Friday, September 30, 2011

Leaning Bearish

Tough to bet on continuation in this choppy market but I think we've had the upside rally due to positive Europe news earlier this week, and today should be part of that unwind.  There is a growing recognition of China weakness, although I am still seeing a lot of denial and EM love.  The US stock market should be the last one to fall, and things are lining up that way.  Hong Kong continues to be weak, especially H-shares.  Usually it pays not to fade gap downs on Fridays when there is no capitulation.  Today's gap down is definitely not capitulation.

Thursday, September 29, 2011

US/Europe Divergence

Something to pay attention to:  The US is vastly underperforming the European market over the past 5 days.  This is not a good sign for the ES for the next few days, but it should be looked at as a positive in the intermediate term.  Europe looks like it has bottomed, Asia is in a bottoming process, and the US is the next one due.  The US market has been the strongest and they always get to the strongest markets last.  Perhaps some bad news out of Europe can be the catalyst for one final move lower to bottom.

Monster Gap Ups After Weak Closes

Today is a classic monster gap up off a weak close.  The odds of a continuation higher off the gap up are high.  I would not be sucked into selling the gap up.  The move looks like the real deal and the European markets are suddenly made of Teflon.  European equities look totally sold out and there are no bulls over there.  Absolutely none.  The sellers have done their deed and with the deep values in Europe, I don't see it going below the lows it made last Friday.  Finally heard CNBC pundits get nervous about China and a hard landing.  It's about time. 

If we are going to get a catalyst to take this market lower, it will have to come from China or the US.  Most likely it will be China but I think that hurts industrial commodities more than US equities.  Copper will perform the worst of all the commodities.  The hoarding of copper in China was plain silly and the reversal of that will make copper prices nosedive.

Wednesday, September 28, 2011

Recent Price Action and Greece

It is interesting to see that the S&P futures rallied 3.5 points in the 15 minutes after the cash close.  It gives me a hint that fast money traders are well hedged already and it will take a really bad news event to take us much lower.  The high put call ratios in the past few days confirm this.  I initally thought we would have a waterfall decline this week but the price action doesn't agree.

Some will view the weak closes in the last 2 days as bearish.  But that is only if we get continuation and gap downs off those weak closes.  Today we gapped up off yesterday's weak close.  If we gap up again tomorrow, it tells me that we're probably not going down much more on this downleg (1130-1140 zone at the most) and we can rally for a few days afterwards, perhaps to 1210.  If any rally up to 1200+ is due to good news from Europe, I would look to short that rally. 

I still don't think we've bottomed because we still haven't got that Greek monkey off our backs.  Only a default from Greece can get the purge that this market needs and get rid of that monkey.  And also get rid of the fear that a Greek default would be like a Lehman bankruptcy, which is I believe to be completely false.

Monday, September 26, 2011

China Slowdown

Dr. Copper has  a PhD in economics.  It is telling that there is a global slowdown, with China leading the way.  The real estate bubble in china is bursting.  It was a giant bubble.  The repercussions should last for the next several months as market participants start getting nervous about China.

The Shanghai Composite is in the middle of vicious bear market.   This is a hard landing.  There is high inflation, artificially low interest rates, combined with a real estate bubble popping.  Absolute the worst of all worlds over there.  And it is not priced in.  Whatever goes on in Europe will not surprise the market.  But a hard landing in China will. 

Looking for more weakness this week as Europe bumbles along and the hard realities in China become more recognized.

Friday, September 23, 2011

Whistling Past Graveyard

The global economy is darkening quickly.  But no VIX spike, just steady trading without too much concern.  In fact, I heard more that one person on Fast Money mention this as a good buying range and that the market could go right back to 1200.  I don't think so.  The Chinese cat is out of the bag.  Europe has done nothing.  And US is the most overpriced of them all.

The moves today smell of total give up and liquidation in the metals, copper down 6%, silver down 16%, gold down 5.5%.  These are total liquidation moves, with no care for price, just get me out type of trading.  The fundamentals are still bright for gold, but when you have so much pressure from outside market forces, you get days like today.  Gold is extremely close to a bottom.  

Still on course for the waterfall decline, with bottom targets somewhere between 1040 and 1080. 

