Why we are out of the market

THE TECHNICAL TRADER'S VIEW:

• The Technical Trading Guide has been a bear of the Eurostoxx index since July 1st. In that period the index has dropped from 3400 to 2663 or 21%. We have been short of the FTSE the S&P and the Nikkei for much of that period as well.
• In the Market Update sent early yesterday morning we pointed out that the risk return of selling stocks was no longer attractive and so advised going square of all stocks for the first time in three months.
• In large part this is because of the fulfillment of the target of a very clear pattern in the S&P 500 index:

DAILY CHART The achievement of the 1000 target is absolutely clear. Of course targets are minimum target for moves, but the loss of impetus after the achievement of a target renders markets more vulnerable to short-covering and therefore changes the risk-reward of the trend-following trade. In addition look carefully at the long-term charts ... There are at least two other good technical reasons for covering stocks shorts at these levels... MONTHLY CHART: Note the close proximity of the horizontal support from the prior high at 954 in 2002. Look closely too at the target of the large H&S pattern in the long term chart... The target of that pattern too has been exceeded. And the same logic as that used above holds good... This is why we are out of the market in stocks. THE MACRO TRADER'S VIEW After a very successful long Short Sterling trade in our Key Trades recommendation portfolio, (see http://www.sevendaysahead.com/investor-guides/ktguide.php) we closed it out yesterday for a total profit of almost 100bp, we are now standing aside from both interest rate markets and equities. Stock markets remain incredibly volatile even now, and have exhibited great volatility for many months. Indeed subscribers will know that we have been long term-bears of equities - about which see above. But, understandably, traders have found it very difficult to enter trades that were swiftly taken out by large intra-day swings. These were caused by great uncertainty over the fate of the global financial system, which had seen stalwarts of the US and UK Banking establishment either fail or require Government rescue. But even now after both the US and UK authorities have launched massive independent and structurally different rescue packages, stock markets remain unpredictable. We are no longer bears but neither are we bulls: - Equities have tried to rally, but even now are again trading lower, and - Inter-bank lending, so crucial to the entire financial system and global economy remains frozen; even after a coordinated 50bp rate cut from leading Central Banks. So what next? US treasury Secretary Paulson warned only yesterday more Banks could yet fail, and the rescue plans will take time to work and percolate through the plumbing of international finance and re-awaken economic activity that is on the brink of the worst recession since before WW2. This leads us to exercise caution. The crisis isn’t resolved; we are experiencing a lull even though much has now been done to improve the situation. Now the UK recession looks like being bad, previously it looked like being a disaster with the real risk of one or more major Banking institution going bust. The good news is that that scenario no longer looks likely since the Governments of the UK (and US) are poised to either take a direct stake in the leading banks or cleanse their balance sheets of ‘toxic’ debt. For now though, interest rate markets are giving back some of their gains, which may offer better buying opportunities for another bet on lower rates - in the future. That is why we are now square. We sense we will soon be able to re-establish good interest rate positions at more favourable levels as markets move from worry over the financial system, to focus on the coming recession and its impact on the real economy. We doubt whether the risk return in stocks will encourage fresh positions anytime soon. Mark Sturdy John Lewis Seven Days Ahead [For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]