The diary of a lonely trader : October 16th, 2012

I found a great Fortune video the other day with Pimco CEO Mohamed El Erian, in which he speaks of Five Global Risks which if materialized can effect the long term global economic outlook.  As most economic dogma is currently escorted by the current election, the interview contains several conspicuous supportive fundamental factors that can evolve in the intermediate term.

From a short term perspective, investors are preparing themselves for earnings season along with several economic reports in the up coming week. Most of the weeks focus will be on earnings, along with any updates on the current Euro Crisis.  The detrimental global economic picture has overshadowed the current domestic market on the short term as the European debt crisis has assisted in last weeks equities contraction.   On the contrary, the $VIX, which is also known as the fear gauge, would have to uptrend above $20 for the markets to fully embrace the short term correction.

Ive been keeping my eyes on the Lehman 7-10 Year Treasury Bond Fund (IEF) as a market indicator.  The current uptrend needs to break out and close above short term resistance levels of about 108.80 in order to support a market sell-off. Rallies in the following indicator show that investors are moving there funds out of stocks and looking for safe havens.  Inflows in the following Fund need to be supported by high volumes in order to sustain the rally.

From a contrarian view, one must use several types of sentiment indicators to rationalize and support ones positions.  The Rydex Nova /Ursa Ratio is a great contrarian indicator and it is currently indicating bullish market posture.  As readings below 0.2 support bullish sentiment. According to Investopedia…

“A very low Nova/Ursa ratio suggests that the little guy has thrown in the towel and that weak hands have been washed out of the market – a bullish signal.” (Source)

Furthermore, last week was one of the most trying months for the markets in several months.  The pullback last week was definitely a fundamental alarm, but corrections are natural in this game and intermediate market posture is still bullish.  Just note that economists base there predictions on lagging indicators, and most lagging economic indicators are weighted in the bearish picture. On the contrary, the trend is your friend.  So we will see at the end of the week if this bullish uptrend will hold up to economic and election duress.

Disclaimer: This blog is published solely for information purposes and is not to be construed as advice or a recommendation to buy or sell a security. Trading involves risk, including loss of principal and other losses. Trading results may vary. No representations are being made that utilizing techniques mentioned in this  will result in or guarantee profits in trading. Past performance is no indication of future results.


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