Thursday, September 22, 2011

Range Mirage

The market has worked to get traders to believe in the range, buy at 1120 and sell at 1200.  I no longer believe that range is valid.  The fundamentals are getting worse every day.  It is being reflected in all the world indices except the US.  Europe believes press conferences, Greek bailouts, and band aids will make the problem go away.   Nothing ground breaking has come out from Europe to stop the banking crisis.

The US stock market is the last bastion for long only funds to maintain their equity exposure.  They are scared to death of European equities and they are getting killed in emerging markets.  Ironically, two of the weakest markets in the world, China and Brazil, are probably the two countries that investors still like. 

A break of 1100 is imminent, probably next week.  Beyond that, you have an air pocket, where panic and liquidation could push us down to 1040 at the worst.  Best case scenario, I see this market breaking 1100 down to 1080, and then bottoming there.  Either way, we've got more downside to go to reflect the new fundamentals of a helpless Fed, slow acting Europe, and deteriorating Asia.


In a bear market, you don't have time to wait for perfect short opportunities.  The market follows its own timeline.  China is in crash mode, and Europe is just dead.  The US is the only thing keeping the patient alive.  But without QE3, the US patient is in critical condition.  More stimulants in the form of easy money is needed but the Republicans are putting on some serious pressure to the Fed to stop the endless money printing. 

Usually waterfall declines take 7-8 trading days to complete.  If you consider the start of the decline yesterday, we have till next Thursday/Friday till we hit bottom.  Who knows how low we can go in that time frame.  I am thinking 1070-1080 will be a price target for a reasonable bottom but we may just go straight to 1040.  Today, the AUD/USD is down almost 2.5%.  These are monster moves.  Euro is also getting hit but a relatively tame 0.75%.  Maybe the elephant in the room is not Europe, but the bursting of the real estate bubble in China.

Wednesday, September 21, 2011


I am expecting a grind higher off the open for the first 2 hours.  After that, we'll probably just trade flat.  This FOMC announcement will be hard to game, so I'm not really interested in trading too much after it comes out.  If we do get a rally off this meeting, I will look to short tomorrow morning.

Tuesday, September 20, 2011

Do the Dip and Run

This market is going back to its old habits.  The dip and run is rearing its head again.  I can feel the dipsters desperate to get long ahead of Bazooka Ben and more QE goodies.  No one dares short with the bazooka aimed at the sellers.  Expect a finish near the highs, probably to 1211-1215 area.

U.S. Stock Premium

Was watching Bloomberg TV the other day, a segment mentioned the forward P.E. ratios of the Hang Seng Index and the Eurostoxx 50.  They were between 8 and 9.  The S&P's is 12.7.  That is a 40-50% premium for U.S. stocks over Hong Kong or European stocks based purely on forward P.E. ratios.  That premium seems grossly out of line with historical norms.  For those saying that U.S. stocks are cheap, then overseas stocks are cheaper than cheap. 

Monday, September 19, 2011

Gap and Go

Looks like a gap down and bleed lower all day today.  Options expiration hangover, China slowing falling apart, and short term overbought readings.  Another Monday big gap downer.  The last 2 were bought, this one will be sold. 

Saturday, September 17, 2011

Top Will Take Longer

I've been thinking about the action over the past week, and a bit surprised that very few people are believers in the rally.  CNBC traders seem to think this rally won't last.  But most are scared to short this thing as well.  I don't think there are many shorts left to squeeze.  But also without a resolution in Europe, you won't have the wave of fund money coming in to drive the market to 1250 and higher.  And I don't see a Europe resolution until the market forces it through panicky trading from a Greek default or some specific bank problem.  Dollar swap lines doesn't solve the problem.

So the most likely path now is one that brings a quick pullback late next week followed by another rally.  In other words, this benign period should last another 2 to 3 weeks, lower volatility with limited upside and downside.  A range somewhere around 1160 to 1230.  My outlook has changed because the character of this market has changed to BTFD (buy the f dip) with Europe putting in a short term bottom.  Europe has outperformed the US since Monday.  It takes time to get bulls on board.  Bulls don't like volatility, so the best way to get traders bullish is to have lower volatility, not necessarily higher prices.  From a price perspective, this rally has very little left.  From a time perspective, this rally still has a lot left in it.

