Friday, October 30, 2015

Upside Exhaustion

The uptrend has been amazingly strong.  Beyond most people's imagination.  But now that we are closing in on SPX 2100, the risk reward is slightly favoring the bears.  Unless we get a rocket higher and break through to new all time highs, the market should take a pause here.  I am not that interested in shorting this market yet.  If I do short, it would just be for quick trades, nothing more than a day.  And it is tough to be long up here, just because of the speed at which we've gone higher.  I am sure any pullbacks down to SPX 2060 will be bought up ravenously by those underinvested and left behind.

What is interesting is that the Fed supposedly talked hawkish and the market is still going higher.  You would think that Europe would like a hawkish Fed and a dovish ECB but Europe has been lagging all week, and is relatively weak again today versus the S&P.  Europe is still way off the yearly highs despite the EURUSD being near the year's lows.  I am not hearing anyone worried about this relative weakness in Europe lately.  Still seems that Europe is more loved than the US.

Bonds are getting interesting again, we might be headed for a repeat of May this year, when we had a bond scare with the 30 year getting destroyed, with yields going from 2.6% to 3.1% in 2 weeks.  The velocity of this down move is not so great, but something to keep an eye on.  There is decent resistance in the 10 year yield at 2.20%, so not too far from here.  I would look to buy around that area, expecting buyers to show up.  This also goes hand in hand with my view that crude oil will top out around 46-47, and SPX has limited upside.

It is back to your boring low volatility market, so I am lowering my expectations for trades, both up and down.

Wednesday, October 28, 2015

Fed: See you in 2016

The Federal Reserve might as well take a vacation till March.  They will do nothing for the rest of 2015, and depending on the stock market, could do nothing in 2016.  All that rate hike talk went down the toilet with one weak jobs report and a little scare in the stock market.  Sure, we had below expectations economic data, but if they are expecting hot economic data after 6 years of an economic expansion, they will never raise.  They are always too optimistic in their projections and always lie about inflation.  This gives them excuses to always do the easy thing: please the market.

I wouldn't short into the Fed meeting, because for some idiotic reason, people still think Fed will raise rates or say they will raise rates.  And they get surprised when the Fed is dovish.   Expectations are for the Fed to do nothing, so I don't expect a big move afterwards.  But still, if they will surprise the market, it will be to the overly dovish side, of course.

Thinking about shorting on any post FOMC euphoria, but its not that good of an opportunity.  The market is close to equilibrium, the predictable portion of the migration is complete, and any moves too far up or down should not last long.

Tuesday, October 27, 2015

Crude Oil Bear Market

Crude oil looks like it wants to test $38 again.  It has been extremely weak the past two weeks, when equities have been ripping higher.  However, since crude oil went over $50 on October 9, and its now trading around $43, you had net fund flows of $133M into UWTI, triple leveraged crude oil ETN, and $190M into USO, crude oil ETF.  Those are really big inflows for UWTI, which only has net assets of $900M, which means you had about a 20% increase in shares outstanding in just two weeks.  UWTI is the most speculative of the crude oil ETN/ETFs, being triple leveraged with massive decay from daily resets.

Now we are entering the seasonally weakest part of the year for crude oil.

It looks like a disaster waiting for crude oil for the next 2 months.  Crude oil usually follows the equity market, and it has been unable to keep up with the equity rally.  Even with all the central bank actions, crude oil can't rally.  In fact it is doing the inverse, going down while equities are going up, rare to see these days.   

This crude oil weakness will keep a very strong bid for bonds, which just loves a weak oil market, more so than a weak stock market.  Bonds are probably the most bullish thing I see right now.  

Monday, October 26, 2015

Scars from 2008

"It is not what I think that is important, it is what others are thinking that is important."

It is still there.  The memories of 2008 die hard.  For most in the investment community, avoiding being caught long in a 2008 style crash makes most overly bearish when you get a steep drop like you did in August and again in September on the retest.   This creates a market that goes into disequilibrium even though fundamentals have not changed much.  Nothing drastic happened from August 18 to August 25 to make the market drop 230 SPX points.   It was not as if China suddenly had a crisis.  It was just the fear of another 2008 that caused the selling.  As a trader, I have no fears of a 2008, because that was probably the best trading year I ever had.  In fact, I would love to be able to trade a market like 2008 again.

