What a quarter that was! Q3, 2011, will go down in the history books as one of the worst in market history, and certainly one of the most volatile. 1929, 1987, and 2008 come to mind. Is the fat lady getting ready to sing in October?
The economic data is saying definitely not, while commodities are saying definitely yes. The one economic indicator I would choose to receive if I were stranded on a desert island, the weekly jobless claims, showed a blockbuster decline of 37,000 over the previous week to 391,000, the first drop under the boom or bust 400,000 line in months. The four week moving average suddenly trended down from 422,500 to 417,000.
The final Q2 GDP report, a deep lagging indicator, was also revised up from 1.0% to 1.3%. These figures are telling us that the stock market has got it all wrong, that the economy is actually improving faster than anyone believes, and that you should be loading the boat with risk assets.
The commodities markets couldn’t refute this view more strongly. Look no further that the PowerShares Multi Sector Commodities Trust Metals Fund (DBB), which has absolutely fallen out of the bottom of a sharp downtrend. You get confirmation of this dire view of the economy from the United States Oil Fund (USO), which is showing an undisputable 45 degree slide from the upper left to the lower right hand corner of the chart, and is a great leading indicator of risk appetite by hedge funds.
Stocks are also warning that the final flush is still ahead of us. The S&P 500 has broken out of a bear flag on the charts, and is now bumping up against the lower end of the old channel. The chart for the Russell 2000 (IWM) is even more foreboding, suggesting that the collapse has already begun. The correlation even extends as far as China, where the Shanghai stock market a new low for the year yesterday.
This is why traders have been using this week’s strength to smack every rally as quick as they can click a mouse. The time spent at the highs each day can be measured in the nanoseconds. Once the window dressing ends on Friday, we could be heading downtown on the express train.
It all adds up to a final margin clerk flogged, throw the baby out with the bathwater, capitulation type sell off sometime in October. This is where we break the August 8 low in the (SPY) at $110 (1,100 in the S&P 500) and make a marginal new low somewhere in the mid $100 handle (1,000). When traders finally throw up on their shoes, traditional value players will at last have the “BUY” signal they have been waiting for. At five months old, this “RISK OFF” move is definitely getting long in the tooth. It is ripe to be put to sleep by the release of bang up corporate earnings that is just around the corner, as well as the usual seasonal juice.
By. Mad Hedge Fund Trader