Thursday, February 22, 2018

Fed Minutes Reaction

The Fed minutes didn't reveal anything new.  And it shouldn't really mean much, because it was Yellen's minutes, and she's no longer the boss.  What will matter much more for this market will be Jerome Powell's first FOMC meeting in March, and that is where the uncertainty remains. 

It is the reaction to the news which is meaningful.  Investors were waiting for the Fed minutes to sell.  Or they just delayed their planned sales till after the Fed minutes, no matter what.  This is why you often see a rise ahead of the Fed meetings announcement during the day because those who wanted to sell ahead of the meeting usually did so the previous day or even earlier.  Sometimes you have investors who want to wait till after the event before buying, like what happened with the CPI report last Wednesday.  But this time, the market was very complacent and viewed the Fed minutes as a opportunity to sell into, not buy in to.  And thus the big selloff afterwards. 

I was hoping for a bit stronger rally to short into this week and it just hasn't happened.  It got close to my short target zone of 2750-2760, but barely missed it before plunging.  Rarely do you see such a big move on a Fed minutes announcement, but this market is a nervous market, and it saw the bonds selloff and followed that market almost tick for tick.  At this point, I don't know if I will be able to get a low risk short opportunity before the market bottoms, so I will change my approach to looking for a low risk buy opportunity in the coming days, if the SPX can get to 2640.  I know that's a long ways away, but its possible in this jumpy market.  What I do doubt though is that we'll see a big move down to 2540 to retest the lows.  I don't think the bond market will stay weak enough for that to happen.  The 3% 10 year stands as a very tall barrier and it looks like bonds are stabilizing at current levels and reluctant to go much lower. 

Ever since the CPI number came out, the put/call ratios have been coming in fairly low.  Yesterday was also low, despite the late day plunge.  It seems like we need to shake the tree at least once or twice more before the V bottom players throw in the towel and the market can bottom and sustainably rally higher.  At 2705, the market is right in the middle of my new range, 2640-2760, so not much edge here.  Waiting for an overreaction towards either side before putting on a trade. 

Tuesday, February 20, 2018

$258B in Treasuries

The stock market usually could care less about how much Treasuries are up for auction in a week.  But since the biggest worry these days is about rising interest rates and big budget deficits, it is catching investors' attention.  Since when did investors care about the T-bill auctions?  It's a sad state of affairs for the US government, when they are so reckless with deficit spending and tax cuts that it actually scares the bond market.  The bond vigilantes were dead for the last 30 years, and somehow they have been brought back from the dead, in an economy with such low growth.  What a mess.

For the stock market, along with rising 10 year yields, it doesn't help that the dollar is strengthening over the past couple of trading days.  No, the US is not that much different than the rest of the world when it comes to weak currency/strong stock market.  The correlation works just as well for the S&P 500, because the global stock markets have just become a mercantile index, measuring how much extra companies can make from exports with a weaker currency.  Just like Japan and Europe.  The currency is the only variable that actually changes from time to time, thus its effect on the stock index.  The domestic markets aren't a changing variable, because there is hardly any growth. 

I know the current news headlines are all about inflation and higher growth, massive Treasury debt supply coming, and rising interest rates.  But the growth is just not that high, and actually weaker than what we had in 2014.  The market needs to latch on to a story that it can run with, and since there's nothing else to talk about now, with tax cuts and the budget already passed, it gets all the attention.  Unlike the pundits who believe there was almost no inflation for the last 10 years, I actually see how prices have changed.  The biggest expense for most people is housing, and that has not seen low inflation as many claim.  Same goes for medical expenses.  Really the only thing that hasn't gone up in prices are commodities and electronics.  The price for services and education is way higher as well.  The CPI and PCE are a joke, and using those figures to determine inflation is playing right into the government's goal, of being able to suppress interest rates by pretending inflation is low, and also reduce payouts for CPI indexed entitlements. 

We have a rare gap down after a 3 day weekend, so close to that V bottom from less than 2 weeks ago.  This market just doesn't seem like it wants to break 2750 until the bond market settles down.  Bonds were strong on Friday and stocks followed.  Today, both are weak.  The negative stock/bond correlation is broken.  It makes for a more unpredictable stock and bond market.  A nightmare for risk parity funds.  This too shall pass, but it probably stays with this market till we hear explicitly (not Congress spoon fed babble on Feb. 28) from Powell at his first FOMC meeting on March 21. 