It is still stunning to me to see people so bearish on these big dips, because they have been such great buying opportunities for 6 years straight!  It is hard for me to understand, but it must be the scars of 2008 which run so deep that they emotionally trump the past 6 years of raging bull market action.   It is not what I think that is important, it is what others are thinking that is important.  I am not the one driving the stock market, it is the institutions and the collective psychology of the masses moving it.

For me, the biggest scars came in 2010 and 2011, when my excessive bearishness and chasing losses hurt me big time.  Unlike Twitter traders, I will admit my past defeats.  That is a part of the game that trading vendors and gurus gloss over.  If you don't study your defeats, you will repeat them.  Even if you study them, you are likely to repeat the same mistakes until you take them seriously and not just say its bad luck.  That is why I didn't fall into the trap of shorting the right side of the V this month, because I remember getting face ripped in the same situation in 2010, 2011, 2012, and 2013.  I was so hard headed and am such a natural bear, that it took 4 years of horrendous ES shorting losses before I adjusted.  Those adjustments, such as going long bonds as a substitute for shorting stocks has paid off over the past two years.

So what about the current situation?  With the kind of disequilbrium that we were in by late September, without a bearish fundamental change, the market could only go back up to where it was before the dislocation, and that is SPX 2080.  You can even argue that the current market is even more bullish than before the big drop.  We've  got a more dovish Fed, an ECB more committed to QE, and China easing more aggressively.  That easily trumps a slightly weaker credit market.

Now, we are back near 2080.  I initially thought I would love to short this level, but after reviewing what happened in 2014, and with the current investor positioning, it isn't so attractive as I once thought.  We will probably get a 2-3 day pullback after the Fed meeting in a sell the news reaction.  Beyond that, I would still rather buy weakness than sell strength.

Friday, October 23, 2015

Suppressing Volatility with CBs

The global central banks (CBs) are doing their best to support asset prices, under the veil of deflation and growth fears.  There is an interesting research report by Artemis Capital Management, a volatility fund that blames central banks for creating shadow convexity and moral hazard with their market supporting actions.  It is a fun read, but I totally disagree about shadow risks and future mayhem due to central bank intervention.

The biggest risk for financial markets is the lack of money, or liquidity.  The next biggest is high inflation, which kills the bond market, the backbone for capital investment.  That is why you had many more frequent crashes when the world was on the gold standard, when money was always tight.  Even with fiat money, without QE and artificial suppression of interest rates, you get spectacular crashes like 2008, and VIX regularly in the 20s, like the late 1990s.

What you get with constant QEs is a VIX at equilibrium around 14, where we are at right now.  The liquidity is still overflowing.  That is why the 1% keep spending like crazy, making vanity purchases driving up the art and real estate markets.  The Fed is still reinvesting assets on its balance sheet, they are not tightening anything.  Yes, 25 bps is a big deal.  Tell me how you would feel being long ZN (10 yr T-note futures) and having it move 2 against you (25 bps).  You would be down $2000 for each contract, which has an initial margin of $1500.  Wiped out if you were on full margin.

It is a goldilocks economy, not weak enough to stop stock buybacks but not strong enough to cause the Fed to raise interest rates.  It won't be like this forever, but the bar is very high for the Fed to raise rates, so the economy has to get really hot for them to act.  And this economy just doesn't have enough organic growth to get that hot.  So basically ZIRP forever.  

Draghi is the Italian Bernanke, the BOJ will buy anything, including stocks, and the PBOC will go to ZIRP policy before their crisis is over.  It is much more likely that we stay in a range bound market for a couple of years before we get a bear market.  I don't buy the argument that we will melt up to ridiculous levels, just because the demand for stocks is not that high from a demographic standpoint.  The demand for bonds is high, however.  I expect a continuation of the bond bull market and the equity bull market to turn into a range market making marginal new highs.  So basically expecting 2015 like range bound trading to repeat itself again next year, at a slightly higher level.

Mo Money

China is getting into the money action.  This looks like classic Friday morning short panic on central bank goodies.  It is setting up the ES towards 2073 resistance, which is about SPX 2080.  Shorting the euphoric open today and looking to cover within the first hour of trade.

