The risk is back

Market has tried to rally and was sold in a controlled manner during the second part of the yesterday's  session. But looking in the details one will remark that risk is starting to enter by a small door. Small caps were clear performers. Commodity currencies were strong as well as East European ones. The implied volatility as well as it expectation (VXX and contracts on VIX) were about unchanged.
As for the moment I'd expect  one more close near the recent lows for the broad US indexes as well as for other risk plays (EUR/JPY, EUR/CHF) before we start the summer risk rally.

The first wave UP

My view on USD has finally worked out. The trend has changed and we've completed the first wave up.

The puzzle of different markets  is slowly starting to assemble. The retrace of this first wave up for the USD has an excellent chance to coincide with the top in equities.  Indeed, after the Dubai's rescue, what an event may strike the self-confidence of the market participants: Eastern Europe? Don't care, IMF will fix it. The party must be going on! Until it's over.

Santa rally, really?

What an entertainment to see bears turning bulls after the 60% rally. Yelnick has called "Wolf!" some times already since at least September, but finally he's calling for the Santa rally to the year end, and may be until February.
Oh, yeah, I understand, it's quite difficult to track any Elliott waves in the corrective crap the SPX or DOW  are made of, so we start to imagine it was just an accumulative phase and we gonna explode on  the upside.
Meantime, I don't see any reason for the averages to accelerate  hence there are virtually no bears in the woods to hunt. Or, may be, still Pretcher, if he calls to cover his double short position, I will immediately put in the mine.
The best illustration is provided by the DOW: he's well as he is, drifting higher under the green line,  enjoying the last weeks of this indian summer.

"Les carrotes sont cuites"

That is coming to my mind right now, - a famous french expression which was a code message to the French Resistance (to start their operations), broadcasted by BBC before the allied invasion of Normandy.

USD: noise and reality

Lotta noise on dollar's fate recently may hide the real story in the process of making. The dollar is the main  funding currency in the world. Trillions of liabilities are dollar denominated and should be payed back in dollars as well. Under the light of the private credit contraction, I think it's the time to take seriously the long ago  discussed theory of the Synthetic Short Dollar. I remember, when  gold bugs were criticizing the theory as something impossible due to the fact that a genuine deflation in US is impossible. And, really, the Fed and US government did all they could to stop the deflation. Did they succeed? The time will show. But we must take in account that they had a good ally - China. Being pegged to USD, the RMB credit expansion has amplified the American reflationary attempt. Moreover, I would even think that it's the Chinese who have reflated  the World economy and only because of the peg we have felt it as a dollar reflation. Since this reflation attempt is clearly slowing in the US and China, one could suppose  that, US and China deflationary forces will strike back with the vengeance and hence the dollar will rise. It's exactly what the USD index chart suggests:

The bottoming process, in my opinion, is clearly underway. Should we break out the blue trend line, a sharp rally will ensue with very certainly higher than 90 as target. Of course, that rally will go along with a massive stocks and low quality debt liquidation.

So, we're about done

Looking at markets' recent  action, I've been feeling something like nostalgia.  Really, it's such a beautiful  moment. The one where you clearly see that all these "green shoots" are fake, but somewhere deeply inside you're enjoying it and would like it to continue as long as possible, just like we enjoy a sunny November day, here in Paris, knowing that the next 3 months it's gonna be rainy  and cold.

As for me, I will very certainly associate this Indian summer with the biggest french retailer Carrefour publicity campaign : "Le positif est de retour" (The positive is back). Never before, I've seen so much rebated brand products and rebate coupons as during this campaign, - certainly because of a lot of money in the clients pockets and positive mood in general.

So, in my opinion,  we should put in a top next week on cash SPX at about 1114-1125. The plunge under 1029 which should follow, will mark the end of this rally. As for Nasdaq Composite, I'm still  skeptical about it's ability to make new highs (above 2190.64).

