Wednesday, October 12, 2011

After we saw a Bull Trap, We are in for a Retest of the Upper Range

Last night, Slovakia was the last of the 17 euro countries to vote on the bailout fund. Regardless of the political issues and the first round of votes being delayed, it looks like the vote will get passed given that the stakes seem too high.

Looking back on my trading of 2008 GFC and the V-shaped equity price recovery then the subsequent stall in the market prices prior to QE2 - I remember thinking that being bearish was the right thesis given the economic data was not that great, despite the fact that the data points showed 2nd derivative improvements. The clich'e 'climbing the wall of worry' was dear on my mind, and all my positions were hedged into the upswing - which concurrently led to a huge underperformance in my equity positions.

Given last week's UK stimulus, the euro bailout fund and now the talk of possible China easing (on the backdrop of falling inflation) we may see another upswing in equity prices.

My thesis here as a portfolio strategy would be to hold energy, materials as your leveraged beta, which you offload your excess margin into strength and keep your core holdings in asx banks anz/cba for the upcoming earnings report.
From a macro trading perspective, the analysts are heavily shorting the AUD given the bearish China sentiment (somewhat warranted given that commodity prices have broken uptrend lines) I think the last rebound off .95c will be the low for the meantime, as a quick look at the weekly AUD chart will still show that we are in an uptrend, and the conditions for USD debasing are still somewhat in place.

The key level in the AUD for the week will be 1.00, and the sp500 is clearly trying to breach 1200-1220 - and if the Nasdaq maintains its strength, and we see some recovery in commodity prices, we may be all hands on deck for risk-on mode.