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Bridgewater Associates is the world"s largest macro hedge fund firm, meaning they
have a good handle on the problems in Europe. Some excerpts from a Bloomberg article on the firm"s
current outlook:
These days, the
view from Bridgewater is dour. They divide the world into two groups:
developed debtor nations that are deleveraging and emerging creditor
countries that are leveraging up. After years of overspending financed by
borrowing, the former are being forced to lower their debt relative to their
income levels, constraining spending levels and employment gains.
Developed debtor
countries, including Greece, Spain and Italy, that can"t print money to make it easier to
service their debts and to make up for slow credit growth will have decade-long
depressions and debt defaults.
"We worry
about Europe not being able to solve its problems," says Bridegewater"s founder Ray Dalio.
A recent Bloomberg article sheds some interesting light on
the current bearish bets in the market. Here are the key points:
U.S. stocks are
likely to extend declines because hedge funds have leeway to boost bets
against the world"s largest equity market,
according to Bank of America Corp."s
Mary Ann Bartels.
The adjusted short
interest ratio, a measure of potential buying pressure, is 1.5 for the
Standard & Poor"s 1500 Composite, down
from 2.4 at the end of July and below its 10- year average of 2.4, Bartels
wrote in a report dated Sept 5.
"Short
interest represents a floor," said Bartels, who ranked third among
analysts who study price charts in Institutional Investor"s
2010 survey. "If you have a lot of shorts, you only fall so much, and we
don"t have that floor, we don"t
have a safety net on the market."
"What we"re most concerned about is the banking system in
Europe," Bartels said. "There is no reason to have a very long
position with the positioning of the charts," she said. Still,
"the level of shorts is nowhere near where we saw in 2008 and 2009"
in terms of potential buying pressure.
The S&P 500 made a higher low in
August relative to the summer 2010 lows (see green line in chart below). The
indicators shown both made lower lows (red lines), which is bearish from a
longer-term perspective. According to Dr. Alexander Elder, author of Trading
For A Living:
MACD Histogram
(blue bars below) works like headlights in a car - it gives traders a glimpse
of the road ahead. If the indicator falls to a new low, it shows that the
bears are strong and prices are likely to retest or exceed their latest low.
Divergences between MACD-Historgram and price only
occur a few times a year, but they are some of the most powerful messages in
technical analysis.
Chris Ciovacco
Ciovacco
Capital
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