Thursday, September 21, 2017

Fed Dot Plots

Looking at the Fed dot plots for September, I find it interesting how the long run projection is still at 2.75%, albeit down from 3.00% in June.  What happened in 3 months that would cause a long run projection of interest rates to go down 25 bps?  Nothing happened, other than the Fed throwing the bond market a bone, to try to keep the bond vigilantes at bay, while they announced balance sheet tapering. 

Everyone with any money on the line knows that the Fed dot plots are a running joke.  They have consistently inflated future interest rate projections, only to bring them down in drip drip fashion.  Is that the Fed's way of increasing optimism about future economic growth?  I don't know if the Fed is being dishonest, or if they're just incompetent.  Probably the latter. 

If you look closely at that dot plot, there is one guy who keeps the projection at the current Fed funds rate level, at 1.00-1.25% till end of 2020, but somehow manages to put the longer run projection at 2.25% or higher.  I know this is Neel Kashkari, the super dove.  He's a bit controversial, and an attention seeker, but he's got the best forecast of them all, which isn't saying much.  Although his longer run projection seems way too high, unless he's thinking something like 2040 as longer run. 

The eurodollar market is pricing in 3 rate hikes over the next 3 years.  That would put the Fed funds rate at a 1.75-2.00% range by September 2020.  I feel like that is a bit ambitious considering that when pricing in future interest rates.  If you consider that there is a decent chance that the economy could enter a recession within the next 3 years and the Fed could cut rates, then there should be a lot less than 3 rate hikes priced in over 3 years.  Remember, you must come up with a probability weighted average of all possible interest rate scenarios, not just the mostly like one. 

The median Fed dot plot is between 2.75-3.00% by end of 2020.  Do they realize that when GDP growth went from 2.9% in 2015 to 1.5% in 2016, they stopped rate hikes dead in its tracks, and were scared stiff.  The economy doesn't even need to go to recession for them to stop rate hikes.  It just needs to slow down to under 2%.  Considering the heavy debt load, low productivity, and low population growth among the developed economies, it is more likely that growth will slow down from here over the next few years, not pick up. 

Add to that Trump's inclination to choose a dovish Fed chairman because he's a low interest rate guy.  Therefore, you have a bond market that is mispriced.  And a Fed dot plot that is even more wrong.  Now I could be wrong and the global economy could have a huge boom and the S&P could become a giant bubble, but that's not likely given the data.  There is always some uncertainty in predicting the economy and the financial markets, which is why there are mispricings in market.  This game is about probabilities, and it is the difference in how market participants weigh the likelihood of various scenarios which provide the long term opportunities. 

The S&P didn't disappoint yesterday.  Once again, it found a way to bounce back after the hawkish Fed statement.  And do it in a non-volatile manner.  It has proven its boring nature AGAIN.  Just untradeable.

Wednesday, September 20, 2017

Fantasy Land at the Fed

There is lot of projections that the Fed spews out, the most egregious and error-prone, being the dot plots for interest rates.  These Fed officials must have used a time warp, going back to the 1990s when the neutral Fed funds rate was at 6%.  They still fantasize about a neutral Fed funds rate above 3%.  Conveniently ignoring the 2% GDP growth rate and the heavy debt burden this global economy is running on.

It is funny that they can't even fathom the thought of consecutive 25 bp hikes at Fed meetings, especially since one of them would not have those "informative" press conferences, but they have the audacity to state that the Fed should reach a Fed Funds rate of 3.5% in a couple of years!

Then when it comes time to actually follow through on their projections, they chicken out with any excuse they could find, such as China in September 2015, the strong dollar and falling oil in March 2016.  Only after the S&P just keeps grinding higher, and the dollar grinds lower do they finally back up their fantasy land projections (at least for a few meetings), and put in rate hikes.

