Saturday, December 31, 2011

Taking A Peek At 2012.

Everyone worth his/her salt is making projection about the 2012. There is almost unanimity in the blogosphere that Euro is going to crash and we will see a repeat of 2008/9. So everyone is bearish biased in varying degree. Doomsday drummers like ZH, Mish, Prechter  et all are having a field day predicting the coming demise of Eurozone and return of the civilization to the stone age. We are encouraged to buy guns, bullets and canned foods. In the mean time, readership surges, ad-revenue and subscriptions come pouring in. They or their sister companies sell bonds by the bucket and deposit the much maligned fiat currency in the same TBTF banks on which they heap scorn every day. Not a bad business model, eh?

Yes, the OECD nations have piled up Trillions upon Trillions of dollars of debt and they will find it more and more difficult to service those debts and sustain them. But it is not going to be one straight line down from here. Trading in the stock market is different from fundamental macro economic analysis. Just look at Japan. It has over 200% of debt to GDP ratio and yet the yen is stronger than ever. How do you explain that? If Greek drachma was in existence, I am sure it would have been severely weaker today as a result of the debt problem of Greece.  Then how come JPY is stronger despite Japan having the highest debt in the advanced world? Just shows that there is no straight answer and things are much more complicated than ZH can explain.

How do you explain then that the commercials are net long EURO is a massive way since Sept 2011? These are the big guns that move the market. They are building up the position slowly and will possibly continue to build up long positions. People like ZH, Mish and Prechter just help them, either willingly or unwillingly, to divert attention from the slow and steady built up of their long position, so that the retail continue to sell.

The following is a weekly chart of EURO.
If you compare these two charts, you will note that while EURO was going up from Jan 2011 till end of April 2011, the commercials were building up short positions.The commercials went long from September and Euro has reached its lowest of 2011. Basically the same point where it started the year. So what has changed if I may ask? Why are these people screaming end of EURO?

Also note that there is no immediate relation between price movement of EURO and long or short position of the commercials. But ultimately, price follows the action of the commercials and that is a long term play.
I am not implying that EURO will start going up from tomorrow as a trend change. All I am saying is that the end of the world does not appear to be in the calendar of 2012.

Look at what the commercials are doing with the SPX index futures. This is different from ES.
Compare this with the weekly chart of SPX.

Commercials were net short of SPX from January 2011 till 1st week of August 2011 while SPX went up. They were net long between Mid-August 2011 till Mid-October 2011 when the markets went down. So the commercials are way ahead of the curve. Now they are short again from end of October. So we can be sure that a down turn is coming. May not be tomorrow. But when that down turn comes, just know that it has been planned months and months in advance. That the coming downturn has got nothing to do with whatever nonsense ZH, Mish or Prechter is saying.

This is what I call being unbiased. Trading  is serious business and modern economics is far more complex. So let us separate BS from trading. Hope this last post of 2011 will help explain my methods and approach to the market. Thank you for following me in Twitter (@BBFinanceblog). Please retweet to your family and friends and visit to profit from the world of finance.

Once again, wish you a very happy New Year.