Wednesday, September 26, 2012

The Next Rally

This market is set up for a rude awakening.  There will be a bounce from this current pullback, probably either on Friday or Monday after CNBC stops showing videos of Spain riots.  But we are getting the increase in volatility that I've been waiting for.  I still want to see some rally attempts that fail to make absolutely sure that we are going lower.  But it looks like 1450 and higher is safe to short next week.  If we get there. 

There is way too much complacency in this market with "In Fed We Trust".  With earnings coming up next month, more anxiousness building for a possible fiscal cliff, and China crashing, you have a lot of bearish catalysts coming up.  Targeting a sharp pullback, 80-100 points (between 5-7%) by mid to late October, to around the 1350-1370 zone.

Monday, September 24, 2012

Volatility Crush

It is a sad time to trade when a bunch of daytraders get excited over a 2% pullback in a stock (AAPL) and wonder if this is the beginning of the end for the stock.  Fast Money is talking about AAPL, because there is nothing better to talk about in this market.  The VIX buyers must be the dumbest group of traders on the planet.  They have to pay up and get beaten up every day with the steep contango, see absolutely no signs of any volatility, and have the Fed eager to talk up the market with promises of more money printing at anytime, through their mouthpieces in the media. 

This is a very unnatural market, a manipulated market, trading like a Ponzi scheme.  I have never seen this before.  There are no precedents.  We are going into the unknown, at overvalued levels, both in stocks and bonds.  Ponzi Ben has done more to kill HFT than any regulation coming from the SEC or CFTC.  We're back in a time machine, trading the 2005 market with VIX in the 13s.  At least you can take a nap without worrying about the market moving!

Thursday, September 20, 2012

Pigs and Cattle

The game never changes.  Livermore was right.  Speculation is as old as the hills.  One day you have the crowd excited about more bond buying, this time in Japan.  The next day, the crowd is disappointed that it won't be enough.  Same story, different price action, different interpretation of the same news. 

Traders are like pigs and cattle.  They get force fed, not corn or hay, but news.  They eat it up as a source of guidance for the trading day.  Now we are gapping down, supposedly on "weak" China PMI data, as if that is a big surprise.  News is found to fit the price action.  If the market is gapping up, the media goes scouring for good news stories to headline.  If the market is gapping down, bad news stories.

There have been a lot of ETF fund inflows since the QE3 announcement, so the crowd is getting into stocks now.  After being lukewarm to the stock market since May.  I don't expect these inflows to last, because I don't see the rally lasting.  We are too high for a long lasting rally.   Retail will panic again when the market starts downtrending. 

Wednesday, September 19, 2012

Mind Numbing Range

The HFTs must hate Bazooka Ben.  The volatility has been sucked out of this market in the ES, and everything else except crude oil.  Either half of Wall Street are Jewish on vacation or we're going to have to live with nonexistent volatility for rest of our QE infinity lives.  Who needs options when you are trading 6 ES point ranges every day?  The last missing ingredient for a top is range expansion, while trading sideways.  Definitely not there yet.

Sunday, September 16, 2012

Counterforces in Commodities

In the commodities futures market, you have two main groups:  speculators and commercial users.  They are now set for a collision course.  They are due to monetary and economic forces at work.  With the Fed hellbent on increasing its balance sheet at 33% annually, about $1 trillion, from its current total of ~$3 trillion, you have a natural desire by speculators to protect themselves from possible inflation by buying hard assets.  End user demand in the commodity is being ignored in a rush to buy before the next guy, the sell to the greater sucker theory.  

But the economic forces are bearish for commodities.  Unless you believe the Fed buying MBS will revive the economy, then you can't be a buyer based on long term  fundamentals.  Europe is hopeless, and will have zero growth for many years.  U.S. can't grow more without bigger tax cuts and pork, not likely to happen next year. 

The biggest and most underestimated factor is the popping of the China real estate/infrastructure/manufacturing/inventory bubble.  They are all interconnected, fueled by negative real interest rates.  China hit their saturation point a couple of years ago, and even overshot that level.  Now its stuck with a bunch of ghost cities, empty apartment buildings, huge stockpiles of various commodities, and piles of bad debt on worthless local pet projects.  The bubble is popping.  Shanghai Composite is in a deep downtrend, getting closer to those 2008 lows.  It is trying to join Spain's IBEX index for the dubious honor of worst performing market since October 2008.  