Ok, enough of the ranting, now time for how to play this upcoming Fed meeting.  I expect the S&P to be a snoozer, as it is about as boring as a market can be.  But for the bond market, it is a bit more interesting.  You have seen bond yields bounce back up strongly after bottoming a couple of weeks ago on hurricane and nuclear war fears.  Now that investors have regained their senses, they realized that they pushed rates too low, and we are getting the payback over the last several days.  At 2.23% 10 year yields, as I write, it is still in the middle of the 2.00% to 2.40% range that we seem to be stuck in at the moment.  With my expectations of the stock market to continue to be strong, I don't see how rates can break below 2.00%.  At the same time, there is just too much investor demand at higher rates for the 10 year to get much above 2.4% without seeing dip buyers charge in.

I do expect the Fed to talk tough, now that the S&P is at an all time high, and with rates well within their comfort zone.  Balance sheet runoff will be slow, and probably they won't be able to keep it going for as long as they say, because as soon as the market has a correction, they will stop dead in their tracks.  Guaranteed.  Think we could get more weakness in bonds over the coming weeks, and probably more of a grind higher in equities.

Monday, September 18, 2017

VIX is the Guide

In recent S&P 500 history, you have not had a market top out when the VIX was under 12.  In July 2007, the VIX was ~15 when the market topped out.  Also in May 2011, the VIX was ~15 when the market topped out.  2015 was a bit of an unusual case because the market topped out when the VIX was at 12, but you did have the market flatten out and chop for almost 6 months without any major breakouts, and it was quite a bit more volatile than it is now.

Right now, we have a VIX around 10, with realized VIX in the mid single digits.  Plus, we've made new highs since last week, and now easily above the 2500 SPX psychological barrier.  These are the types of markets which grind higher as investors watch in disbelief that there is hardly even a 5% correction.  Since we had the washout in late August, and nervousness till last week, this move higher has at least 2 more weeks to go, and probably well more than that.

It is a slow motion bubble, so it looks innocuous, with the low volatility, but it is building up a lot of potential imbalances when the top is reached.  When will that top happen?  That is one of the hardest things to predict, the top of an equity bull market.  It is clear that there are still not enough signs.  So while I will not participate in any upward moves from here, I definitely will not get in the way and short it until we start seeing more volatility.  The VIX has to sustain above 12 even after several days of rallying in order for me to be interested in the short side.

Saturday, September 16, 2017

Traders: What Not to Do

It is a fact that most traders end up losing over the long term.  In order to be part of the minority of traders who win long term, you must trade differently than the majority.  That is just simple logic.  Then the first step is to identify what the majority of traders do.  The second step is to avoid doing those things.  By reading books about traders (Market Wizards series is a good starting point), seeing what traders say on Twitter, Stock Twits, stock message boards, etc. you start to get a sense of what the majority do.

What most traders do:

1. Bet too big.  In equities, it is betting it all on one stock.  In futures and options, its using too much leverage by buying or selling as much as you can.  Even if you have good pattern recognition skills and accurate analysis of the long term macro situation, there is still a lot of uncertainty in this game.  Good traders still lose a fair number of times.  It is just part of the game, you can't be perfect in this business.  If you bet too big, you can have a string of winners and then that one big loser will eliminate all your gains plus more.  Or even blow you up and take you out of the game.

In my early career, I had a habit of trading only one or two stocks at a time, and using full 2 to 1 margin.  It led to some exciting times, lots of wins and losses, and I was lucky to have survived.  I had a very effective strategy and it worked about 90% of the time, but the 10% of the time that it didn't, I lost huge on the trade and it would eliminate all the progress I made building up my account.  This happened a number of times and I still didn't fully understand why I couldn't really breakthrough to the next level. 

It wasn't because I didn't have an understanding of the market or good pattern recognition skills.  I was just constantly betting too big. And although that led to rapid growth in account size during the good times, I would inevitability trade a stock that would act like an outlier and end up losing anywhere from 50% to 90%.  Remember, if you lose 90% of your money, you need to make 900% to get back to even.  900%!

Try this math exercise:  you bet 50% of your account on a 1 to 1 payout, with 60% chance of winning, 40% chance of losing.  See where that account value goes over the long term.  The effect is the opposite of compounding. 

