this market enters the realm of possibility, I need to see a break in that pattern. And I won't know any of that until the end of the day. Throw in the caveat that… at any point, given the strength we've seen so far, it would be OK for this market to have a down day any time it wants, makes any single-day call risky to say the least. So a failure on say… the BA earnings report, might… or might NOT be significant. It's a leap of faith. Either way, you make your bet, you place your stops, and you let history take its course. The path we've been on has been bullish. To call an end to this pattern is of course nothing short of calling a top. If earnings are coming out bullish, then perhaps wanna-bears want to wait until the bulk of earnings are done… which is the end of this week… before entertaining a fade. There is an increasing tone in all manner of commentary that things in the economy are not as bad as we had thought. The news is now coming around to the justification of price action. When the bottom in stocks was put in about a month and a half ago, it was put in on a terrible fundamental statistic, and there was not a glimmer of hope in the economy. Now that we are 230 S&P points higher, we are discovering that the fundamental backdrop is less bad. Funny how that happens.

Again… why do I care? If I'm not trading S&Ps well, then I should just trade others markets that I feel more confident with. Except… and again… the problem rises to the top that ultimately, the direction of the stock market is largely determining where bonds are, and the Dollar, and oil and gold. Do you think 10-year yields would be pushing 3% if the S&P were trading down around 600? So in everything you do in the capital markets, you need to know where stocks are, what they're doing, and you should probably have a view on where you think they're headed.

I can do a couple things with that reality. The easiest thing I could do with it is deny that it exists. Or… I can use that information and analysis as opportunity to position the way I want in other markets. This is the path I am trying to follow. I believe that bonds and the Dollar are in the process of topping. In the case of bonds… obviously I'm talking about a top in price. The reason for my long-term bearish view on bonds is obvious. And the only credible threat to that trade, deflation, is not a camp I find myself in. I do the grocery shopping and I can tell you… I don't experience deflation there. The Dollar is a slightly less obvious macro. And it is not so much bearishness I have directly on the dollar, as it is a view that capital will ultimately look for better opportunities that the Dollar can provide. And the flight to safety trade, which has been in force now for two years, will ultimately reverse. I don't think savers and investors of the world WANT their money in Dollars… I think they feel presently that they have no better/safer choice. But the savers (and future savers) of the world ARE looking for an alternative. Eventually… they will find it.

How do I play all this? Well… I'm keeping a very sharp eye on stocks for that turn in sentiment. I'm keeping my eyes peeled for those early hints that better that expected news is losing its positive impact. Price not validating news is the first evidence that a market is running out of buying/selling power. Meanwhile, I am still keeping my eyes open for stock driven opportunity in other markets. Right now it appears that bullish stocks are also bullish for the Dollar. So recent action is pushing the Dollar Index up to that 87 area I've been watching for weeks. If the Dollar is in a big topping process, then anywhere in that neighborhood should be an area that provides solid resistance to further upside. 87.25 is a 60% retracement off the bottom. As for bonds; 3% has and remains a very tough area to get above, so long as the Fed is holding the threat of intervention above the markets. So I think one can, for now, cover shorts around that level and look to reposition on rallies in price. If the stock market does correct in any meaningful way once this Q1 earnings season passes, we could be back to 2.50 in 10-year yields fairly quickly. Ultimately though, we will not skate through this period of unprecedented monetary and fiscal accommodation without cost to long-term yields.

6:30 New York time. The baseball season in the US has just gotten underway. And like baseball, I have some rules of the game that go along with my trading. One is the three-strike rule. I'm allowed three separate trading attempts (complete with associated stop-outs) to get on the right side of a market. Well… I took my third and final swing at trying to short the stock market yesterday. I, like many others have been skeptical of the recent rally… more so the farther it has gone. I have essentially disregarded my own news/price-action methodology to do so. My friend Jim has some proprietary tools that are getting very toppish too. It only generates a couple of signals a year so you pay attention when it does. Anyway… I've obviously been trying to play the short side and it has NOT been productive.

The harsh reality for doom and gloomers on the economy and stocks is that the rate of decline in negativity of news has undeniably slowed. Even the Fed's recent beige book acknowledges that. And the beige book is somewhat dated… far from real time. The worst hit sector, the catalyst of the decline, the banks… are beating expectations with earnings. More importantly… equities are confirming the improvement with price action. When markets go up on bullish news, it means they still have plenty of buying power. Even now, CNBC is hosting two guests who think that the equity averages have outrun the fundamentals. Who said it… John Templeton? Bull markets thrive on skepticism. As long as this dynamic persists… equities have some upside. The necessity of keeping up with one's performance benchmarks outweighs the necessity of listening to "experts". Equities continue to demonstrate classic bullish price action with lower openings and higher closes. The action is just the opposite of what we saw during the worst days of the swoon. Instead of melting into the close… these days the market rallies. Gilmore… who remains bearish… told me the other day that back in 1930's, the stock market corrected 60% to the upside from the lows before rolling back over and retesting. I checked… it's true. The market made a low the week of July 11, 1932 at 45.29 then rallied to 75.61 by August 22. It then rolled over to make a higher low the week of Feb 14, 1933 at 56.04. Given the scale of the numbers these days… I think a rally of 60% is impossible. But we have already done 20%… so why not 30%. Interestingly, the big rally back then lasted 1 month and 1 week. That's right about where we are in time, given that the low was made the end of the first week in March.

