Guilty Until Proven Innocent

Just like a civil courts case, the market is now guilty until it can prove itself innocent.  Just as in January/February 2014, we are trading below a falling 20d, which to many, represents sellers there.

As the cases of Ebola continue in Africa, residents down here in Dallas are nervously watching the news for any indication of further spread from the Dallas infected.  It's tragic and unsettling.  While I prepare to fly to Chicago tomorrow for my daughters wedding, I must admit to already having thoughts "what if the infection spreads further here while I am gone?".  I've never been an alarmist however those in voluntary quarantine continue to take risks, going on airplanes and cruise ships, placing others at risk.  If more Ebola cases spout up in other cities, will people begin to stay in their homes and venture out less to theaters, malls, restaurants, bars, etc.?

The ECB announced they will begin their asset purchase program much sooner than expected after a raft of grim eurozone data this week alarmed financial markets and placed both Germany's doctrine of budgetary rigour and the ECB's monetary policy in the hot seat.  While this may help American multinationals with exposure to the EU, it definitely does not help small caps, 80% of which have no European exposure.  Small caps may not able to weather a strong U.S. dollar as easily as their larger cousins either.  This may be why the Russell 2000 saw weakness again today but small caps are also a barometer for overall risk appetite itself.  Is the market selling over or merely back filling so the shorts can re-load at higher levels?  That's what I would do.As I said, I feel the market is guilty until proven innocent.  While $RUT and the Dow have tried to bounce off their 20m (a nice place to buy) we still have a good deal of geopolitical headline risk with Isis, Russia/Ukraine tensions, North Korea's Kim Jong Un's mysterious disappearance from public view, China's (and Europe's) slowdown to contend with and of course Ebola nagging in the background.  Let's not forget 3Q earnings which have kicked off and 4Q guidance.  Many concerns circle the retail and consumer discretionary area.  Is the consumer tapped out here? 

Clearly Wednesday's low must hold.  SPX et al closing above the 50% retracement level would have me raising an eyebrow.  Closing above the 78.6% and I'll bet you a steak dinner we challenge the market highs.  It is entirely possible we are merely carving out a wide trading range and will resolve matters via time rather than price.  While I nibbled on a few longs this week, I've hedged both.  I'd rather be right and lose a little with worthless puts, than be fully exposed and have face ripped off.

Note:  I will be out of office until Thursday, October 23rd.  Intentionally leaving my laptop at home.  If you experience a problem, you may contact me @

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