2.  Try to make money everyday.  I am lucky that I didn't have to work for too long before I was able to just trade for a living.  I never developed that worker's mentality.  Although in the short amount of time I did work, I quickly developed a dislike for having to wake up early in the morning to do something that I didn't want to do, just for money and my "career".  So when I started trading for a living, I tried to make as much money as I could, so I could amass enough money to not have to find a job ever again.  Unfortunately, that led me to trade too big, and go all in too often, because of my greed and overzealous desire to build up my account as fast as possible. 

But I never really chased prices, and would often let halfway decent opportunities go by because I didn't feel like I needed to make money every day.  If a good opportunity was there, I would plunge in. And usually there was.  But if not, I didn't do any trades.  I watched TV, read a book, and tried not to stare at the trading monitors.  I didn't make money that day, but I didn't care.  I never treated trading like work, so I never expected to get paid based on the hours I put in.  I was willing to wait for the next good trade.

On the topic of daily trading, one of the dumbest things that a good trader can do is to quit for the day because he made his daily profit goal.  Unless that trader has some psychological problems dealing with winners, he should try to make as much as possible when the going is good because most of the time, they aren't.  Especially these days.  As Stanley Druckenmiller says, "it takes courage to be a pig". 

More importantly though, a trader shouldn't force trades and trade bigger to try to make a "comeback" for the day and turn a losing day into a winning one, to make yourself feel better.  I have made this mistake countless times and at the end of the day, when I stare at a huge loss on my trading screen, I think to myself, "What the hell am I doing?"  Its the same feeling a gambler would get at the casino when he keeps hitting the ATM to try to comeback and recover his losses, only to end up with a huge loser when the night is over.  Trading is a long term game, not a daily one. 

3. Think short term.  It is hard to come up with good trades, especially long term trades.  If you turn a good long term trade into a good short term trade, that is a big mistake.  Yes, it is a higher level mistake.  For those who have traded for a while, and made some money at it, it is a common mistake.  I have made it numerous times throughout my career.  If only I had just stuck with the trade for another few days, another few weeks, another few months.  Then I would have had a home run.  Those who have bought dips in the SPX know what I am talking about.  Same goes for those who bought dips in Treasuries this year. 

That is why it is so important to thoroughly analyze what the current long term opportunities are in the market and then when the market gives you a chance to get in at a good price, you need to ride it for as much as you can.  You can only do this if you have a lot of conviction on your trade, and your short term view aligns with your long term view of the market. 

How do you develop conviction that is usually accurate and helpful rather than irrational confidence?  Through studying, experience, and gut feel.  Some of it can be taught and developed, but the gut feel is usually more innate.  This conviction is something that I am constantly trying to improve, both in accuracy and breadth.  Some markets and time periods are just easier than others.  Right now, we are in a bit of a difficult time period, low volatility and very few good medium term opportunities.  However, that should pave the way for some monster long term opportunities.  There is a good long term opportunity developing, but it will only come to fruition once the price action and higher volatility confirms the topping phase of this US equity bull market.  So I am trying to preserve capital for what I view as interesting trading opportunities in 2018.

Wednesday, September 13, 2017

S&P Strength and Bond Weakness

The two big things that have happened over the past 2 days is the rise in the S&P 500, but more importantly, the disproportionately big drop in bonds relative to the SPX strength.  In a short term risk on move, you usually get about a 0.04% rise in 10 year yields for a 1% rise in the SPX.  We have gone up 0.12% on the 10 year since Friday, while SPX has gone up 1.2%.  In normal circumstances, the 10 year should have gone up only about 0.05%.

Obviously it does speak to the overshoot short squeeze higher that happened in the bond market last week while the stock market was only slightly down.  But it also re-emphasizes what I believe to be the new en vogue hedging strategy for the hedge fund manager.  They are now going long bonds as a hedge for their long stock positions.  In the past, they would have just used VIX or shorted SPX for a more direct hedge.  It probably means that you will not likely see much more upside in bonds this year until you start seeing stock weakness.  At these levels, I find it hard to believe that both stocks and bonds will just keep going higher without a break in that positive correlation.