Still waiting to short, didn't expect the sellers to come out so quickly on Friday and beat it down after the 3 day weekend.  Any bounce in the bond market should provide an opportunity to short the S&P if it bounces towards 2750-2760 again this week.

Friday, February 16, 2018

Furious Rally

Fast and furious on the way up.  There was a selling panic on the way down, and since the Friday afternoon bottom, it looks like a buying panic.  Now the last 9 years of S&P trading are probably popping up in the minds of at least a few money managers, thinking, is this another V bottom?  I am not in that V bottom camp, even with this furious rally, just because of the overextension higher in January, the speculative froth at that point, and the late stage of the market cycle that we are in.

That being said, I am not so sure we'll get a retest of last Friday's lows like many believe.  It could very well be a retest of the daily closing low last Thursday towards 2580, or perhaps a bit higher towards the December post tax cut bill low at 2625.  There is still a lot of speculative demand to BTFD, so that should provide good demand if we get anywhere close to 2600.  On the other hand, so many weak hands have gotten in since the beginning of 2017 that I can't picture a V bottom higher, especially after a 340 point drop from peak to trough, a 12% drop that hasn't been equaled since the panic in early 2016.

Also, I am looking at a market that is going higher, now around 2735, but the VIX bottomed out yesterday at the open, even though the SPX was at 2715 at the time.  Since yesterday, the VIX is inching higher even as the market goes higher.  Obviously there is demand for volatility at these levels, even as the market keeps going up.

I previously stated that a top to bottom range of 2540 to 2740 was likely in the coming weeks.  We broke the 2740 area overnight, so I am wrong about the range.  But I still believe the upside is limited from here in the short term, thinking a possible top of range at the start of the panic and gap fill zone at 2760, from two weeks ago.

Also from a timing perspective, post Presidents Day/ Chinese New Year holiday last gasp buying could propel us to a short term top next week, hopefully for a potential good risk reward short around 2750-2760.

It looks like the bond market has stabilized for the moment, despite hot CPI numbers, so I don't expect another rout in the stock market like we had last week.  But we should still have some leftover nervousness and choppy trade as investors adjust to the new higher volatility regime.

Thursday, February 15, 2018

A Little 2000 and a Little 2007

I sold too early yesterday at 2694.  I can't help myself.  At this stage of the bull market, I am just a nonbeliever when it comes to the long side, which makes me want to sell rallies quickly, before they peak.  Even though I know that I am selling too early based on past experience.  These rallies off panicky V bottoms usually last longer than I expect.  But those past experiences were in the middle of a very strong bull market.  The market will act differently near the end of a bull market compared to the middle of it.  That is why I am nervous holding longs in this market.

I know it is presumptuous to assume that we are near the end of the bull market, but almost every anecdotal, fund flows, retail trader volume, and valuation metric supports that assumption.  I still can't get over the fact that most CNBC guests brushed off the 340 point plunge in the SPX in less than 2 weeks as just technical selling.  Of course the huge rally in the first 3 weeks of January was all fundamentals.  The selling is viewed as irrational and technical, just some overleveraged traders blowing up, and algos causing panic.

I haven't seen so much confidence in fundamentals since 2000.  Even in 2007, near the top, there were worries about a housing bubble and credit problems from subprime.

I have an acquaintance who is an on again, off again stock investor, buying into Chinese equity mutual funds in 2007 and after that debacle, finally buying stocks again in 2017 after a 10 year break, and to boot, investing not in bitcoin, but altcoins (because they are cheaper) near the end of 2017. 

He has been bragging about his 2017 stock gains, mostly in tech stocks, and while he was shocked by the big drop last week, he viewed it as bots gone wild, and and refuses to sell because fundamentals remain strong. 

Deep in my gut, I have a feeling that 2018 is a mix of 2000 and 2007.  Like 2000, you had a huge rally in tech and growth stocks.  Interest rates were going higher.  Globally, it is a lot like 2007, with real estate speculation at all time highs in parts of Europe, Asia, Canada, and Australia. 

A lot of times I let my big picture ideas get in the way of short term trades.  But I often find the path of least resistance, and thus the odds, favor those who are on the right side of the trade long term, even if it is a short term trade idea. 