Today's intraday action looks very tradeable.  Short the open, buy the first 30 minute dip, cover and reverse long and sell the long at the close. However, in the coming weeks, the ES will be harder and harder to predict as the prices and number of bulls and bears are close to equilibrium now.  Bonds and other markets look dead as well.  Volatility will die out.  Opportunities will be scarce.  Its time to rest and relax from the constant action over the past 2 months.  I am considering taking a trading vacation after the Fed meeting next week.

Thursday, October 22, 2015

Missed the Rocket Ship

Just depressing to see this bull rocket ship leave without me.  I have been bulled up for most of this month and I was holding the ES looking for a move higher but thought we would have some intraday pullback volatility which would let me get back in cheaper after my premarket sales.

If you want to make the big bucks, you CANNOT try to play the intraday squiggles.  Because for every time that you are able to make a few bucks on the intraday volatility, there will be days like today where the market just goes one way the whole day and you miss out on the bigger picture move.  That is what happened to me today, I turned a great trade into a good trade by cutting it off too early.  Let this be a lesson to you the next time you want to trade around your position.

More ECB Printing?

Draghi came out again with guns blazing promising more QE and even lower rates.  This has given Europe a huge boost, and a smaller boost to the US market.  Remember that ECB's QE announcement earlier this year just made the euro weaker and caused US equity investors to worry about a stronger dollar.  So what is good for Europe is not necessarily good for the US in this case.

I have reduced my ES long into the pop premarket, but I will buy on any weakness later today or tomorrow.  Still a dip buyer's market but we are getting later into the rally phase and you will get more choppy trading behavior.

Keep an eye on the euro, a weakening euro is definitely not what the S&P wants.  Treasuries and Bunds look like they are invincible now, with all central banks dovish.  NIRP forever.

Wednesday, October 21, 2015

Macro Trumps Earnings

It seems like almost all the big earnings reports so far have been misses with the stocks tanking AH.  NFLX, WMT, JPM, GS, MS, IBM, YHOO, CMG, etc.  And the futures don't even flinch on those earnings reports.  It is all macro, all positioning now.  It is all about the need to add equity exposure for the underinvested.  The Fed's dovishness is a convenient excuse to buy equities.  Investor positioning just got too bearish and unless something really bad happens (these earnings reports haven't done it), investors need to add long exposure.  It all doesn't happen in a day, or a week, it takes several weeks, up to a few months.

When you are in the middle of that transition from overly bearish investor community positioning to more normal positioning, stocks don't stay down for long.  If it goes down, it tends to only last a few hours, or a couple of days at most.  Then you have those who need to buy, putting pressure on prices to go back up.  Considering how the broad market is acting in the face of all these bad earnings reports, it tells you that there is still a significant group of fund managers that want to buy, regardless of the circumstances.

Still long ES, and given the still relatively high levels of put activity going on, I don't feel like the migration is complete.  I see crude oil trading under 46, down 5 from several days ago, and the energy stocks hardly went down.  Its a teflon market right now, and probably will remain that way until at least the FOMC meeting next week.

Monday, October 19, 2015

Opportunities Drying Up

For the futures trader, the opportunities are quickly disappearing.  Typical equity index behavior off a bottom.  Most of the gains off the bottom are made in the first 2 weeks.  The next 2 weeks of gains are much smaller and take longer, just because the volatility dies down so much and the desperate buyers have already covered shorts or returned to their normal long exposure.  

We had a golden time period for about a month and a half when you could take advantage of panicked trading to buy the dips and ride it up as the panic died out.  When there are no big dips, there will be no big rallies.

The VIX doesn't lie.  It is a good leading indicator of near term volatility.  VIX is below 15, something I don't think anyone could have imagined even last month, even if you knew that the market would go back up to SPX 2030.  The inverse of the VIX has outperformed the S&P by quite a lot during this rally.  That is a good sign for bulls, all else being equal.

But with a lower VIX, the upside will be limited, and the trading will be boring.

Friday, October 16, 2015

Central Bank Put

The Yellen put is alive and kicking.  So are the Draghi and Kuroda puts.  The stock vigilantes got their way.  They got the Fed to cave in.  The Fed is now considering mulling negative interest rates, and QE4 shouldn't be too far behind.   A rate hike is a distant memory.  Stock vigilantes 1  Bond vigilantes 0.