After this benign period, we should get a sharp resolution to the downside to test 1100 and likely lower. 

Friday, September 16, 2011

Bear Meat

The bears are going through the grinder again.  Fifth straight up day, and still a big wall of worry over Europe.  The market does not make it easy on the short side.  Right now, we need time at this higher level to convert more bulls before the next leg lower.  I am really hoping for one more piece of government intervention in order to get performance chasers on board.  That would be the easy short.  If we don't get that, it will be harder to time the short, but sometime in the middle of next week sounds right.  I am not interested in longs at this point until we get capitulation.  The level I am looking at is ES 1222.  Above that, we could get a short squeeze up to 1235.

Thursday, September 15, 2011

Dollar Swaps

This is not a liquidity problem.  The ECB and the Fed think providing dollar funding will solve the banking crisis.  It is a solvency problem that needs to be solved through wholesale sovereign bond purchases and a TARP like program.  Liquidity is not the problem.  I think you have to short government intervention that doesn't solve the problem.  We probably will squeeze shorts for a few more days up to the FOMC meeting, but after that, there are no barriers to shorting this market. 

Tuesday, September 13, 2011

Banking Crisis

BNP Paribas is unable to get dollar funding because US money market funds don't want to put there money there.  SocGen keeps denying rumors.  At some point, the rumors can't be ignored and have to be taken as fact.  The stock prices don't lie.  The credit spreads don't lie.  The Europeans have a banking crisis and they are doing nothing about it.  A press conference by Merkel, Sarkozy, and co. will not solve this problem.  Each press conference will be a shorting opportunity.  Getting close to the terminal stage of this crisis when there is no going back.  I remain bearish.

Monday, September 12, 2011

S&P Too High Vs. The World

With the dollar finally catching a bid, the S&P cannot outperform the world like it has.  It is almost as if the market views tax cuts and deficit spending as the key to prosperity.   I strongly believe that the American stock market has been the hiding place for those that have to maintain equity exposure.  The market always gets to the hiding places LAST.  So when we panic, the S&P should finally play catch up on the downside to European equities.  The Eurostoxx 50 is at fall of 2008 panic levels while the S&P is still 10% above the summer 2010 lows. 

I don't believe today is a repeat of last Tuesday.  I am expecting a weak close as traders don't want to stay long overnight. 

Friday, September 9, 2011

Point of No Return?

The center is starting to fall apart in the EU.  Rumors of Greek default, member of ECB resigning, German banks preparing for a Greek default.  DAX hitting new yearly lows, which were just hit on Tuesday.  Reflexivity starts to go to work if the European markets fall even further.  Selling begets selling.  That is when you get panic selling and the S&P breaks 1100. 

I thought the final panic down move would happen after September options expiration but a bear market waits for no one.  When it wants to go down, it goes down.  This market is a ticking time bomb and it is just a matter of time before the explosion goes off.  Today could be a false signal and we could rally strongly next week, and then have the perfect setup for a run for the roses to 1100 and lower.  Or we could go straight down for the next 7 days.  At least for the rest of the day, the market wants to go lower and SPX 1140 is in play.

Safe Havens

Is the US dollar a safe haven?  Yes, under the following conditions:

1) Japanese central bank scares yen buyers with bursts of yen selling that rips the face of the shorts every few weeks. 

2) Europe gets so bad that no one wants to hold any euro denominated assets other than German bonds.

3) Gold volatility gets so insane that $70 moves intraday are normal, scaring off safe haven buyers.  What, did they expect only $70 up moves and no $70 down moves forever? 

4) Swiss gives the FU to safe haven seeking speculators and decide to peg their currency to the euro with unlimited Swiss franc selling / euro buying. 

5) Fed takes a break from QEing for more than a couple of months.  Bazooka Ben takes a break from bombing dollar longs to get cute and do Operation Twist, which will acheive basically nothing but squeeze 30 Year Treasury shorts.

6) Everyone believes that Obama is telling the truth when he says the $447 B jobs act will be balanced with equal amounts of spending cuts.  Or, what's another $447 B in the budget deficit among friends, do people really care if it is $1.7 T instead of $1.2 T?  They are dumb enough to buy 10 Year Treasuries at 2% anyway, feed them more hay.

