The dichotomy

Good Morning.

Yesterday's market response to the Italian political risk was far from what a lot of people could have thought about, It looks like Southern European markets were the only one affected: the Stoxx50 closed 0.21% lower, the German Dax rose 0.17%, for what it may concern the common currency it closed the European session at around 1.2944$.

Although Italian newspapers this morning are writing about a speculative attack on the Italian market ( the Ftsemib closed 2.20% lower to 15,354.01) the reality is that markets did not react the way they used to…

The DJ Euro Stoxx50 Dec future ($FESX_F) after declining into the high 60s made all the move back to close just few ticks away from the opening print.

The E-mini S&P500 Dec Futures($SPX_F) rose to 1421, breaking the 1419 that just the day before was seen as a major resistance

The CME Nikkei 225 Dec Futures ($NKY_F) tried an up-side breakout to close just on the channel's edge.

According to us it looks like while the US and and the Japanese market were just focused on what was happening inside their boarder: the fiscal cliff in US,  a new round of easing measure in Japan; the European market was blindly following the US forgetting about what was happening in its territory. Therefore we were assisting to a dichotomy between a global market place (characterized by an high degree of correlation between regional markets) and a specific market place (characterized by a minimum degree of correlation therefore minimum impact by outside agents).

The move in the common currency is expression of the fact that the European market was “a follower”:

In days like those we are trading in: although few commentators expect the Fed to announce more stimulus measures to spur growth having the effect of devaluing the greenback versus major peers; the Euro trading at 1.2950$ does not reflect the actual political and economical framework.

Therefore the question is what's going on?

US investment banks have closed their books as at the last trading day in November, hedge funds have protection in place therefore using the “power of gamma” to cut their net exposure once a short leg kicked in (therefore buying all the way down to keep the net exposure constant in case the short leg had not enough power), other market participants were on the sideline ready to buy for the long waited Christmas rally.

Thus, if the common currency will be able to regain “the bounce supporting line” and the bund to fell below the 145.27 mark:

then we got the proof that we are in long only trading field. At this point you need to make a choice:

• buy the deep
• stay aside

Which one is yours….

Originally posted at www.77sigmatrading.com