Oh well. I guess all that's what happens when you don't practice what you preach. What about other markets? Bonds. Now there you go. Once again, the short bond trade manage to earn its keep on the portfolio side. I added to my bond position on Wednesday and that turned out to be the right move. And it is only fear of intervention that is keeping 10-year yields below 3%. I will probably trade around the position as it pokes back up toward the 3% level, but my bias is going to stay on the short side.

And the Dollar? Once again… like stocks… few professionals like it… so naturally, it's going higher. A recent Bloomberg analysts survey showed the majority of FX strategists negative on the long-term prospects for the dollar. So as markets are wont to do… never satisfy the majority… the Dollar continues to torture by not going down. The only upside of the short-dollar trade is the net percentage directional movement is relatively small… compared to equities anyway. While all this makes me very nervous… I'm still short and I'm still looking to add on strength when the opportunity arises. I'm actually still up on the trade (at least as of yesterday), and I plan on adding more back up toward that 87 level.

6:00 New York time. The last 3 days I watched gains in my short 10-year position get chopped to nearly breakeven. Unlike my usual episodes of stupidity… such a set of days does not bother me. The Fed has just undertaken one of its pre-announced long-dated Treasury securities buying operations. Throw in some weaker data along with a bad day in the stock market and voila… lower yields. My position is really a toehold position. It is simply the start of what I hope will be a much larger position eventually. So like FX intervention of old (and I'm going back to the 80's)… such a helping hand by the authorities to lower yields is actually a gift for a longer-term bear such as myself. There were times back then when C-banks were trying to "reduce excess FX fluctuations", and speculators (such as those I worked for) would wait for them to finish operations and then lay all over the market. I intend to add to my short position today.

On Monday I was driving to the shop and heard Bloomberg talking about Bill Gross, and how he was becoming more bullish on Treasuries, having increased his allocation from 15% to 20% in Q1. The information came off the PIMCO web site. I love those little tidbits. They're meant to be "newsworthy", but such sound bites create more questions than they answer to my mind. Is Gross truly more bullish… or is he simply less bearish? I went to the PIMCO website and was able to read Gross' 2008 outlook; he was quite bearish the current financial environment as of January, but in it he makes no specific call on where long Treasury rates are going… though he does say the authorities will be stepping in to try and cover the huge coming void in credit… and that does imply much lower short rates. Do equity markets figure into his market call? Even if a giant participant like Gross says he takes a fundamental view of the market… you know he sees all these correlations and even if he doesn't say so… you know they affect his thinking. Or maybe it's more a call on the economy and deflation? The point is that such information, taken out of context, means nothing. In the best case it's confusing and in the worst case it might actually miss the whole point entirely. And you wonder why I use the financial news media as a contrary indicator.

It boils down to this for me. Yes… short term… the Fed buying Treasuries will have a positive impact on prices. But longer term, the question is whether or not 2.80 is a rate that you/I would/should be willing to lend the US government for the next 10 years, given the fiscal and monetary policy steps the authorities have taken. Or rather… I should say… what will the aggregate appraisal be of net participants as reflected in market prices. Because at the end of the day… it really doesn't matter what I think.

By the way… for those readers who think I am nothing but a short-term contrarian… I'll have you know that I have been short 10-year notes ALL YEAR. I originally put the trade on early in Q1 and have traded around that short core position since then. So there!

6:30 New York time. I got stopped out of my short S&P trade on Thursday afternoon. That makes me 0 for 2 in my last two attempts at playing the stock market, short term, from the short side. Stocks have had a very good upside run lately. Yet the news and data remain bad. It is uncertain what losses remain at the banks. GM remains teetering. These are the same arguments that have been thrown around for the past 6-months and were used to justify equity prices going lower. My argument over a month ago in trying to pick a bottom was that all this news was already in price and has been discounted. Now… as I start to lean against the winds of current price movement once again, I am falling back on the same set of arguments to justify my short side forays. It's kind of ironic actually.

I'm wrestling with what I want to say but the bottom line is… your P&L is the ultimate determinant of what trades one should have on. Yes… all this bad news is out there. And yes… many smart people and professional market watchers think this is just a bear market rally, and prices are going to visit the lows once again. But the reality is, prices right now are defying all those predictions… along with the ongoing stream of negative data releases. Bullish news generates far more upside than bearish news does downside.