There you have it, we have finally achieved enough conditions necessary to get a temporary speculative bid in the dollar.  For those expecting a long lasting dollar rally, I suggest you join Robert Prechter in the deflationistas camp, those who think a 10 year bull run in oil prices is temporary, believe in the CPI numbers and the tooth fairy, and think S&P will go to 400.

Thursday, September 8, 2011

Crackpot Market

93 points down in less than 3 trading days.  66 points up in 36 hours.  Something is really unstable here.  This is a mini fall of 2008 trading.  There has been nothing really substantial coming out of the EU to stop their crisis.  They probably need a TARP or a bond buying spree like the Fed did in 2009.  But all we've gotten are little band aids while the crisis gains momentum.  It is a bigger problem than in May 2010 but we are much higher on S&P.  But Europe is much lower than May 2010.  So are the crowd favorites, Brazil and China.  Something is not adding up.  QE2 did a lot to distort dollar based assets higher, and it has just left us with bloated commodity prices.  Oil at $116 even during a financial crisis!  (WTI is irrelevant now, the global oil price is Brent).  Killing the consumer with high oil prices via QE2 and bailing them out with payroll tax cuts and jobless benefits forever.

I don't see a sustained rally until Europe comes up with their version of Ben and Hank's  bazookas.  And that probably doesn't happen until markets really panic.  Before then, you will see all sharp rallies get faded and eventually we will test 1100 and break it.  This zone around 1200 is a place to sell. 

Wednesday, September 7, 2011

Tax Cut Addiction

The Obama jobs plan is basically a renewal of the payroll taxes, with a bonus tax cut for employers.  Just another big tax cut scheme with some infrastructure goodies thrown in.  This will of course be financed with more debt, also reducing the Social Security coffers to make it insolvent more quickly.  This is all inflationary, keeping up the huge budget deficits because there will be no cuts in government spending to make up for the lower taxes.  You cannot be too bearish on the S&P because giving out extra money is a sure fire way to stop a recession in its tracks. 

As I mentioned last month about the doomed dollar, it was a foregone conclusion that payroll taxes would be extended.  All the budget deficit debate was all talk, no action.  Gold is lined up to go parabolic within the next 6 months, it is basing at the 1700-1900 range ready for liftoff.  At this point, the path of the S&P doesn't matter, gold has gone off on its own road, where dollar weakness will only add to the fuel.  The current dollar rally is merely temporary.  A Pavlovian response to European sovereign debt worries with no fundamental basis.  No one can match the USA when it comes to huge budget deficits and money printing. 

Tuesday, September 6, 2011

Lack of Buyers

The trading last week was done on low volume, both on the way up and on the way down.  It was disturbing to see a strong selloff on a bad nonfarm payrolls number without much volume.  The evidence that you have cleared out the weak hands is a lot of volume on a volatile day.  Maybe we will get that today, but I wouldn't step in to buy until we see it. 

On this downleg, I don't see us going down to 1100.  We need to trade a bit longer in a range before breaking down, because like me, a lot of people are bearish on this market.  Hope needs to rebuilt a bit at the least.  When all the news is behind us this week, a relief rally could go back up to as high as 1210.  From there, I would look for that next down move to test 1100 and likely break it.  I am looking at the most likely scenario, but we can take the path lower in a different way.  So playing a relief rally is dangerous since we could go straight down. 

Friday, September 2, 2011

Mixed Picture

The market wants to pullback, now that a lot of shorts have covered and stuck bagholders let go of some unwanted inventory.  The most likely scenario is for the market to be weak for the next several days, get down to 1150, and then have one final rally to a lower high, perhaps to 1215-1220, and then collapse down to 1100.

But I don't have a lot of confidence in that scenario because we don't have enough bulls on board to really break down hard.  That may change in the coming weeks depending on the news flow.  Overall, I am leaning bearish as the charts are broken and fundamentals are deteriorating.  Only thing going for the bulls is that a lot of traders are thinking like I am.

Expectations are low for nonfarm payrolls, but the overnight trade leading up to it is not encouraging for the long side.  Quite a mixed bag.