Rich commie insiders are trying to take out as much money out of China as quickly as possible ala Russian wealthy in the late 1990s.  China is extremely deflationary.  And underestimated by the investor community.  This is something that is being lost in the euphoria of QE3 and the desire to protect against insane money printing. 

The worst commodities from this China supply demand vantage point are copper, coal, oil, and yes, even silver.  A lot of silver goes into making solar panels, much of that being produced in China and no longer in demand now that governments are less willing to subsidize this money loser.  Fundamentally, gold should be fine, because it has no industrial uses, but I can't picture going up while all the others go down.  Only for fleeting moments does gold go higher while industrial commodities go lower (sharp spikes in May 2010 and August 2011). 

Who do I think wins this battle?  Over the next year, I expect deflation to win over, but eventually it will be inflation.  It always is.  The deflation forces from China will spook Eager Beaver Ben to bring out his uzi once again in 2013, this time shooting out as much money as possible until he has a corner on MBS and 10+year Treasuries, causing a run on the dollar with every mom and pop investor clamoring for commodities.

Friday, September 14, 2012

Ambitious Targets

For the first time since we bottomed in 2009, I am hearing cries of S&P to 1500, 1550 and new all time highs from MANY people.  Those willing to short this move are few and far between. 

The index and equity call option activity is through the roof today, more than the elevated levels yesterday.  Brian Kelly on Fast Money was bearish at the bottom last week Tuesday, near 1400, now he's rip roaring bullish at current levels.   If this isn't enthusiasm, then I don't know what is. 

Back to my blueprint for a top that I posted in August, I can check off two more items: 1)  bullish sentiment, enthusiasm, and new highs 2) A shot of good news UNLIMITED QE.  There is one item left: increase in volatility as market goes nowhere.  This should happen in the coming weeks.

Banana Delivery

We got the bananas out on time.  And more than expected.  And unlimited.  Apparently there were quite a few who were caught flat footed by this QE3, otherwise we wouldn't have had such a sharp rally on something that was imminent and hinted at over and over.  Now what?  The knee jerk reaction is to sell the dollar, buy gold, oil, other hard assets, and stocks.  Timing tops are more difficult than timing bottoms.  You don't have that crap in your pants moment like you do at bottoms.  Instead the market lingers near the highs, consolidates with increasing volatility, and suddenly goes lower.  The length of the consolidation is hard to time, but it should start next week, where we'll likely trade in a range for a few days, get traders used to these prices, more comfortable buying stocks at these prices, and then the next catalyst will be eyed. 

The X factor is the hedge funds, how will they trade the remainder of the year?  Will they chase longs and try to catch up with the S&P and risk buying at the top and going negative on the year?  Or will they play it safe and try not to have a disaster of a year (i.e. going negative when the market is up so much)?  My bet is that most will go with option 2, and just try to survive this year, and be safe in the company of the mass of underperforming, but still positive on year hedge funds.  Without hedge funds chasing this market higher, I don't see us going much above current levels.  The retail crowd and insiders are not likely to be buying. 

Gut tells me that the dip buyers will keep the market from plunging anytime soon, but the extent of the rally on anticipation of central bank news means more volatile times ahead.  I don't see a crash, those only happen in an environment of financial panic, and that doesn't happen anymore with activist central banks.  Instead, we'll likely get a grinding move lower that will be punctuacted with sharp, fleeting countertrend rallies based on central bank "news". 

Thursday, September 13, 2012

QE2 Template Doesn't Fit

The last time the Fed went on a bond buying spree, it was November 2010.  The market initially went higher and then had a pullback which was a golden buying opportunity for a monster rally into new highs.  The S&P was at 1180 then.  We were still in an inventory up cycle after the paring down of inventory in 2008-2009.  It is now at 1439.  Valuations are not cheap anymore, in fact, they are expensive considering where we are in the economic cycle.   Unless we get irrational exuberance into stocks, I don't see a continuation of the rally.  I see that as a very low probability event. 

The bond yields, both Treasury and MBS are so low now that only marginal gains will be made with Fed purchases, making monetary stimulus much more limited this time.  So the only catalyst for higher prices is hedge funds chasing the market higher and animal spirits.  Both should be limited.  We have run up a lot ahead of these central bank events, because that is what kept us out of the abyss during the summer.  It is payback time now that the news will finally be released. 

I am sure Ben will not disappoint the market, he never does.  So expect a QE3 bazooka today and euphoria that will lead to a one or two day rally.  And then short term consolidation next week and then a new downtrend. 

