Confirmation of a Trend Change

Today, I received more confirmation of the major trend change that announced itself yesterday. Yesterday, by the way, was the first big drop in stocks that coincided with a rise in bonds in two months. See this chart from Yahoo! Finance. Ever since the QE2 rumor came out, negative economic news was good for stocks. But now that's a dud, with no news to sell. It's a traders's nightmare. From the Investor's Intelligence survey, we learn that bulls outnumber bears by 42% to 28%.

Today, there's more confirmation. After yesterday's collosal move in Treasuries, I expected some give back. Out of 11 basis points, only 1 has gone back. Stocks, on the other hand, are showing lots of weakness. It's time to get aggressive.

The economic fundamentals are nauseating. Dave Rosenberg states that the 2.4% GDP growth estimate from Q2 will probably get sliced in half to 1.0-1.5%. In the absence of any growth drivers, we'll see 0% to -0.5%  for Q4. Rosenberg's got $80 for S&P500 earnings next year. I think this could get priced in by the end of this year. I'll throw a 12X multiplier on that and forecast 960 by the end of the year.

Now there's the question of how to play this. I believe that due to the European austerity, raising of interest rates in Australia and Canada, and tightening of credit in China, US weakness will be magnified in emerging markets. So I should buy EDZ. Another one to look at is EWC (MSCI Canada index) as either a short or to buy puts on. The Canadian housing market is rolling over, the currency is slightly overvalued, the US is sliding fast, and weakness in China could crush the commodity industry. I got a distinct feeling of foreboding upon reading this data from Rosenberg, which is more important to me that any rational explanation. The gut learns patterns much more quickly than the rational part of the brain. As far as the puts go, volatility is very low for the March '11 $24 puts at 33. I've put them on the watchlist.

Trade:

Buy 10% position in EDZ @ $37.88.