We got a relief rally even after the CPI came in high.  It tells you a lot about the market positioning ahead of an event.  A lot of shorter term traders and investors were nervous about the CPI number and either sold or hedged ahead of the event, or right after the event, which meant the market really only had one way to go after the dust settled, which was up.  It was similar to the bad nonfarm payrolls report that came out in early October 2015, when the market gapped down huge on a miss, only to rally huge from the opening bell all the way to the close.  That NFP report happened to come right after the market had bottomed, similar to the CPI number yesterday. 

A big gap up today after the big bad event(CPI) is over.  It just happened to gap up into a strong resistance zone near 2720.  You are getting the fade off that strong open today, which makes me think that its going to be difficult to go up much higher from these levels.  Waiting for a possible short next week, if the ES is between 2720 and 2740. 

Wednesday, February 14, 2018

CPI Worries

I don't recall a time when so much focus was on one CPI number.  It did come in higher than expectations, which has only stoked the flames of inflation concerns in the market.  The stock and bond market correlations have been blown out of the water, with many days when stocks and bonds move down together, and some days when stocks and bonds go in opposite directions.  It is a completely mixed bag at the moment.  Those who have been using bonds as a positive carry hedge against stock market down moves are questioning the strategy. 

Risk parity has been pummeled the last few weeks, and it is all due to the new theme of this market, which is inflation.  The inflation fear has its origins from a weaker dollar, higher oil trend in 2017.  The tax cuts which add at least $1.5 trillion to the deficit passed at the end of last year have added fuel to the inflation fire.  More recently, the reckless government spending continues with a huge $320B addition to the budget for 2018 and 2019, with a permanent increase in the budget caps. 

It is pure politics.  Most Americans don't care about deficits, they care about wages and economic growth, government benefits, and taxes.  Deficits are nearly at the bottom on the priority list.  With lobbyists buying off politicians' votes, there is almost a guarantee that taxes go down and spending goes up.  It is the politically popular thing to do, both among the general public and the lobbyists.  It just happens that the tax cuts and the government spending go straight to the coffers of the lobbyists and power players in Washington DC.  That is why you will continue to see bigger and bigger budget deficits and a huge increase in national debt.  And just like Japan, with their huge budget deficits, the end solution will be a monetization of the debt.  The Fed will have to do another huge QE program to sop up all that Treasury debt and keep interest rates low when the next downturn happens.  And it will happen. 

As I write, the S&P is screaming higher off the panicky open on the high CPI number.  The past few trading days clearly show that investors are adding back risk and feel like Friday's V reversal was the bottom.  While I agree that it is a short term bottom, as I am long, I disagree that it will last more than a couple of weeks.  The market psychology has changed, and the interest rate picture has gotten less favorable.  It will not be shrugged off unless bonds embark on an uptrend.  I see that as being difficult given the events coming up over the next few weeks which will keep fixed income investors nervous.  Powell speaks to Congress on February 28, then the newly feared nonfarm payrolls number on March 2, and then the ECB meets a week after that to probably discuss the end of QE, and then you have Powell's first Fed meeting, with a press conference, where he will be under pressure to be hawkish with these high inflation prints and strong jobs numbers.  That is a murder's row of events for fixed income investors.

So I give this equity rally until next week, and then the nervousness should come back in late February/early March ahead of these events.  And unlike ahead of this CPI, I expect there to be selling ahead of the event, not buying and short covering.

Monday, February 12, 2018

V Bottom?

It looks great on the charts, the hammer reversal on high volume, testing the 200 day moving average, and rallying hard into the close and now gapping up huge on a Monday.  Short term, it probably will grind higher just because there isn't much resistance till you get to 2680-2700 area.  But you just don't make a V bottom and never look back when the VIX goes from 12 to 50. 

I am still long, but got in way too early so hardly showing a profit despite a 120 point rally off the Friday low.  It could have been worse.  I could have puked it out on the Friday selloff, expecting another massive sell into the close, but the market was so oversold and the put activity so far off the charts, that it felt like the market was a coiled spring looking to bounce back.  Originally, I was looking to sell on Monday or 2720, but now it looks like it will be better to sell later this week, and will hold on to see how much higher the bulls are willing to take this thing. 