I do expect the SPX to stall out here as we are right at that psychological 2500 level, which should provide short term resistance.  Also the weakness in bonds should be a bit of a headwind for stocks to go even higher.  Due to the near term SPX resistance, I don't think bonds will sell off much more, but I don't see much of a bounce either.  So while near term downside in bonds is limited, the near term upside is also limited.  It looks like last week took out most of the weak hands in both bonds and gold.

SPX should flat line around these levels right under 2500, and then expecting a dip next week. That should help bonds have a bounce, which probably won't last long, just as I don't expect any dips in stocks to last long.  Low conviction here, so I won't be putting on big positions.  October should provide better levels to make longer term trades. 

Monday, September 11, 2017

Irma and N. Korea Hype

You know how the media like to blow up headlines to draw eyeballs to their articles.  It is slightly, just slightly more refined form of click bait. 

The algos didn't bite and refused to selloff the market on Friday ahead of the fear mongering.  As I said last Friday, the algos are getting much smarter.  There is definitely AI and machine learning going on, because they have gotten more sophisticated from even a few years ago.  If you had the same headlines and weekend risk 5 years ago, the S&P would have likely dipped at least 3% ahead of the event, led by emotional hedge fund managers, and then rebounded like a screaming banshee as those same hedge fund managers bought back what they sold ahead of the "scary" events. 

Nowadays, the hedge fund managers don't even do much manual trading, their performance reviews have shifted their funds to more quant based, AI and machine learning strategies.  This makes the market much less emotional and more price action based, which shows you the muted market reaction to the North Korean nuclear test last week, and less derisking ahead of the fears of a North Korean missile launch and Hurricane Irma this past weekend.  All in all, it makes the market tougher to trade, as there always has to be someone on the other side of your trade.  And AI computer based trading programs are much tougher opponents than trigger happy hedge fund managers.

We are getting a repeal of the risk off moves in Treasuries and gold this morning, along with a gap up in the S&P.  It is notable that the Treasuries and gold are selling off much more than expected for a 0.5% gap up.  It tells you that traders have resorted to hedging not by shorting S&P, but by buying Treasuries and gold.  They have finally caught up to the risk parity hedging strategy.  It could make for a nasty move if Treasuries can ever go down and stay down while stocks are flat.  But that's a story for another day.  Expecting a dull market this week in S&P land.  The bond market should be a bit more interesting, but it too is probably going to have a low volatility trade after today's selloff.

Friday, September 8, 2017

Short Squeeze in Bonds and Gold

Yesterday, you had heavy volume as bonds and gold both squeezed higher, after the ECB decided to postpone the taper.  This was what most expected, but you still had a significant minority that thought Draghi might provide more details of their future tapering plans.  He didn't give the bears an inch, and provided the usual dovish spiel, while throwing the euro bears a bone by saying that he is keeping an eye on the euro and its strength.  Draghi definitely likes to bring out the "whatever it takes" line on various topics, this time, it was on getting to 2% inflation.  He sure talks like a determined dove, but he can't solve the scarcity of German government bond supply problem when it comes to following the capital key guidelines for QE.

You basically had a perfect storm in the form of ECB can kicking, and of course North Korea and Hurricane Irma over the weekend.  That was just too much for bond and gold shorts to deal with and they finally capitulated and bought in a panic. We got remnants of that buying wave this morning, but with the current price action, it seems like most of the weak hands have been taken out. All this while the S&P trades in a sleepy range from 2350 to 2370 this week. 

I expect their to be a little relief buying in stocks on Monday, after the weekend event risk is behind us, but it should be a small pop because the market just hasn't gone down much ahead of these uncertainties.  It is clear that the US stock market has gotten smarter, as the market is very reluctant to provide a good buying opportunity even in the face of bad news.  If we had similar news flow 5 years ago, the market would have pullbacked a lot more, and then subsequently rebounded a lot more.  Now, its short and small pullbacks on bad news, and short and small rebounds after the V bottoms.  After seeing the volatility on Tuesday, I was expecting much more this week.  But it's been a dud for S&P traders. Just a dreadful S&P trading market.

