Chill-Out time

It's Chill-Out time for the equity markets. It got a little heated at the beginning of the week, but the scene is a bit calmer now. VIX is down to 28, the US 10 yr is up a whopping 22 bps as I write this, and the global equity markets have bounced off their lows. The tone of the media has also changed. Although it is impossible to measure this scientifically, it seemed that ALL of the stories on Tuesday / Wednesday were doom and gloom, whereas the mix is much more balanced today. Positive stories today included the bail-out of the monolines and progress on the fiscal stimulus package. This will be important to watch as it could have a strong impact on the markets when it finally goes through Congress, though I am sceptical about the final impact on the economy.

Light week data-wise. Initial unemployment claims were surprisingly low again today. This also needs to be carefully watched. If this remains at such a low level, it will be a major hole in the recession story, which has now become mainstream. Existing home sales were very poor today, however. Lower interest rates seem to be having an impact on refi applications, but the banks and consumer credit companies see rising losses on the horizon and they are scared. Anecdotal evidence suggests a BIG decline in new auto loans, for example.

I expect the market to bounce around a bit here but ultimately move slightly higher over the short term. Not surprisingly, the chatter is still somewhat negative, and I will wait for some optimism to return before re-establishing my full short position. This is a risk management exercise more than an attempt to goose returns. I am looking for SPX to reach about 1380, maybe higher.

MARKET POSITION: EQUITIES - SHORT (6 units); GOLD - LONG (1 unit)