The big event this week is the CPI coming out on Wednesday.  The worry that is pervading Wall Street is inflation.  I have a feeling there could be a relief rally after the number comes out, which could propel us to the top of the range.  After a capitulative selloff on Thursday/Friday, and strong reversal, the bulls will get emboldened again and take prices to where they can't sustain, which is 2700+.  That is the target area to sell the long and reverse to short.  Last week carved out the top and bottom of the range for the next couple of weeks, 2720 on the top end, 2530 on the bottom end.  Those will be the general boundary areas where you want to fade the momentum on either side. 

I don't think the worst is over, and full expect another strong selloff after a few days bounce.  However, that next selloff should be more contained than last week's selling, where uncertainty about price support levels caused investors to sell first, ask questions later. 

Friday, February 9, 2018

Too Eager

Well, that was a good idea, buying the dip, it was just a few hours too early!  I overestimated the support levels at 2640, and should have expected a pre-weekend risk off move to start a day early.  No one wants to hold too much risk over the weekend, as the market is plummeting.  So I should have anticipated the selling begets selling theme into the close when S&P continued making lower lows and lower highs, below 2640. 

In this kind of manic market, being too eager to buy or sell will cost you a bunch of points, as I am seeing overshoots that are August 2011, August 2015 like. 

Yesterday's action does confirm that you will have a lot of resistance in the 2700-2720 area.  That is a dead body zone, where eager beaver buyers who didn't want to miss a bottom, jumped in too early, and paid the price the last 2 days.  Remember, because we sold off hard yesterday, we are near strong support levels around 2580-2600, so its going to take some dedicated selling to take this down even more after yesterday's pounding. 

Since I am already in a long position, I don't want to add more here.  I do expect a bounce back next week, but will it be from 2580, or from 2540?  I would be surprised if this thing went to 2540 today, and that would change the nature of this selloff into something more vicious than even a bear like me would expect.  It does seem like yesterday's selling did finally change the tune a bit from its just technical selling, to, it will take some time for the market to settle down.  There is a gradual acceptance that this selloff will not end in a V move higher like people are used to from past selloffs. 

Anytime you take the VIX from 12 to 50 in a few days, you will leave a mark and bruise the psyche of the bulls, making them reluctant to jump head in to buy stocks.  I do expect a bounce to start either later today or early next week, but the question is how high can it go.  Not so sure that it can hit 2720 again so quickly.  If it did get anywhere near 2700, I will dump my long and consider another short. 

One bad sign for the bulls is that bonds continue to act like it has the plague, unable to rally at all even though the stock market got destroyed yesterday.  That will be a pressure point for this market until bonds stabilize.  This bull market will not keep going higher if interest rates keep going higher.  The pain point has already been hit, its just the stock market bulls are in denial that it only takes a 10 year above 2.80% for the pain to arrive, not 3.5%-4% like most thought.

Wednesday, February 7, 2018

Just Got Too High

It gets repetitive to watch CNBC and Bloomberg guests point out that the recent selling was technical, and not based on fundamentals.  So the parabola higher in January was all fundamentals, and the selloff was all technicals?  So if it goes up, that is because of fundamental, rational reasons, and when it goes down, it is because of those crazy algos selling it down.  Oh, and those stupid XIV investors and volatility sellers.  Blame them too.  

You would figure that these financial analysts and portfolio managers would talk some common sense and reason after all their years of experience, but most just end up parroting each other and blurt out the same misinformed message.  It is deeply embedded in our reptilian brains to deny undesirable realities, and blame it on something or someone.  

I don't have some great insight into the market or how it behaves.  A lot of it is common sense.  If you have some of the lowest cash balances at the retail brokers and volume 50% higher year over year in January, that is a sign that retail traders are all in on stocks.  And since most retail traders lose money, it probably means most of them are wrong.  So by the principle of transitivity, going all in on stocks in January was probably wrong.  

Also, the higher stock prices get, the less attractive they are as an investment.  The market was up almost 200 points in 3 weeks, or 7% in January at the top.  That is an annualized rate of over 100%!  That is on top of 20+% rise in 2016.  And the market wasn't cheap at the start of 2016 either.  

The US stock market valuation is excessive.  That leaves this market vulnerable to big drops on no news.  It is turning into a Ponzi scheme, where new money needs to keep flowing into the system to keep it going, or it collapses.  At these valuations, you need steady equity fund inflows to keep the scheme going.  These aren't self sustaining valuations.  

