In the back of my mind I know that it’s not smart to get involved in this market, it’s still broken, there are so many issues, including some important technical hurdles that need to be overcome.  But only price pays, and you need to pay attention to what the market is telling you.  We may be in a bottoming process right now on the intermediate term time frame.

The key is to have an open mind to any scenario, and be prepared to get long when the time comes.  Build your lists carefully.

Here is the laundry list of stuff that I want to see happen to start taking long positions again.

The $EURUSD needs to get back above 1.215 and hold there for a day or two, at least.

The $SPY needs to get back above its 20 day moving average and put in a large volume move to the upside.

Tech needs to lead on the upside for a day or two.

The long bond $TLT needs to break down.

Several equity sectors need to break their downtrend lines from the past five or six weeks.

Once again, my gut tells me we roll back over and break support at $SPY 104.50, but I’m prepared to get long and make some money if the market allows.

Greece has been bailed out by the IMF and Eurozone, but the actual amount of help they are receiving is far greater than what was first expected.  Similar to the Bear Stearns mess, the Greeks have complained recently that their situation was being made more difficult by CDS traders seeking to profit from their misfortune, causing the situation to deteriorate further.  Frankly, anytime you hear a company complain about traders selling your stock or shorting your debt, you can bet that the CEO is lying out of his $%&, or worse, and typical of the financial crisis, truthfully didn’t understand the issues his company faced.

Fast forward to today, when Spanish politicians and central bankers are denying that they need any help dealing with their debt.  Some believe that Spain may need upwards of 200 billion Euros of help.  We are also beginning to see others throughout the Eurozone come out and bemoan the fact that CDS spreads have widened, and some mad that so many hedge funds are short the Euro.  This all sounds very familiar doesn’t it.

After speaking to many people over the past few months regarding the sovereign debt issues in Europe, it seems to me that the issue is more wide spread than just Greece.  I won’t write a whole thesis here, but the general idea is that many Eurozone countries do not have the ability to grow their way out of the global recession.  Socialist policies in many countries are choking their economies to death, and extricating themselves from these policies is going to be near impossible.  Given that the unemployment rate of 18-27 year olds in Spain is upwards of 20%, major social unrest could take place if the government cuts back on social safety nets.

It seems that many are underestimating the pervasive nature of this problem.  I don’t believe the market is pricing the risk of defaults on sovereign debt accurately, just as they failed to price the risk of default on MBS defaults accurately.  Yes, the default of the underlying assets meant losses for holders of the paper, that was bad, but what brought down many financial institutions were the side bets on those assets where the risk was mispriced.  We all assume that someone will come in to bail out these countries as Greece is being now, but who will ante up?  Will the ECB print money to fund bailouts throughout the Eurozone similar to what the United States government did?  If that’s the case, and their plan is to debase the Euro, then I don’t see any reason to cover that short.  That’s the best case scenario.

The worst case is that there isn’t enough money to bail everyone out, that we do see some sovereign debt defaults, which by the way, does happen, we didn’t always live in a world where everyone gets bailed out of their messes.  I’m not educated enough on the issue to know how much bad debt is out there, but I know this, when politicians begin to vehemently and in a very loud way, deny that their countries are in any sort of trouble fiscally, it’s time to be very suspect of the situation.

I’m not sure how this plays out in terms of inter market price movements.  It’s obvious that the European equity markets are not liking what’s going on.  I talked yesterday about the Spanish ETF $EWP being ripe to be shorted yesterday.  It’s now down 7+% this afternoon.  I should have taken my own advice, but I was busy making sure that my exposure to the long side of the US equity markets was minimized and my risk across the board was taken down.  It seems to me that there is much more downside there.

I’m going to do some digging on who has the most exposure to European sovereign debt, what banks would be the hardest hit.

I’m not saying the Eurozone is set to collapse, what I’m saying is that I believe the term contagion doesn’t make any sense, it’s not about the problem spreading, it’s about figuring out whether the problem persists already throughout the greater Eurozone and has not been accounted for by those who would wish to ignore or hide it.  At this point, I believe it’s prudent to assume the worst.

Pretty obvious at this point eh?  The jobs number was bad, far worse than expected at -85K.  I’m not surprised, then again, I don’t think you can even trust the number anyway, they always get revised down after the fact.  I continue to believe there aren’t any jobs out there, and there won’t be any time soon.  This country’s economy is going through a radical shift, we don’t produce anything anymore, and we haven’t embarked found the next growth industry.  Will dumb manufacturing jobs ever come back to this country, I doubt it, we’ve moved on, up the ladder of production, we are a service and ideas economy now.  We were screwed in the 80′s before the computer changed our economy and gave us all jobs.  We will once again find a spark to ignite a new industry to do the same, hopefully it doesn’t take a decade.