The most important thing we accomplished on this recent correction is to confirm that the central banks are not going anywhere.  They are here to stay, with interventionist central bank policies at the slightest sign of economic weakness.  We aren't even close to a recession, and the central banks are already feeling antsy about needing to print more money.  This is wildly bullish for equities.  It is slightly bullish for the short end of the yield curve, and slightly bearish for the long end.

Over the coming weeks, you will see the fund managers that de-risked get aggressive on the long side as they feel invigorated by a newly dovish Fed and central bankers looking for ways to pump up asset markets at the drop of a hat.

Earnings don't matter, because if they did, S&P wouldn't be this high in the first place.  It is all about the central banks, and they love to be at the center of the action.

Middle of the Migration

If you ever watch those nature documentaries, you often see the herd of zebra and wildebeest move from north to south, and then back north.  They are following the rains, to go to where the grass is greener.  It was the start of the dry season in August, and at the peak of the drought, you could sense the fear.  The weakest animals collapsed and died.  These were the overleveraged funds and individuals.  You had the grass all chewed up and dried out by the end of September, but that was the end of the dry season.

You have started the migration back to greener pastures.  It is raining again.  But the nerves from the drought are still there, but day by day, the herd gets more comfortable.  It has been 2 1/2 weeks since the drought ended, and the migration started.  Usually these migrations last 4 to 6 weeks, so there is still time left for the herd to saturate the plain and eat up all the grass.  If the conditions are very favorable, then these migrations can last for several months and prices can continue to creep higher and higher.

That is the tricky and difficult part about shorting.  When you are short and wrong about the length of the migration, you get trampled by the herd.  It is a dangerous game, short selling.  It works much better for individual stocks than for the overall market.

Even though the S&P is down for the year, if you include dividends, it is about flat.  I don't know about others, but for me, it has been a tough shorting market even though the market is flat.  The scars and habits from the previous years are hard to get rid of.  I still find it much easier to buy dips than to try to short rallies.  Because you never know when the rally that you short is the one that goes on for months and months with no pullbacks.  The fear of that possibility keeps me from doing more than surgical strike short campaigns, where I try to stay in the trade for a few days at most, and get out even sooner if the market doesn't go down at the time that I expect it to.

Staying bullish and with the growing herd.  The FOMC meeting, BOJ meeting, and the China propaganda/central planning meeting are all coming up in the last week of October.  It should be quite a bullish climax as the herd gets excited about all the money printing that is possible.  Remember, earnings fundamentals don't matter now, it is all about the fundamentals of money.

Thursday, October 15, 2015

Earnings Fears

We have bad earnings to blame for the 2 day pullback.  Bank earnings have been weak and we got a bomb from WMT.  And NFLX disappointed with their earnings.  It has been a bunch of disappointments.  As I stated before, in the comments a couple of days back, I would be a scale down buyer between ES 1992 and 1982.  Well, I followed my own advice and got long ES.

This is a pullback you usually get to consolidate a big up move off a bottom, and these consolidations usually last about 5-6 trading days.  If you consider that we got rejected by SPX 2020 last Friday, then we are on day 5 of the consolidation.  We should get a move higher off this consolidation within 2 trading days.

We got a gap up today which seems a bit surprising considering the weak earnings after hours, but global markets remain well bid.  China seems to have enticed dip buyers as there seems to be front running ahead of possible stimulus at a big meeting near the end of the month.  They never make it feel comfortable to buy weakness, and with the weak retail sales numbers and the WMT and NFLX bombs yesterday, it felt like a mini armageddon.

Bonds are tough to game here, I am not touching it because I remain positive on equities but bonds seem like they have no worries in the world with the weak economic data and dovish Fed musings.

Tuesday, October 13, 2015

Swing Shorts Don't Pay

You have to give props to this market.  It is not letting bears cover lower, as every 10 point dip is voraciously bought.  Straight Outta 2013/2014.  Even oil dropping $3 has barely budged the oil stocks, and a weakening Europe only served as a buying opportunity at the open.

And to put the cherry on top of this bull sundae, put activity is rather high for a flat day, showing no complacency whatsoever.  We are overbought, and should be having a down day here, but so many are underinvested that any weakness is bought with reckless abandon.  This market is on a mission to squeeze every last short and make every single put expire worthless.  With this much buying power, SPX 2060 is a lay up.

Begging for a trip down to SPX sub 2K for a golden buying opportunity.