All the dip buyers came out yesterday and we closed almost at 2700.  It did seem on CNBC that everyone was viewing the selloff as a buying opportunity, and not a warning sign of a top in the making.  I have a different view, and expect the market to trade in a lower range around 2540 to 2720 for the rest of February.  That means yesterday's rally got this market closer to a sell short zone.  I will be looking to put on a starter short position around 2700 today, looking for a move back down later this week.  Not interested in a long this week unless you get down towards 2600.  

Tuesday, February 6, 2018

Cliff Dive

Wow.  That was panic selling that we haven't seen since August 2015, and before that, October 2014.  But unlike those other markets, you didn't have a parabolic rise collapsing within days.  This market is unique in that it spent very little time above 2800, even though it went all the way up to 2870.  Even in 2000, you didn't have those kind of spike moves higher and then straight collapses lower.

If I have to find a precedent, it would be the flash crash of May 6, 2010.  You had a strong rally from February into April, taking the market up 180 points, or nearly 18% in just 2 months.  The market topped out in April and consolidated for several weeks before the plunge in May.  Similar to now, April 2010 built up a lot of complacency in the market, as the put/call ratios were extremely low day after day.  Also, the market was in a sharp uptrend, which is different than a flattening top that rolls over into a waterfall decline (August 2007, August 2011, October 2014, August 2015).

Similar to May 2010, you had built up a lot of complacency in the prior months, which led to a huge selloff intraday for no reason, as algos went bananas and selling beget more selling.  That is similar to what you saw from yesterday afternoon and spilling over into the after hours session.  The ES dropped 80 points from the futures close, a huge move and the panic was thick overnight, much scarier than the post election overnight panic, because this was on no news.

So what is the game plan?  I wrote a couple of blog posts about a similar market in August 2015, that could provide a basic guideline to trading these type of markets:  Mix of August 2007, August 2011, and August 2014 and Hopeful Opens and Scary Closes.  This is a bit different market in that we are still above the 100 day and 200 day moving average, despite the carnage.  Those other markets easily pierced through the 100 day and 200 day moving averages before hitting bottom.  It doesn't mean we have to do that here, but the 200 day moving average is at 2535, so I guess if you count overnight prices, we did pierce the 200 day.

Based on the overnight range, of over 100 points, SPX should be contained today between 2540 and 2640.  That isn't a huge help when the ES is trading at 2590, but it gives you an idea of the boundaries that have been set in this panicky market.  You will not have traders willing to push the ES above 2650 given the recent price action, and you will have bargain hunters and corporate buyback flows providing support at SPX 2540-2560.  Once the dust settles today, we should have formed a tradeable bottom which could take the market back up to 2700-2720 area.  I don't think you can get back much above that zone, maybe 2740 if the market gets overextended, but that will provide a strong lid to this market, and we'll have a tradeable range where you sell anything around 2700, and buy 2550-2600.  The ranges are still fluid right now, but after today's cash session, it will go a long way towards forming the bottom of the new post crash range.

I expect that range to hold for at least the next 3 weeks, so it gives enough time to trade it and profit and move on before a range breakout becomes more likely.  Today is the key.  If we have another panic session like yesterday and break through the overnight lows, you are looking at 2011 type of selling and who knows where the bottom is, maybe 2400.  But it looks like the market has capitulated already, and seems like the market will find value today between 2540 and 2640.

Longer term, this market looks to be forming a massive top and this panicky selling is part 1 of that top formation.  It is trading more like 2000 than 2007 or 2015.  We may have one last gasp rally in the spring towards the January highs after you form an intermediate term bottom this month, but I expect that to be sold and for the next bear market to start in earnest.

Looking to buy any dips down intraday towards 2540-2560, with a 2-3 day holding period looking to sell at 2700.

Monday, February 5, 2018

Pajama Trading 101

Just a brief primer on what to do when the overnight S&P futures traders panic after a big down day.

1) Don't sell, and considering buying into the down move.  The selling is usually either late panic hedging by cash traders or liquidations by overleveraged traders cutting losses.  It is not fundamental selling and usually doesn't last beyond the overnight session.  In most cases, by lunch time in US hours, it has recovered all the overnight losses. 

