Monday, June 19, 2006

BoJ put?

The drop I predicted last week never took place. I had an inkling of what was to come when I found out on Thursday morning the Bank of Japan (BoJ)’s announced it was maintaining the zero interest rate policy (ZIRP).

Many pundits would tell you that the rapidly shrinking Japanese monetary base was the reason for the recent global stock market sell-off, so that a temporary reprieve by the BoJ was exactly what the doctor ordered. The less-than-hawkish remarks by Bernanke certainly didn’t hurt, but the indices were already up substantially when he started yapping. In the end, Thursday was a rare 2% up day for the S&P and the Dow finished a 2-day, 300-point rally.

The key question for the moment is this: does this move negate the call for an impulsive, 5-wave down, or was this a mere ABC correction and happy days will again be here in short order? The chart below attempts to put that question in a graphical form. Thursday’s bounce, although substantial, was still within the down channel. In my view, until the S&P manages to break above 1265 (upper channel and previous resistance) the bears still get the benefit of the doubt.

However, I am giving serious consideration to the possibility that we’ve started a short term rally (in the context of a longer term bear phase of course). I mentioned last Tuesday that I intended to ease out my puts: I closed out my EEM puts last Tuesday (Dec 110s @ $28.20, bought @ $10.30), SPY puts on Friday (July 122s @ $1.30, bought @ $1.25) and half of the IWM puts today (Jan 80s @ $11.90, bought @ $5.10). I intend to maintain my shorts and bear funds. As far as PMs are concerned, my low bids entered on Wednesday were never hit. I’m reasonably sure the upcoming leg is B of 2, so I will be happy if I can get those shares but I don’t feel the need to chase either.

This is not investment advice. Please do your own due dilligence. Good luck and be safe!