Wednesday, September 12, 2012

Don't Be Relieved

After the Fed comes out with QE3, you will finally have all the potential bad news AND good news out of the way.  So there will be relief and concurrent with that emotion, prices that reflect it.  But the market is always looking ahead, it doesn't look back.  QE3 is almost in the rearview mirror, I don't care if its unlimited QE, because that is the base case assumption now.  Unless a lot of the Fed money into Treasuries and MBS ends up in stocks and commodities, you don't get a continual uptrend.  You may get money that is just stuck there in Treasuries and MBS taking yields even lower. 

Let's see how many positive and negative catalysts await after QE3.  Just from what I am hearing, they are ALL negative catalysts!  Not one single positive catalysts after QE3.  Q3 earnings are going to be bad.  China continues to slowdown.  Election uncertainty coming up and the fear that Obama will win again, because he's ahead in the polls.  Fiscal cliff.  Maybe the only positive catalyst that I see mentioned is if Spain asks for the bailout, but that's probably expected by most as being inevitable. 

So it's a really bad time to be relieved after we get QE3, because news-wise it is all downhill from there.

Friday, September 7, 2012

Blowoff Move

The upthrust over the next several days will eventually lead to the final call for alcohol.  The zenith of the buzz.  The hangover is around the corner.  I expect us to make a top for the year sometime in the middle of September.  The S&P is at a new 4 and half year high.  The S&P 500 P/E ratio is above 14.  For what? Potential 5% earnings growth with profit margins at all time highs?  Unless you get a wholesale investor sentiment shift away from bonds into equities, you cannot sustain the uptrend and get multiple expansion.  In the end, it is about supply and demand. 

The only way you increase the demand is through insider/corporate purchases, or investor/ fund inflows.  The insider/corporate purchases are dying down, so we need inflows to move things higher.  It is highly doubtful that you get that inflow wave into equities that can take us to 1500 and higher.  Investors have been burned so often in equities that they are now gun shy, willing to forgo any additional marginal gains for relative safety in bonds.  This is a secular shift that is still ongoing.  That is why we topped out at 1370 last year, and we stalled out earlier this year at 1420. 

The uptrend in U.S. stocks is coming from funds that are taking money out of global equities and piling into the U.S.  The U.S. equity market is the sole hiding place for stock investors, inflating valuations and keeping this trend intact.  But the music will stop with the upcoming elections and fiscal cliff, I expect a risk off move in late September into October ahead of these potential downside catalysts.

Thursday, September 6, 2012


The news came out and we've got only minor sell on the news reaction despite a huge run up overnight.  The market is too short and underinvested here.  The fear of a sell the news reaction was greater than the reality.  I expect us to squeeze higher intraday into the nonfarm payrolls number which should beat expectations.  The chase for performance is now on.

Wednesday, September 5, 2012

That's it?

That was a pathetic bounce off what should have been a blockbuster rumor headline of unlimited ECB bond buying.  The futures aren't even positive off the 4;15 close.  The funds are turtling up here, they see the weak earnings coming in from Fed Ex, etc, they see China crashing, and the only positive catalysts are all telegraphed (ECB, Fed) and fund managers fear disappointment if central banks don't pull the trigger.  Despite this, its too hard to short, even when it seems so intellectually compelling, because the price action doesn't tell me that we're ready for the down move.  And I don't want to get my face ripped off when Banana Ben shoots his uzi.  And yesterday on Fast Money, it was a parade of bears despite a flat day.  Too tough here, have to wait.

Tuesday, September 4, 2012

Waiting to Act

The weakest equity markets in the world are in Asia.  Japan is trading like it's still in a deep recession.  China is trading even worse.  India is also bad.  Australia remains weak.  Yet the U.S. market is less than 2% away from post 2009 recovery highs.   Europe is no longer lagging and trading about even with the U.S. equity freight train over the past few months.  It is no coincidence that the 2 world markets that are performing the best have also had the most central bank yapping.  I cannot remember a time when almost all of the attention was focused on central banks for so long.  It has been like this for months. 

The whole market is a house of cards right now getting built higher and higher.  At current valuations, with this kind of economy and lack of insider/corporate equity demand, the market just can't go much higher. 

A top is approaching, but timing tops is always tricky, more difficult than timing bottoms.  Tops are processes, and usually you want to wait and short when there is enthusiasm.  I don't see that at all right now, so I can't short this market.  But going long doesn't feel all that great either, with the current fundamentals and valuations.   So we're left to wait and react.  I am looking to short enthusiasm.  It could be coming within a couple of weeks, probably from an announcement from one of the central banks.