The Week Ahead: Shakeout or Smackdown?

For the weekend warriors, checking the box scores over their Saturday-morning coffee, the action in the market was rather placid last week.  The S&P 500 gained 0.1%, the Nasdaq rose 0.4%, and the Dow lost 55 points – less than a half-percent.

But for those of us in the trenches fighting it out on a day-to-day basis, last week was much more action-packed.

On Tuesday, equity indices traded sharply lower as a confluence of international data points indicated that the global economic growth story wasn’t as robust as previously expected.

China downgraded its GDP forecasts, the European drama kicked back into high gear, and Brazil reported its second worst annual performance in nearly a decade.

The news came as a shock to institutional managers who had largely been positioned for a continuation of the “goldilocks” recovery (not to hot, not to cold…) The action triggered a number of risk points for our existing trades, automatically reducing our bullish exposure, while also hitting entry points for a number of counterbalancing bearish trade setups.

While we understood that the headline risk from Europe could quickly derail the “melt-up” environment for equities, it still made sense to continue with the bullish trend (with reasonable stops) until the music stopped playing.  As the environment quickly shifted, we adjusted our exposure accordingly.

Heading into the end of the week, equities started to recover from their slump – helped along by positive employment numbers both Thursday and Friday.  As we open a new week of trading, we now have to determine whether last week’s shakeout was simply part of the Wall of Worry that typifies bull markets, or if the sharp selloff was the first salvo in a much more ominous battle between the bulls and bears.

The Mercenary Portfolio is currently positioned with a bearish bent, and less exposure than we began last week with. There are a number of key areas we have our eye on for potential trades as we work through this key inflection area…

Financial Exchanges Back In Play

It’s been a tough few years for financial exchanges and clearing firms. While trading activity has been fairly high, the risk levels for clearing operations (who guarantee both sides of most traditional AND derivatives trades) has been sobering.

Last year’s MF Global catastrophe dealt a significant blow to investor’s confidence in this business – a business that survives solely on “trust” that the system will work.  Our friend
This week will be important from a technical perspective as traders determine whether last week’s action was an isolated event or a more ominous red flag.

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We’re more than willing to put capital to work in high reward-to-risk situations, while still respecting the price action and the potential for more choppy action.

Written By: Mercenary Trader