Due to the lousy jobs number, and what will continue to be lousy jobs numbers, the $FED isn’t raising rates any time soon.  Here’s what will happen.  Food and energy prices will begin to creep up, and then explode to the upside.  At that point the fed will have no choice but to raise rates, and they will do it quickly by more than a full point to start, sending the dollar screaming.  Until then the Dollar is going to wash around as equities churn higher yet.  In the short term, here’s what I see for the $DX_F.

That 50 day moving average in blue is going to be tested.  This is a very bullish flag pattern which should resolve itself to the upside after that test.  I’ll be looking to take a short position in the $EURUSD as it comes back up to test significant resistance levels.

As for the equity markets.  We continue to see healthy sector rotation taking place.  Financials are running into earnings season, no surprise.  Materials are hot as hell but are set to take a break following a crazy run to the upside.  A few healthcare names I’m watching are breaking out of long term bases, I would be looking there for exposure.  Look to buy the tech leaders on any weakness, I highly doubt they are going to let $AMZN dump before earnings.  As well, I believe they are going to blow the numbers out of the park, hell they better after this run, or it’s a long way down from here.

The signs were there last night as I noted the market internals yesterday were ugly.  Well, today’s were uglier, down / up volume was almost 20:1 with 500 advancers to 2500 decliners.  Up until yesterday we were seeing up / down volume relatively balanced even on down days, pointing to the fact that buyers were stepping in all day to support prices.  This changed yesterday as we saw 6:1 selling to buying volume, and spilled over into today’s 20:1 collapse.  The last 10 minutes today were especially bad as the market really puked on big volume after the closing imbalances came in heavily sell side.  This tells me a few things, first off, sellers were waiting too see if a rebound rally emerged late in the day as it often has during this epic run.  Second, short sellers felt much more comfortable today holding onto their positions.  I’ve been joking that the shorts who refused to cover into strength have been left icing their balls more often than not, today was not the case.

The next few days now become very important as the sellers have a strong win under their belts.  Shorts thrive on momentum, selling begets selling, it’s now time for the dip buyers to step in if they still have the appetite.  The $SPY will test its 50 day moving average either today or Monday, that will be a monster level.  Take a glance at the chart of the SPY below.  The rising wedge patter of the rally since March was broken on strong volume today.  If you don’t think big players are looking at this you are kidding yourself.  At the end of the day charts are a visual representation of market psychology.  Market technicians don’t study chart patterns because they look pretty, we study and observe because the bars on the chart represent how the market feels, fear and greed represented by price, and more often than not these patterns which go back hundreds of years play out in the same manner.

Let’s get something straight though, this does not mean that it’s time to get bearish.  I’ll be very vocal when I believe the time to get short equities in size is upon us, I’m not one of those who chose to waffle around and hedge their statements.  Cash is a position, sometimes it’s better to sit and wait for the next move to reveal itself instead of flailing around trying to test the market for direction.

I will be on high alert for a tight range over the next two days.  If we churn above the 50 day moving average in a tight range tomorrow morning through the close on Monday it will be a very bullish signal.  Each time during this rally where the market has put in an intermediate term bottom we have seen two days of churn followed by a strong up day.

A few more important things I’m looking at.  The corporate bond ETF $LQD went ex dividend yesterday and opened weak, after which it continued to get crushed.  It ended the day down nearly 1.5% which is quite a wallop for a bond ETF.  The volume here was huge, almost three times average, someone wanted out.

The 20 day moving average had been trend support since the beginning of this rally, it was broken today.  I believe we are entering a period of consolidation, at best.

Material names led to the downside today with retail, staples, and healthcare finishing the day in decent shape.  The dollar had a strong day, but I see this as more of a reaction to the equity and bond weakness than a driver as the dollar has been lately.  I mentioned a few days ago that we were going to see the short dollar trade unwound a bit, I think we are almost through with that process.  Tests of 50 day moving averages by $EURUSD and and $USDCHF will be huge.

Treasuries, especially the 10 year are breaking out in a big way.  We’ve been seeing signs of this coming for a few weeks.  I got long on the first breakout in early September only to be whipped out.  It was a mistake not to take the second entry signal given on the 25th.

As I’ve become less bullish over the course of the past few days, not bearish though, I’ve shifted my book to a more even weighting.  Visa, Take Two, Jet Blue, Huntsman, and Skyworks on the long side were sold.  I’ve added Magna and LDK Solar shorts as targeted positions, not on an overall bearish bet on the market.

Everything automotive looks weak right now, it has been by far the weakest looking industry for a few months.  The charts and fundamentals are both bearish here, if the market takes a leg down this is somewhere you want to look for downside momentum.  Take a look at yesterday’s post for a little color on the $LDK short.

Today was important for sure, but not a reason to be bearish yet, it will take a break of 99.50 on the SPY to get mere there.  I’ll keep my book balanced and take note of a definite chill in the air.