Capital flow determines the direction of market prices. And the direction of market prices ultimately determines what the news is (or more specifically… what news gains attention). So I would caution bears of all colors… myself included… the train continues to pull away from the station. And it is leaving behind a great many participants who are holding on to many of their doubts and fears, and are reluctant to commit capital to this market in these turbulent times. But I would say to you, just as I berated myself this weekend, the very fact that getting long stocks here is a hard thing to do, is what actually INCREASES the odds that it is the right thing to do. Once again we look to open lower after a long US holiday weekend. Am I going to use the lower opening to cave in and capitulate? Nope, too rich for my blood. But I tell you this. There are a zillion guys out there just like me, thinking along the same lines. And it is because of people like me that the market is going continue to tease and taunt us as it moves higher, IN SPITE of fears that we are NOT out of the woods yet.

Somewhere across the aisle from the stock market is the Dollar. The short Dollar trade is one I still have on, and continue to be involved with. Basically… one nightmare at a time is better for me. More than any other country, the United States has thrown money and policy at the problem. More that any other country, the United States has threatened its capitalist philosophy and intervened massively in the markets. The Fed and Treasury, have pumped a huge amount of money into the system in an effort to hold everything together. We are printing money financed with bonds and then offered to use that money to buy those very bonds back. We deride the ECB for not doing enough and yet they, more than we, are holding to the idea of letting the system fix itself. The ECB continues to be far more hawkish that our own Fed. The great fear among fiscal conservatives is that we are mortgaging our future on a short-term patch. We are increasing the Dollar's fiat currency status and threatening its reserve currency credibility.

Where is the Dollar trading in all this… and where has it been trading for the past 6 months? How about higher. I thought I positioned my first unit of short-dollars pretty well. And yet that position is in the red. I'm not giving up on the trade like I did in stocks. I am going to look for yet the next level that I'm supposed to be selling at. And yet deep down I have a bad feeling about it. The Dollar… specifically LONG Dollars… fits nicely into that category of "hard trades". There are great risks in the long term for the Dollar from the implications of policy we are taking now. And yet… the Dollar remains the currency of choice. It is very hard to get long Dollars here. I won't do it. I want to short it. And yet… I think that is one of the very reasons it continues to do better. The very fact that price action defies a precarious fundamental background keeps participants on the wrong foot… under-invested or worse… like me… the wrong way. Sometimes the best trades are the hardest trades.

6:00 New York time. I took another poke at the short side of equities on Monday afternoon. I know I have said recently that one can start playing stocks from the long side… but that didn't mean exclusively. Lets face it; equities went from total gloom and doom to overly optimistic over the course of 14 trading sessions. We went from banks needing more capital, to banks becoming profitable… and then back again… within one trading month. I'll tell you… if the equity market were person, you'd be pushing him/her toward getting some therapy. It's positively neurotic. I HAVE also said repeatedly that most of these markets (equities in particular) wear their emotions on their collective sleeves, and that opportunity will frequently arise from that volatile emotional skew. The other factors that helped make my mind up were; the failed new high the S&P 500 put in on Monday, having rallied to an intraday high of 850, above the 840 high put in late March but then closing weak on Monday, and the fact that I have sat on my short Dollar and short 10-year positions without doing anything, and that a rally in stocks would probably hurt those positions. So you could say the short stock trade was both hedge and separate trade. All I really want it to do is play for the retracement in the other two so that I can cover my short at about the same time that I put on more short Dollars and short 10-year. I DO think we have seen the low in stocks back in early March.

Beyond all that, I don't really have much to say. For the most part… I don't trust the stock market… either way. Unless one finds an entry point that provides clearly define risk/reward, it is a volatile game with wide swings. Entry is one thing, but what about exit? Even now, the idea is creeping into my head that buying interest is going to reemerge sooner than later and force me out. The hardest trade with the current macro set of fundamentals is to be long stocks. That's what makes me nervous. I suppose I'll just continue to follow my standard MO. That is, stay with the position until the S&P's do something out of bearish character… an upside reversal on bearish news lets say. I also need to keep in mind that the two more important trades for me are, in order, short longer Treasuries, and short the Dollar. A fresh bottom and renewed rally in stocks will have strong implications for them.

6:30 New York time. I opened oysters this past Saturday with the now (im)famous oyster farmer and ex-Wall Street programmer, Mike Osinski, who helped write the software that helped create the mortgage bubble that started the economic cascade lower which we are all now suffering with. We both helped at a small oyster festival at one of the local wineries on the North Fork of Long Island. Even my sister, who heard about the recent article (self written) in the New Yorker, called me yesterday to ask if I knew about this guy. I can't blame Mike for his shameless self-promotion. He actually talks a blue streak about the benefits of oysters both dietary and environmental. He's good for the product and the industry. Am I at all bitter about the attention he is getting... when I went the same path 4 years before he did... when I worked for a more prestigious group of Wall Streeters than he did... and now that I grow a much better oyster than he does... not at all. Does it seem so?