Thursday, September 7, 2017

Debt Ceiling Deal and Dovish Draghi

We should be much higher considering we got the debt ceiling extension without any headaches and then a dovish Draghi at today's ECB meeting. So we had a good news wave that peaked out at SPX 2470 this morning.  That is the high optimism price point in this market.  Last week's low of SPX 2430 on North Korean missile launch is the low optimism price point.   Keep that in mind when trading this chop over the next couple of weeks. 

There is a lot of caution that I hear from financial TV, but the put/call ratios and the low VIX tell me that real money is not doing much here.  The low VIX is a tell that the pullback should be shallow, as the VIX is a very good predictor of near term potential losses in the market.  You would think with North Korea and a massive hurricane heading towards the US, the market would be a bit more nervous.  But this market has been so resilient for so long that the algos are all programmed to buy dips and support the market on down days.  That is why you got the V bottom on Tuesday, saving the market from an ugly close. 

Remember that last week, after North Korea fired a missile past Japan, there was a sense of optimism that the market was able to shrug off that event and head towards 2480.  The crowd got back to being bullish.  Now they feel like they are offsides. They don't turn on a dime.  I expect them to take a few days to sell off some positions to get to a more risk off stance.  One supporting factor, a big one, is the strength in bonds in the face of a flat stock market. The lower interest rates will help to keep the stock market from completely falling apart here. 

If we do selloff again towards 2430, I would expect there to be a lot of fear mongering on CNBC.  It should be a point where one should put on longs for the eventual ride higher.  This bull still has a while to go, and you need to keep that in mind when trading during these choppy times.

Tuesday, September 5, 2017

Nuclear War Threat

We got the North Korean nuclear bomb test and it was good for a 6 point gap down on the SPX.  Is anyone really surprised when the stock market shrugs off geopolitics?  This happens over and over again and investors still act like the market is acting irrational.  North Korean bomb tests are nothing new, and neither are their missile launches.  The only variable that's changed is Trump and general public mistrust of his judgement and temperament. 

The reaction in the non-Asian equity markets clearly shows that North Korea is a non factor.  The overnight trader overreacted again as we are now trading higher than the overnight range in the regular trading hours.  Oh and look at the bond market.  It is screaming higher, even when equities are basically flat.  All North Korea has done is provided corporations lower interest rates to sell bonds at.  So you have a net positive from a liquidity perspective. 

It's going to take something other than geopolitics to take this market down.  You will need to have a weaker bond market or a weaker economy to bring down this bubble.  Right now, economy is just strong enough to maintain low single digit earnings growth while keeping the Fed easy.  Real GDP growth at 2% is Goldilocks, post 2008 style.

If there is a dip down this month, anywhere close to 2420, I would buy that dip and ride it to SPX 2500+.  There is still some juice left in this bull market, as the Republicans will be desperate to get some kind of tax cut package through Congress to put some points up on the board.  After the debt ceiling, that catalyst becomes the main focus of the market, so expect a better tone to the market and higher prices once we get to late September.  In the meantime, hope for a little drop to get in long for the ride higher.

Thursday, August 31, 2017

ECB and the Euro

Draghi and the ECB crew are sending out smoke signals on the strengthening euro.  They don't like it.  These trial balloons, through their favored news outlet, Reuters, tries to keep the euro strength in check while they try to buy time for upcoming ECB meetings.  Remember, Draghi promised plans on QE tapering in the autumn.  Which means he has to say something on the topic either in the September or October ECB meeting.  The news on worries about a stronger euro means they are likely to punt tapering into the October meeting, backing themselves into a corner, making a decision over the next 12 months based on how the euro and financial markets trade during autumn.

It just reinforces my view that the central banks are turning into micro managers who react to short term market movements to make long term monetary policy decisions.  Of course, it is not a two sided coin.  If the economy is strong, then the central banks are slow to remove stimulus.  However, if the economy is weak, then the central banks are in a mad rush to provide immediate stimulus and jawbone the markets higher with phrases like "whatever it takes", etc.

