I am going to make today’s post short and sweet. If you are short equities, take some money off the table. Don’t cover it all, but make sure you cover some.

The hysteria about European banks is running pretty thick this morning. The German DAX closed down more than 3.5% on the day. Deutsche Bank hit levels we haven’t seen since the 2008 credit crisis:

As you can see, we are sitting at an important support level. Could we bust down below? For sure - never say never. Don’t ever forget the Friday before the week-end Lehman went bankrupt. The Lehman preferreds were trading for something like $20 bucks and they opened in the pennies. There is always a chance the market loses confidence in a financial institution. This loss of confidence can happen astonishingly quickly.

And there is no doubt in my mind these new fangled convertible contingent bonds have failed to provide the stability regulators were hoping for.

The selling of these issues seems to be creating a self fulfilling feed back loop. This shouldn’t really be a surprise because at the end of the day, bond investors always shoot first and ask questions later. The best risk capital is equity, and maybe a better approach would have been just forcing equity issues ahead of time.

In the long run, I am uber bearish. But the fear is running so high, I can’t help but think about the adage if everyone is crying, you should be buying. I know I am mixing time frames, and this is often a trader’s greatest sin, but at the risk of being cute, I believe we will get a rally in here. Have a look at one of my favourite indicators - the 10 day Bollinger band with 1.5 standard deviation bands:

It is by no means perfect, but with a little bit courage, this is often a good level to buy.

And here is my final thought. During the past few years, the Japanese Yen has often led the move in risk assets. This recent sell off has seen a massive rally in the Japanese Yen (lower in USDJPY rate).

But we are now sitting at some major support. My guess is that it holds, and the Yen drags the whole stock market higher. So I have covered some equity shorts in here.

In case I am wrong, I have bought some Yen 115.60 straddles. If I am off base about the stock market bouncing, then I suspect the break in the Yen will be violent. Hopefully it will cushion the opportunity cost of my stupid stock market cover.

Thanks for reading,
Kevin Muir
the MacroTourist