Payrolls on Friday turned out to be largely a non-event for equities. And the weakness certainly didn't help bond yields either. Equities for their part, continue to act like a market that has shorts trapped and has need-to be-longs waiting in the wings. I don't know how long this bullishness will last, but as I said last week, equity rallies always tend to go farther than I expect largely because of the depth of the participant base. Bonds… well, their best bullish argument is that the Fed is going to be buying more of them. Other than that, I really don't think most analysts would paint a long-term bullish fundamental picture for Treasuries. The deflation argument is not being supported by the evidence. The dollar didn't have a very good day either though certainly not as bad as Thursday. Neither of these two markets are a big surprise to me and I have maintained small positions in both. Unfortunately… from a trading standpoint, both these markets have been very sticky down toward their recent price lows. 10-year notes have been unable to trade for long above 3.0% and the Dollar Index, many analysts and strategists would argue, is still in a bull market.

The biggest surprise on Friday was gold. I added to my gold long trade on Friday but then got stopped out when it failed to recover and closed on the days lows. Between Thursday and Friday all the money I made being short 10-Years and the Dollar went to pay for the gold. Oh well. Today gold looks to start the floor session $15 lower. I can't figure gold out. You would think we have a pretty good fundamental environment for gold right now, yet it is performing poorly and the chart looks rather ugly. Perhaps this latest run back to equities has created a temporary anti-gold trade… a return to paper asset appeal and away from hard asset safety. Who knows? Correlation swings both bullish and bearish between these markets seem to change weekly.

So now I'm back to simply short 10-year notes and short the Dollar Index in short size. My P&L continues to go nowhere fast. Patience patience patience. One thing these markets have fairly regularly provided are short-lived and violent trading opportunities.

6:30 New York time. I'm sitting there on Thursday morning watching CNBC. And they're talking about the ECB getting closer to quantitative easing. The ECB actually disappointed by going only 25bps. But all I can think about is the fact that Monday, the same commentators were talking about GM having to declare bankruptcy, and Treasury saying US Banks would need a lot more capital. I cannot remember a time in my professional career of greater market mood swings. Here it is, 3 days later and we're back to everything being OK again. What do I expect? Perhaps I should read my own Philosophy and Methodology again. What drives news Master? Price drive news Grasshopper. News will always attempt to justify price. So if price changes over the course of a couple of days swing wildly from big gains one day, to big losses the next, what would one expect the talking heads to say? You should feel sorry for them Grasshopper. For they cannot step back and say this is crazy. It is simply their job to give you a rational reason as to why prices are doing what they're doing on any given day. The danger is simply in YOU taking them too seriously. They are really just the wind Grasshopper.

OK… now its Friday. In my Wednesday post I said I thought Payrolls might be a culminating event. Yeah… maybe so… but perhaps at this point... in the other direction. The S&P 500 is 55 points higher than it was at this time on Monday. The conditions of the test (Payrolls) this morning are SO far different from the conditions of the test on Monday, as to be like night and day. They are so different that now, I'm tempted to say that Payrolls has greater odds of creating a reversal to the DOWNSIDE than in catalyzing a further move to the upside. Actually… while I might be saying that, I am not actually predicting it. I know well enough through painful experience that equity driven capital flow in a performance environment after a huge down-move is far too dangerous to glibly predict like that. It is vicious bear trap for someone like myself… who has a tendency to be early. Flow driven equity moves ALWAYS move farther and longer than I expect them too. I'm only making a comment about my own perception of the TENDENCY of Payrolls to be a reversal data event. That's all. Granted… IF stocks were to shrug off an early bad release, turn higher, but later to roll over and fail… I have to admit I would be very tempted to jump on that kind of price event.

The point is... I think the trick in these markets is to have your view, and then act on that view when it is OUT of favor, on the idea that it will only be a couple of days before that view is back IN favor again. And while that might be dangerous in our current equity market environment, I think it can work well in the other capital markets… those that are not so tied to capital flows from the passive money manager crowd… who are now all scrambling to keep up with their benchmarks. During my ride to the shop on Monday I was subjected to a number of Bloomberg guest analysts who were telling me all the reasons that the Dollar would stay strong. In actuality, after yesterday, if you held the position, you would have been better off selling the dollar on Monday than buying. In that vein, I bought some gold yesterday. Yesterday was an odd day for gold. The dollar was very weak. Yet gold got hammered. I can put my own spin on it but perhaps that would make me no different that the talking heads in trying to find rationality in an irrational market. Lets just say there was heavy selling in gold despite the fact that its highly corollary market, the dollar was sharply lower. Perhaps is was just some asset allocation out of ultimate safely back into equities. Who knows? All I know is that repeatedly… in these markets… reward frequently comes from fading an excess price move… especially when it runs contrary to other information you deem significant and your market view. Have a great day and best of luck.