This is why the bond market refused to selloff this year even as the S&P kept making new highs.  It sees an ECB reluctant to remove monetary stimulus, and a Fed that is increasingly worried about inflation being too low.  The Fed should be much tighter with the current loose financial conditions and rising stock market but it picks and chooses weak data to support their dovish bias.  This feedback loop keeps stocks rising and the bubble going, until fundamentals get so bad that the stock market can no longer ignore it and it comes down under its own weight, like 2015.

I see another 2015 scenario coming up in the next 6 months, and its going to be an uglier version this time, just because of the extra excesses and overvaluation.  But we've still got higher to go before that happens, so there is no rush to put on a long term short.  Shorter term, it looks like this market will retest the SPX 2470s narrow trading range that we established in August.  I expect the market to go back down to the solar eclipse lows of 2417 sometime in September ahead of the debt ceiling debate.  So there may be a short opportunity coming up soon, in the 2470s.

Tuesday, August 29, 2017

Too Much Liquidity

The S&P is barely down 0.5% in premarket and gold and bonds have already gone wild.  The sharp up moves that happen to bonds or gold when there is even a sniff of risk aversion shows how much liquidity there is in this market.  Even with the Fed tightening.  Remember, all that money that the ECB and BOJ are printing has to go somewhere.  And it definitely isn't just staying in their domestic markets.

It is the main reason why it is so hard to make money shorting the S&P 500, the final boss.  You need to have bonds react less bullishly to risk aversion situations in order for stocks to go down and stay down.  Otherwise, these down moves are fleeting, as the bond proxies in the equity market keep the equities afloat, and when the dust settles, you just have lower bond yields and stocks going back to their pre-selloff levels.

Looking out over the next couple of years, bonds are going to be the place to be when the equity rally flattens out and starts the topping process.  The bond market remains resilient due to the ample liquidity and steady retail inflows.  Europe and Japan are just too weak economically to get away from their NIRP and QE policies.  They will be there to be the marginal provider of liquidity to keep markets buoyant.  I would not be surprised if the ECB follows the SNB strategy and starts to buy equities for their QE program during the next downturn.

I am waiting patiently for the market to get closer to my buy levels, which are between S&P 2410 to 2420.  We nearly got there during European hours, but we've rallied quite a bit from those lows.  Trying to keep this S&P down is like trying to keep a beach ball underwater.  Its buoyancy still amazes.

You still need near perfect conditions to short this market, and with the level of caution out there despite being so close to all time highs, shorting is just not a high probability trade.  It is still a dip buyer's market, and I will continue to use that old, beat up playbook because it keeps working.  Sure, it is going to be a bit less effective than when the playbook was less well known, but it's like going from a 80% win rate to a 65% win rate.  Still high enough to make confident bets on the long side.

Friday, August 25, 2017

No Thrust

After the strong rally on Tuesday, when the S&P closed at 2452, a crowd of bulls came out of nowhere to declare the end of the pullback and a march towards new highs.  As I mentioned before, that is uncommon even during this long bull market.  The first big rally day after a pullback has usually been met with some skepticism or expectations that its a one day wonder.  Then we promptly managed to have 2 small down days before today's pre Jackson Hole gap up.

You can basically treat this Jackson Hole event like a non press conference Fed meeting, important, but not that important.  And usually the market gaps up on Fed days.  I don't expect any fireworks at this Fed meeting, I mean Jackson Hole conference, because Yellen will not want to be too dovish despite the weak CPI numbers, because of the weakening dollar, and Draghi doesn't want to be too hawkish because of the strengthening euro.  In that battle, I expect a stalemate, with the market left to go on its own path, which I believe to be a choppy pullback that stays between SPX 2455 and 2410.

The market is currently not too focused on Trump's words about a government shutdown if he doesn't get border wall funding.  But if there is one thing about Trump, he doesn't like to back down from confrontation.  Add to that the debt ceiling debate and there are negative catalysts waiting to be focused on at any sign of weakness.