2) Expect an overnight gap up the next day.  If the market had a big down day on Friday, then a panicky overnight session on Monday will usually lead to a short term bottom and a gap up and strong Tuesday.

These are just the basics of trading panicky markets in the S&P 500, since many haven't seen a market like this since early 2016.  This is the type of market that becomes more predictable.  A VIP market, volatility increases predictability market.

The big story on Friday was the strong nonfarm payrolls report, selling off bonds, and putting risk parity funds into a vice squeeze of pain on both sides, as stocks and bonds got crushed.  The only reason you would think that stocks would keep selling off is if you think the bonds will keep selling off.  I am not in that camp.  I believe that the selling in bonds is not fundamental, but panicky and speculative.  Sometimes fund managers sell not because they believe the fundamentals have changed, but because they have to reduce risk and therefore sell.  On top of that, you have trend following speculative flows on the sell side which exacerbate the down moves.  Even with a strong jobs report, it doesn't change the Fed's rate path, which is more dependent on inflation rather than employment.  The Fed and the market has already come to the conclusion that the job market is strong.  The only debate is whether inflation will go up or not.  And the job report did nothing to clarify that debate.

Just because I don't think bonds are going to keep selling off doesn't mean I am bullish on stocks.  I realize that stocks are in the last stages of a long bull market, and that is when volatility picks up and retail is all in.  But the top will usually not be a point, but a process.  I still believe that the market will chop around the top, and revisit 2875 and probably make marginal highs in a couple of months.  That will be the time to short.  Right now, its a time to look for panicky selling to buy dips for short term trades.  Since I have a longer term bearish view, I would urge to be cautious in buying dips until you get some serious selling, down to around 2680-2700.  There is massive support at those levels.  We can bounce hard from the overnight bottom today, into Tuesday/Wednesday, but I don't think its worthy of a big long position yet.

Friday, February 2, 2018

All About Bonds

The stock market can't deal with yields this high.  Not at these nosebleed valuations.  In 2013, when the 10 year was trading at 3%, the S&P was trading at 1800.  At 2800, a 10 year trading at 2.85% is not going to be taken well.  The underlying assumption of a low discount rate because of low Treasury yields is being blown up.  If you have to discount cash flows at higher yields, then the present value of that asset has to decline. 

Also, don't forget that retail is basically all in on this market.  So trading long is now trading with the retail side.  With no central bank support.  I am sure we'll have a bounce back soon, but don't expect a runaway market higher anymore.  This is the 9th inning of this 9 year bull market.  Trade accordingly.  There is some support at 2780, and below that stronger support at 2760.  Resistance now at 2835-2840 on the upside. 

Thursday, February 1, 2018

Out of the Short

That was a horrible trade.  I finally took the loss yesterday in the low 2820s after doubling down at 2850 last week.  It was a painful short, and it is a relief to get out of it at a somewhat decent level to regroup and wait for a better area to short.  I haven't seen a stock market trade like this so I don't mind losing in such a rare type of market.  If I had lost a similar amount in a normal market, I would be much more upset.  This is a manic stock market, so past patterns don't work as well. 

I see some strong support at 2800 area but I will pass on the longs.  I don't like getting long markets where retail is so heavily involved, they could panic sell this market into some deep, deep pullbacks.  Also, Bond yields keep rising, which is not a good sign for stocks. 

Wednesday, January 31, 2018

Volatility Picks Up

I never thought I would ever think that a VIX going up to 15 would be considered a VIX spike, but it is.  Going from VIX < 10 up to 15 is now considered a risk off move.  It is still a tame market, but at least we are beginning to see the volatility rise as the market has reached valuations that are increasingly unstable.  Valuations that cannot withstand 10 yr interest rates going up to 3%. 

Just take a look at a 2 year chart of the S&P 500 and tell me that you think this is a good time to start buying dips.  I was considering covering everything yesterday and maybe should have to reset my shorts today, but I will hold the position because I still see too much air underneath to 2805, and plenty of air below that to 2760.  These parabola type markets are notorious for violent shakeouts, because there is so much speculative money in the market during these type of moves.

We have the Fed meeting today, and end of month, wrapped into one.  I am hearing a lot of talk about pensions rebalancing from stocks to bonds but there is no definitive proof that they will rebalance today, instead of next week, or a month from now.   Usually pension funds don't trade much, and from what I have read, are increasingly looking to increase equities allocations for their "higher" returns to emerge from their underfunded status.  It is speculative to guess what they will do.