6:00 New York time. Sorry about no post or message to that effect on Monday. I struggled to put together a couple of paragraphs only to have my machine crash and lose my work. At that point I was too cranky reconstruct it. I guess that's about the way I feel about the markets lately too. I have tried to be patient and wait for good set up opportunities, only to either screw the opportunity up myself or watch the markets take it all back. We have not had a lot of follow through in these markets the past couple of weeks.

Whatever… as always, I have to be patient and wait out the difficult times and be observant for the next opportunity. We had a lot of news over the weekend into Monday. The Obama administration has taken a harder line on providing funding to GM and Chrysler. Certainly a harder line than they did with the banks. It certainly proves to me there's nothing like having an insider at Treasury to sell the deal for your industry. And while the auto industry may have longer standing problems that Wall Street, my own view is that at least THEY actually MAKE something! And they may pose more (or at least as much) systemic risk as the banks. Who knows? Besides… whatever is decided on, it will not be a traditional solution (bankruptcy) anyway. And the government will have a huge role in the breakdown and restructuring. I guess they've already said they would stand behind the warranties. We're in uncharted territory.

This week had and still has, a lot of other news scheduled as well. We had housing data, and we still will get manufacturing data as well as employment data. Essentially… the markets are in for a whole mess of stimulus. And… as always, it will be how the markets deal with that information which will be more important to me than the data itself. Stocks have embarked on a mini-correction to their recent run up. How deep that correction goes (especially against all this data) will be very important in determining if this recent rally is for real or if we're going right back to the lows again. Even Jim Rogers on CNBC yesterday afternoon was saying he thought there was a good chance that a bottom is in… at least for a little while. Personally… I have a hard time buying the idea that we could rally for a quarter of so and then head back down to test the lows… especially this far into the cycle and especially since the equity markets forecast the economy six months ahead. So a visit to new lows in July would mean the economy closes 2009 at new lows as well. What would that be… 2 ½ years of economic contraction with no recovery in sight. That seems a little much to me… especially with what I continue to see anecdotally. By the way… perhaps you have noticed I have stopped commenting on my anecdotal information. Its still out there but I've decided to stop beating that horse as far as supporting my view.

OK… so what about strategy for the next few days? Well… I think once again… this week has the potential to culminate on the monthly Employment Situation. As you remember, it was one month ago that we set the current low in the stock market. That too was on a Payroll number. Prices spiked lower on a big negative number but reversed by days end. The 20% rally in prices from that point… well… its history. But here we are again, with the market pulling back into Friday with a lot of bad news on the table. I hate to sound like a broken record but I think the strategy remains largely the same. I don't think there is any doubt that the Non-Farm Payroll number is going to be a bad one. And I think one needs to be prepared to buy that dip, especially if it is at a higher point than it was last quarter, and we would have to have quite a move lower in a very short period of time to NOT have it be so. Put it this way. The buying frenzy that ensued in the days subsequent to the March report showed how crazy this market can be when the perception among participants turns toward the view that a bottom is in. That turns on the performance game, and that is a very powerful factor indeed.

What does all that mean for bonds and currencies? Well… I hope it will mean higher bonds yields. I still have a small short 10-year position on. I also hope it means a return to the weak dollar trade. I sold the start of a small Dollar Index short position the other days when the market tucked up under the overhead resistance at 8700. That's the point that the market broke from on the day we got that recent Fed Statement. I guess if that kicks in it helps gold find a base and rally. And higher stocks has been positive for oil too. So there you go for the major markets. Unfortunately… it still tends to revolve around what happens to equities. Yeah, that sucks. But that's the way it is.

6:00 New York time. OK… maybe that's a little over the top. But its kind of the way I feel about the stock market lately. Nobody trusts it. Nobody is quite comfortable with it. And even those brave souls who like it… are cautious about buying it up here after a 20% recovery in the indices. All that my friends, is unfortunately why it is far from done going higher. In a very short period of time… less than one month… we have gone from real worry… to a wall of worry. I think we have a situation where, if we HAVE had the worst of the news on the crisis, the world is vastly under invested in stocks from a performance standpoint. Adding to that, as stocks improve, it creates a feedback loop improving confidence in the commentary and the public perception. All of this in what many have described as a "crisis of confidence". As the whole cycle turns, it feeds on itself. Welcome to the human emotional condition. We have vastly greater per capita participation from the public in the capital markets than we ever have. Most of that capital is managed professionally on a performance basis. And unfortunately, that is also why we are destined to repeat the boom bust cycle in markets with ever-greater volatility. We can move hundreds of millions of dollars of capital at the push of a button. We have all manner of sophistication in how we analyze the markets. It lends itself to split second decisions. For the average person, it's great when things are running in the bullish direction… it sucks when it's running in the bearish direction. For professionals… it is simply important to recognize the two. And from where I sit and what I see, the stock market is quickly evolving to the former. Yesterday it went from a $100 loss late in the afternoon to close $170 higher! The behavior that is being now rewarded is to buy on dips. The S&P 500 bumped up against major resistance at 800 a few days ago, pulled back for all of two days and then crashed right through. I know… I was short. Since then it has tested that number only once for a nanosecond, and then took off again.