Since we are near the upper end of that SPX range, I would favor either cash or a small short.  As for bonds, I would favor being long for the next few days as the SPX goes to the lower end of that range.

Wednesday, August 23, 2017

Flip Floppers

Well it didn't take long for equity investors to go from fearful to greedy.  The equity put/call ratios have fallen drastically from last week's levels, going from .78 and .82 on last Thursday and Friday to .57 and .55 on Monday and Tuesday of this week.  By the way, Monday was actually a flat day so investors were already starting to get bulled up before yesterday's big up move.

What is quite telling is the nontrivial gap down that we have in the SPX, right after we hit the June highs around SPX 2455.  Based on my social media read, traders seemed quite confident that yesterday was the start of another thrust higher off a panic low, which is quite a change of attitude from previous panic lows.  The crowd has finally started to catch on to the pattern that has repeated itself since the 2016 presidential election.  Buy any 1-2 day dips and be rewarded instantly, and for several days.  The market tends to repeat a pattern until it gets recognized by the majority of traders and then the pattern usually stops working.

Yesterday's rationalization for the strength was talks of tax reform.  It is quite surprising how fast the White House and Congress have regained their credibility after previous failures on health care.  Also surprised how fast everyone forgot about last week, when Trump's comments made everyone think tax reform was dead.

Congressmen have been bought and paid for by all the lobbyists and special interest groups, which is the main reason you haven't had any tax reform in 30 years.  No one wants to take the brunt of the pain when it comes to removing tax deductions and loopholes, and if there are no removals of tax deductions and loopholes, you can't have tax reform.  The Washington lobbyists will not stand for it, and that will be it for tax reform.  Tax reform is not the main desire of the equity market anyway.  The equity market wants unfunded tax cuts, that will blow out the budget deficit, which favors stocks over bonds.

Apparently Trump is now threatening a government shutdown over the border wall.  If he also threatens a breach of the debt ceiling he just might get it!

I sold my short term long yesterday, too early, but I just didn't feel like the rally would last beyond the day.  In hindsight, I should have just waited later in the day to sell, even if I felt like yesterday was just going to be a one day rally.  Something I will keep in mind next time.

Monday, August 21, 2017

VIX Underperforming

Compared to the one day drop we had on August 10, the current pullback is more severe but the VIX has actually been lower.  The VIX September futures closed at 15.25 on August 10, and 14.95 on August 18, despite the SPX being lower on August 18 than August 10.  Even with further weakness today, the VIX futures are actually negative on the day.

Although this pullback doesn't look like it will be a quick snapback higher to SPX 2470s, I also don't expect a big pullback that would crack 2400.  We could have a drive down to the 2410 area but I expect that to hold as there is already a lot of put activity in the equity options and the fear is already palpable on financial TV.  Fast Money on Friday was uniformly bearish, expecting more weakness.  When that happens, its usually a fade.

I have added to SPX longs today and will look to play for a short term bounce.

Friday, August 18, 2017

SPX 2410-2420 Support

The market is getting very close to SPX support levels of 2410-2420.  That is the level that has held all summer, after the Draghi tapering scare in late June.  With options expiration today, you are seeing a lot of delta hedging happening, pushing stocks lower, along with the usual fears that you get after the market gets whacked nearly 2% the day before.  The equity put/call ratios have stayed elevated since last week, and today they are sky high.

We are getting close to some decent short term buy zones here and I have gone in small buying the dip.  It is very possible that we see another push lower down to 2410, where I plan to add, but I want to have a bit of longs on hand just in case we pop right back up from these levels.

The financial media's infatuation with Trump and the political headlines is helping to push prices lower and bring out the fear, the right ingredients I am looking for when buying.  Funny how all of a sudden the market got scared that Gary Cohn was going to resign, as if he was the messiah for this stock market.  Tax reform will not get done, it will mostly likely be tax cuts with no reform if anything does get done.

This market has rewarded dip buyers over and over again, it is just a matter of how big of a dip to wait for before buying.  This dip should be a bit bigger than last week's, but not by much.