What I can surmise with greater confidence is retail finally getting confident about stocks.  You can see it in the global equity ETF inflows.  In the TD Ameritrade and E-Trade trade data.  I can just feel it now reading the Stocktwits stream.  The bullish bias has permeated the investment landscape.  It is really late in the rally.  I can only imagine the vicious selloffs with all this speculative money in the market.  It will make 2015/2016 look like an opening act. 

Looking for any bounces to be sold quickly in this market.  Staying short, but with one eye on the exit on the next down day.

Monday, January 29, 2018

Stocks and Bonds Gapping Down

Is 2.70% 10 year finally a pain threshold that stocks can't ignore anymore?  The bonds keep selling off, and at some point, that is going to affect the pricing of future cash flows, as well as the negative effects it has on the broader economy.  The Fed is taking its merry old time tightening, so the market is getting ahead of their actions.  The Fed fund futures are now pricing in 2.6 rate hikes for 2018.  That is up from 2 rate hikes at the beginning of the year.  Now it is viewed as almost a certainty that there will be 3 rate hikes now for 2018, which tells you how much the market is believing the Fed.  You haven't seen this kind of forward market pricing of rate hikes for the next year since 2006.  Even in 2017, the market was always vastly underpricing the expectation of rate hikes from the Fed forecast, because the Fed has always overpromised and underdelivered on rate hikes since the financial crisis.  The market is finally believing in the Fed forecasts, which is a game changer. 

Since the Fed will rarely surprise the market by hiking more than its forward guidance, it means there is limited downside for the short end of the yield curve.  Going from 2.6 rate hikes to 3 rate hikes being priced is not going to present much downside for 2 year and under Treasury maturities.  And the long end is supported by end users like insurance companies and pensions which are having to buy more long bonds to match durations of their liabilities, which are increasing as the baby boomers enter retirement.  So the only vulnerable part of the curve is probably the 5-10 year maturities, which also happens to be the point where the Treasury is trying to issue more coupon bonds to pay for the higher deficits this year. 

I expect Powell to be just like Yellen, so he probably won't surprise on the hawkish side, but with the S&P so strong, I also think he will try to do rate hikes for March and June, and then probably wait to see higher inflation or an S&P that keeps going higher before doing anymore. 

Short term, there is the State of the Union speech, and with the market loving Trump, it will probably keep the market bid until Tuesday's close.  The Fed meeting is Wednesday, but it is almost meaningless like most non press conference meetings, plus it is Yellen's last meeting, so market won't put much weight to the wording of the press release.  I expect a sell the news reaction after the State of the Union, so Wednesday should see some weakness.  The weakness in bonds should also be a burden for this market at these Treasury yield levels.  But we'll see, shorting this market feels like betting against Mike Tyson when he was on a roll in the mid 80s. 

Friday, January 26, 2018

Exterminating the Shorts

I don't know if there will be any shorts left at the top of this bull market.  This parabolic move has destroyed a lot of capital from those fighting this trend.  All the past historical patterns have been advocating short term weakness for months now, and yet it keeps going higher.  The put/call ratio remains extremely low.  The equity inflows are coming in heavy.  Volatility is rising.  The rises are getting steeper.  Retail trading volume has exploded higher (trades up about 50% from previous year), if you look at the earnings reports from TD Ameritrade and E-Trade.  It is all late cycle behavior.  

Usually when the dumb money starts making money, it is usually close to the top of the move.  And retail is making money in the stock market.  I don't ever recall this kind of straight up market even in 1999.  This is something different, and definitely harder to trade short-term.  After I close out this badly timed short, I will have to choose a different way of making a bearish bet on this market.  Either through a different equity index, bonds, or commodities.  

It was foolish to have even tried to short one of the strongest index of them all throughout this bull market, the final boss, the S&P 500.  I will go after easier targets next time.  Hopefully I get a chance at a graceful exit within the next few weeks.  There has to be a pullback in here somewhere, right?  If not, it will get ugly for shorts like me.  As painful as it is watching the daily gap ups, I will hold the position waiting for a panicky down day to cover.  The VIX is finally firming up so it gives me a bit more confidence that a pullback is near.