Look… ask me if I'm long stocks? Answer… no. I'm one of the multitude that are nervous about the indices up here, having rallied already a long way off the lows, and with so much lingering bad news. And I'm not alone. There are a zillion guys out there just like me. Few of us willing to bite the bullet and just buy the next dip. We have just come out of the worst market pullback since the Great Depression… the Dow having retraced almost 60% of its distance from its highs, and yet many of us think getting long after a 20% rally off the lows is too risky. OK, I've beaten this horse enough. And infuriated what few gold bug readers I have left. It's nothing personal. It's just an observation regarding price behavior and reaction to stimulus.

Unfortunately, with the stock market taking center stage, the other markets have kind of taken a back seat in terms of activity. Bonds are caught between the fear that the Fed is going to step in and buy paper, and the bearish ramifications of stocks, followed by the economy, recovering (albeit slowly) and generating upward pressure on interest rates both from an inflationary risk and from the prospects of the Fed slowly removing accommodation. Personally… I believe the need for the Fed to step up Treasury purchases is slowly becoming moot. Still, participants have been put on notice and who wants to stand in from of an authority who is willing to take extraordinary measures at need. That's the only reason I can think of for the warm receptions most of the Treasury auctions have received lately. Regarding the dollar… and gold… who knows? There's a two-sided argument here too. And with prices in no-mans land… I have absolutely no edge or inclination what so ever.

So I guess the only question is whether or not I'm going to step up and experiment with buying stocks at some point. All I need is a reasonably dip then just close my eyes and put the trade on.

6:00 New York time. Well… what can I say? The last few days have certainly thrown me for a loop. In the same way that my wise-guy trades from the long side in stocks over the past 3 months would frequently come back to bite me, so too did my short-term short side trade positioned when the market bumped up against 800 in the S&Ps. I expected a much more significant correction from that 800 level, and I've been saying the depth of correction and position of the low would be important in determining the underlying strength of this market, but I never expected the sell off to be SO short lived and SO shallow, nor did I expect the buying interest in the market on Monday to be SO intense that it was able to close the market where it did. Since then, and in fact, since the reversal in price that fateful first Friday in March, when we had that huge negative Payroll number, in my objective opinion, US stocks have performed exceedingly well, especially since we are SUPPOSEDLY in a bear market. The proof is always in the price action. And I think it puts on display the latent buying power in the equity market. I have heard it mentioned in the news, and I agree, you have all kinds of money management activity now where managers are going to start to worry about keeping up with their benchmarks. They are in an uncomfortable position (should the market continue to do better) of having to make their portfolios look more aggressive and involved from a position two weeks ago where they wanted to have them defensive and conservative. So I guess I'm saying that for now, the stock market is to be bought on dips.

What is interesting too (and perhaps a good thing) is that the strong correlations between other markets and equities seem to be falling apart with stocks trying to do better. The Dollar has been trading both sides with no clear direction since that huge day of the Fed Statement. At this point I have no clear opinion on the dollar. It appears at present that since last Thursday anyway, the US led world recovery in equities has actually drawn money back to the Dollar, perhaps on the perception that the US has taken more dramatic steps than anybody else to get out of the crisis. As such, we'll be recovering first. I understand that the US has put itself in an extraordinarily precarious financial position with all of these attempts to free up credit and stabilize the financial markets. In a vacuum, all of that would be very bad for the Dollar. But given how bad the rest of the world is (and lets focus on Europe), should the Dollar really be that much weaker vis-à-vis the Euro? Or the Yen for that matter? I can make a case for either side of the macro. So long as I have no view, and the price action is not pointing me in one direction or another as far as evolving story line… I have no position.

Bonds have kind of gone their own way too, with the equity rally and on the heels of Thursday's Fed statement. I think a pullback from that huge rally for a time is a natural response, but the reaction to yesterday's 2-year note auction displays more bullish behavior than bearish. As much as one can point to the tremendous amount of Treasury debt that needs to be sold, and the future inflationary expectations from monetary conditions, the market is not trading like it wants to go down. Today we get new 5-year paper and a 7-year note tomorrow. Hard to believe in this environment that new Treasury paper would be in high demand but that does in fact seem to be the case.

Add to all this the fact that gold has been the weakest of the major capital markets since the Fed statement, does not do a lot to support the case that problems are still expanding rather than subsiding. Gold is the barometer of fiscal/monetary responsibility/irresponsibility. And while we saw a pop in gold on the Fed Statement of last week in response to the Fed buying Treasury securities, the reality is, gold, more than any other market, has worked its way back to close to where that rally started from. Look… I'm as flabbergasted as anybody that the markets would let the authorities get away with as much as they have… especially since equity markets have started to signal that, at least on a forward looking basis, the worst may be behind us. Still… for now anyway, it is what it is.