3 possible scenario for the next wave of crisis

Seeking Alpha publishes an interesting article on 3 possible ways the next wave of crisis will play out.

In brief they analyze 3 scenario :
Deflationary: dollar and bonds  rise, stocks fall.
Inflationary: dollar and bonds continue to fall, stocks continue to rise. In one word: more of what we have  already, and that's precisely why, in my opinion, it's the least probable:  at present, the real economy and financial markets are going in the different directions.
Hyperinflationary: all paper instruments fall destroying the economy as we know.

A simple analysis of some recent trends  gives a higher chances for the 1st scenario. It's my opinion as well.

Running with bulls

No surprise, we're rallying ahead of the Fed decision. Just as many times before, since the bear has begun. Go ahead, load the mull and run with bulls, it's still an Indian summer, and the Fed won't disappoint until it  won't matter anymore.

So, where to go now?

Tuesdays we had an often played situation with the Europe sinking (on  the come back of bank worries) the first half of the session while SPX future was retesting previous day lows at around 1027.

And after the retest the Buffett's bet news had hit the tape. I've written recently that in my opinion the trend for transports have changed and I'm sticking with that view. While railroads may have a bright future in the long run, due to changes in the way we transport goods and travel our-self, the current situation and perspectives are far from being a bright spot.
As for the nearest future in other markets, I believe that  we have finished the correction for some and the first impulsive wave down for others. It will be interesting to see the quality of the rebound. The leadership is clearly changed since the techs and especially semis as well as most financials are no more. So I think some good upside is still in cards for inflation related stuff (gold and silver are leaders as usual), especially if Benny doesn't disappoint markets with his words about exit strategy.

The wind of change

So, the expected correction has finally started and, as for me, did the most of its job last week. In my opinion the trend change is  now  confirmed for semis, small caps, home builders and transports. For Nasdaq my scenario seems to be followed with an exception of starting point. The only broad group where the top is clearly not in are big caps with DOW Industrial and XMI as benchmark indexes.
For inflation related stuff  things are a bit trickier. On one side the GSR (Gold to Silver Ratio) indicates the bottom is in.

On another, gold price and USD index charts still looks uncompleted. The same story for emerging markets ETFs. They had such a strong momentum before the correction has begun, that I can't see them not to make new highs before we'll actually roll over.

Complacency and Confidence

The words associated with Wednesday's session.
The broad indexes are approaching critical levels of resistance, Intel beats the Street and ends near the lowest level of the day, - to say this performance was largely anticipated. The volatility index (VIX) make new lows, showing there really isn't much fear in this market. AlphaTrader has initiated a long position in volatility via VXX with a goal to stabilize the whole portfolio in case, just in case, everything is not that good the market seems to believe.

Silver and Gold were quite disappointing, failing to advance in this risk and inflation friendly environment. Looking at my favorite chart of gold to silver ratio, I find it looks indecisive at the moment.

To complete the pattern, the ratio should go at least to 55, which would give us 20 bucks silver with, say,  1100 bucks gold.  In fact, the task is not impossible, given the current weakness in USD which, in my opinion, should shortly land around 74

Will precious metals anticipate the bottoming USD and decline in advance or will we have a spike provoked by the fear of the global inflation. Despite the appearance, this market becomes very tricky. The gold to silver ratio is the thing to watch very closely.

No Top is in, yet

So, it seems, it's a bit frustrating to be a bear theese days.
Yelnick and a lot of other elliottists have reiterated recently "last chance to exit" calls, but no chance, we haven't entered the first wave down, yet, - it's only a zig zag correction. Indeed, it would be surprising to start a new leg down a priori without any notable non confirmation signs. Hopefully, during this new leg up, we will be satisfied.
I'm looking, at least, for a relative underperformance of technological and homebuilders stocks comparing to traditional big caps. On the other hand this wave should mark the highest point of price and optimism for inflation related stuff, like EM stocks/bonds and for precious metals sector as well: "Hey guys, we're facing a hyper(re)inflation, no?"