Winds of Change in USD and SPX?

I have warned about premature celebration regarding the economy.

What does this mean for an investor or a trader?

It is not crystal clear yet for me.

Personally, 2008 was relatively straightforward. As I warned many times over 2008, we were heading a lot lower. However, by late 2008 and early 2009, once we had crashed, the future was looking a big murkier to me. The problems are still there, but a 60% move in 17 months means that at least some of it was priced in. I correctly saw the potential for a bear market rally but I completely messed up the trading of it and did not allow the rally to run its course.

In recent months, now that the “easy" money (it is never easy) had been made on the short side in 2008, I realized that I needed to adjust my approach.

I began to distinguish my intellectually bearish stance (where I believe this entire rally to be false and doomed to fail) from trading on the bear side. Since August, I have been a lot more selective about waiting for confirmation of the bearish case to show up. I believe we at least have a bearish set up here and I am trading quite heavily from the short side (note that my stance could change tomorrow).

Since the September 23rd Key Reversal Day and more recently, the October 21st Key Reversal Day, the market has looked toppy. A number of technical indicators are at least flashing caution, and since September 23rd, I have played the short side carefully, with small positions and with small gains. We have had a bunch of double tops in key indexes (transports, Russell, SOX) and poor action in key sectors such as financials and homebuilders. Good news is no longer leading to gains, and bad news is met by selling. Volume has been heavy on down days and poor on good days.

In the past week, I have ramped up my short positions as confirmation of at least a correction have shown up. We may be in a selling stampede (Jeff Saut’s term) that normally last 17 to 25 days, and are interrupted by 1.5 to 3 day countertrend moves. By my calculation, we are likely in Day 12 on Thursday, and today’s FOMC reversal might have been the end of a 3 day counter trend move.

The setup is here, and I believe a move below recent lows of 1029 should lead us to 950/956 by around November 20th.

The bull case, in my opinion, is that we bottom around those levels and then rally back by year end or early 2010 to 1100 or higher.

The bear case is that we are going much lower than 950 and will take out the March lows, albeit not in 2009.

I believe in the bear case, but if we get to 950ish, I will pause and see the quality of any rally that develops.

Everybody is now discussing a new US dollar financed bubble (we covered this 2 months ago). If the dollar soars, as I think it might, S&P 950 is a slam dunk. However, to get the bear case to actually happen (beyond the current move to 1030ish), the US dollar needs to take Tuesday’s spike high and take out 77. A USD spike should kill the resilience that commodities have been showing and shave points off the TSX and S&P.

In addition, we need to see further strong selling (similar to what happened between 3pm and 4pm today) show up again this week. That will confirm to me that we are in a selling stampede that is about to get really chaotic.

Note that gold/silver, credit spreads, US long bonds and weakness in financials are all potentially warning of coming problems. Offsetting those signs are resiliency in oil, commodities and China.

I suspect that the market will decide this very soon. If we don’t go sharply lower soon, I will probably have to put away the bear case (again).

Positions in USD, CAD, Euro, QID, SKF, HMD, JPM, BMO, CM