As far as my own strategy goes at this point… I don't have much of one. I got stopped out of my short S&P position on Monday. And with correlations having broken down, I had little confidence in either of the short 10-year or the short dollar trade. So they went too. It's simply time to regroup. I'm going to go back to watch and see mode, and keep my eyes peeled for the next opportunity. My inclination is to sell longer Treasuries, sell the Dollar and buy equities. I do not worry too much about the Fed buying Treasuries, especially since I think the improvement in equities has taken the pressure off the Fed for now. That said, I think the upside in yields will still be limited by the threat of the Fed. Equities… well… like I said, I think one has to look for dips to start playing the long side from. Same for the Dollar, I think one can start playing from the short side again… its just a matter of waiting for the right opportunity in terms of risk/reward and price behavior. I would like to see it rally back up toward the levels it broke from, generating a better selling opportunity. Who knows? And, as always, if gold gets too beaten up, I reserve the right to trade that from the long side too. In all of this… I just don't know when. It's a long year, and we are still only a quarter of the way through.

6:00 New York time. The tone this morning seems quite opposite from the tone of Friday afternoon. I'm guessing it's the Geithner toxic asset announcement anticipation. We left Friday having closed on the lows in stocks and the Dollar rebounding a bit. Treasuries were actually lower. Now we have stocks up sharply… better than 20 S&P points… what's THAT about? Oh well… such is the schizophrenia we see in the markets these days. We get emotionally driven swings from one extreme to the other. The question I ask now is the same question I always ask… is any of this price action/news stuff significant? I know the last few times I have made critical trade decisions either the night before or early in the morning, I have gotten burned. Its one of the reasons I wrote off the early price action I was seeing when I checked in last night before going to bed. And if it IS the Geithner announcement… lets ask ourselves what the track record has been of his PRIOR announcements. I would have to say neutral to negative. So… I guess I'm simply going to live by the stops I put in on a GTC basis last week. Here again… perhaps in different form, but mechanically the same… the markets are pressuring me to supplant my earlier plans and level in favor of more expedient pain relief and zero P&L change. You can't make money that way. No balls… no babies.

6:00 New York time. I want to start by discussing a couple of topical issues. For one… obviously there is a great deal of emotion running around over the proposed taxing of bonuses of individuals who were under contract at banks and other financial institutions who received federal money. Most of the CNBC crowd seems to fall on the side of the employee and the firm's responsibility to retain talent and stand by contractual obligations. That makes sense. The other side is the public and Congress who are simply "outraged" that public bailout money goes to (in some cases) the very traders/executives who helped bring the banks down. I have no axe either way… and I understand both sides. The upholding of contracts is a critical element to rule of law… it is one of the LAST things this country can hold up as being "sacrosanct". But even on that score… in the REAL world there are all kinds of legal "interpretations" that can be questioned in ANY contract. We have brouhaha with our home oil company over automatic delivery and a price cap. We feel we're justified, as I'm sure they do. On the other hand… regarding the bonus issue, to expect NO public backlash is to live in an unreal world. Did any of these guys think any of this stuff was NOT going to come public? It's like the auto execs flying down in private jets. At least take some measure of thought as to the CONSEQUENSES of your actions! I can see both sides but I also don't think anything we're seeing should come as much of a surprise. The legal system has always tended to single out the most obnoxious abusers and sought to make examples of them. Was Martha Stewart really a criminal or did she just thumb her nose at the wrong people in the judicial system? I think the latter.

The second topical issue pertains to trading. I have heard a great many commentators talking about what a great trading market this is… specifically in regard to WEDNESDAY. I've got news for you. If you made money on that Fed announcement you we're LUCKY! Pure and simple. You had to ALREADY be in the right trades. Well… I guess I should take that back… you could have also been INCREDIBLY fast. I'm a trader and I can tell you these markets are BRUTAL. You tell me anybody was happy on Wednesday when gold was down $25, at new lows in the high 800's, and the next print on the Fed statement is $20 higher. Think many people made out on that one? I only know of one… and he has owned gold forever and STILL had to sit through the gut wrenching move from $800 to $1000 and then almost all the way back to $850. And how about 4 points in bonds right after pushing the high end of the yield range? The Dollar was no picnic as well. If anything… all this continues to reaffirm for me the fact that you need to continue to fade the emotional ranges, and rigorously control risk.

That segues back into my actual market commentary. I sold S&Ps short yesterday morning. The Fed announcement managed to push the S&P right up into that 800 resistance level. Add to that, the fact that what could (from the reaction of the other markets) been interpreted as VERY bullish news, ended up generating only a marginal gain on the day, made this an attractive trading opportunity. Attractive also because I can place a relatively tight stop with what I see as a lopsided risk/reward ratio. And come on… equities I think have been up 8 days in a row as of Wednesday. Hey… even in a BULL market one expects some form of corrective action after that kind of run. This market has all the stink of participants who are deathly afraid of missing a rally… another emotional trait.

I also sold some 10-year notes. The Fed rally allowed me to reset shorts at a 50bp better price. And is the reality of the Fed buying Treasuries really a bullish thing in the long run? Gold doesn't think so. Nor do Dollar traders, nor oil traders. There's just something fundamentally wrong with a government that borrows money by selling securities, and then turns around and buys those very same securities. That's just wrong. How's the song go… money for nothin' and the chicks for free." Go Treasury.

Lastly today, I'm also taking a close look at the Dollar Index. It is yet another market that had a massive short-term move, in response to stimulus, flushing out a lot of positions, and is now looking around and asking… where next? Once again, I think the dollar trade, the gold trade, and to a degree the bond trade… are all predicated on equities. And equities have managed to go from a view that the glass is empty to the glass is full over the course of 10 days! Sounds to me like participants have been sipping "special" tea and looking down the rabbit hole debating a jump. My scenario for equities remains the same. I think we get a pullback, which we may have already started, that takes us some retracement ratio back toward the lows. The depth of that correction is going to be huge for me in determining the strategy in all these markets going out. If we pull back only half of this recent rally and then turn and start higher again… then I would say there is a very good chance we have seen the lows, and equities are turning higher on a much longer-term basis. You have already seen how fast sentiment can turn around. That same kind of turn around can ripple through the public and the larger economy, turning public sentiment and behavior to the upside.

6:00 New York time. These are the toughest market times for me. I've either gotten out of, or missed my trading opportunities, yet the trades themselves are still carrying some momentum. There is that nagging pull of missing the boat. That unrelenting tug of greed that makes me want to toss in the towel and just get back in. The reality is… worse that overriding your own stops in taking yourself out of a trade… is caving in to the lure of greed as it works on your psychology to convince you that you are missing something… often just as its running out of gas. I think that was the single biggest repetitive mistake I made when I first managed capital over 14 years ago. And I think it is the single biggest mistake our species continues to make in helping to recreate again and again, a history of booms and busts.

It is a constant battle (personally anyway) to successfully keep telling myself to be patient, that markets present opportunities on a regular basis. And that in our current market conditions anyway… ESPECIALLY markets such as we have now, that points of greatest strength frequently are also the points of greatest weakness. It's the paradox of the blow-off. Just as the mania reaches fever pitch… you need to be selling. Just like in the movie Trading Places. Unless one believes that we have entered a new trending environment in the last two weeks, you (I) have got to take the leap of faith that we remain with market conditions that will continue to punish participants who cave in and buy strength or sell weakness. And that… just like gold at $1000… or 10-year notes at 3.0%… these levels do NOT indicate breakout… but continue to be range ends that are not ready yet… to breakdown.

I take a philosophical view. This is just another chance to improve myself. To be able to step back and go to the sidelines just as it seems the game is kicking up to a new level. My natural propensity is to always be in motion… usually fast motion. So anything that forces me to slow down and be more thoughtful is a good thing.

A quick review of where we go from here might be in order. First off… I am not predicting whether the stock market has put in a long-term bottom or not. What I will say is that we have reached all the milestones in both time and price that WOULD historically be associated with a major market washout and significant buying opportunity. That said… anyone who say's they know for sure is blowing smoke up you're a** and simply playing to 50/50 bet. The test will come, I believe, on the first pullback to this "bear market rally". I very much expect significant problems at 800 in the S&P. That will naturally be associated with some fresh emphasis on bad news… of which there is no shortage. But the key defining factor in any bull market is its propensity to put in higher highs and higher lows at price points of significance. So it is not so much that equities have staged their current rally. More critical (to me anyway), will be if they can put in a higher low on the subsequent retracement to this bear market rally at a reasonably convincing level. If stocks do this, THEN I can start making the case that we have seen a meaningful change. THAT will set off a string of corollary trades that one should not miss; higher bond yields, a weaker dollar, higher oil… perhaps higher commodities. It will signal the start or a return to risk. So money will start trickling out from the safe havens to more risky (and thereby rewarding) points. Emerging markets will recover. It WILL be a very slow process though. Recent history has done great damage to investor psychology… even professional investor psychology. While there is cash in the sidelines, there is a lot less of it that there was.

The coming stall and pullback is the NEXT trade I have my eye out for. I will work as hard and as diligently as I can to get on board and profit from it. So far… while I have made some money this year… it has been more of a disappointment in terms of squandered and missed opportunities… some of them quite large. But that is the beauty of markets. Unlike oyster farming where one only gets one opportunity per year to do things right (or wrong), markets present a dozen major opportunities (for me anyway) ever