Stronger Euro

Europe just cannot handle a stronger euro.  A weak euro is the lone supporting mechanism for the European rally.  If the euro gets stronger and Draghi doesn't do anything about it, it is a free fire zone on European stocks.  The Fed has entered the currency war, surreptitiously under the guise of global worries and waiting for more inflation to raise interest rates.  With the Fed now in the currency devaluation camp, although not as blatant as Europe or Japan, or China, it is now a zero sum game.  For every winner, there will be a loser.

Last year, all the countries could prosper under a stronger dollar regime, a positive sum game, including the US.  That was because of the excess liquidity still being generated by a tapered QE, which ended at the end of 2014.  Starting from 2015, that is no longer the case.  No QE, no positive sum game.  The US stock market will not tolerate a stronger dollar any longer.  It can only tolerate that under a QE mechanism.  Which goes counter to the strong dollar theme.   If the EURUSD gets under 1.10, it will have temper tantrums and the stock vigilantes will put a gun to the Fed's head to do nothing, or if things get bad, a QE4.

Of course, the Fed is filled with cowards and will bow to the demands of the stock vigilantes, with no rate hikes if SPX stays below 2050, and another QE if SPX goes below 1800.

I am looking for a pullback today, with SPX 1990 in the cross hairs.

Bonds are a no play, rallying strongly on Friday and Monday, leaving no edge.

Friday, October 9, 2015

Relentless Rally

We never got the sell the news reaction on FOMC minutes.  But I am short term bearish now that we got the good news pop on a dovish Fed.  As if that's really a surprise anymore.  I will wait to short on Monday morning but expecting a trip back to SPX 1990 next week.

This is to just to play a short term pullback next week, I am expecting more rallying to come in the weeks ahead, so not going to stick around for long on any shorts next week.  The markets are getting boring again as the VIX is a teenager again.  Will trade less in weeks ahead.   Saving my bullets for a better opportunity down the line.

Thursday, October 8, 2015

Looking for a Pullback

The market has rallied for 7 trading days from the bottom last week.  This is the initial thrust higher, and it has been powerful.  But the internals of the rally, when I look at how the leaders are doing, is poor.  The Nasdaq favorites, the FANG, like FB, AMZN, NFLX, and GOOG have been lagging.  So have biotech stocks.  The leaders have been the laggards, like energy stocks.

Usually when you see the laggards leading the bounce, it is unsustainable, because those laggards are usually bouncing not because of fundamentals but because of poor investor positioning.  I would be more bullish if the leaders were coming from the stocks near 52 week highs.

Plus we have resistance around 2000, and the intraday price action the last couple of days seem to show that the market is tired here.  I am looking for a pullback down to 1970 to consolidate the move.  I would also look for the 10 year to get back under 2.0% in that move lower in equities.  Fed minutes should be dovish, but that is pretty much expected, so perhaps a sell the news reaction later today into tomorrow.

Wednesday, October 7, 2015

Buying Thrust

This is a powerful bounce off a panic selloff.  Like summer 2010, fall 2011, and fall 2014, you get the strongest point gains at the beginning stage of the buying thrust.  Officially we hit bottom for this down leg last Tuesday, so we are only 1 week into the rally.  Usually the biggest gains happen during the first 2 weeks of the rally, and then it gets choppier as the rally matures and more people jump on board.  On average, these type of rallies last around 4-6 weeks.  And they retrace at least 2/3 of the losses from the initial drop, which would be SPX 2100, so if you consider 1870 to the be floor, then we should go up at least till 2020, but more likely till at least 2040.

Of course, we could have a fake out buying thrust like we did on December 2014, but that is unlikely here.  This bottom had a lot more panic involved, and the sentiment got so bad and fearful that this one has high odds that it is the real deal buying thrust.  Based on this scenario, you cannot be short.  You have to be long here and use any 1 day dips to add long exposure.  This rally probably has till the beginning of November, with the target area around 2040-2060.  If we do get to that area, the risk/reward for staying long would not be worthwhile and I would consider a small short at that time.

We have a long ways to go, time wise, but not point wise.  It is a bit depressing for latecomers to know that 120 of the likely potential 170 points gain from 1870 to 2040 has already happened.  Really only about 50 points of upside left from 1990.  But I still like the risk/reward here being long just because all the ingredients for a good bottom were established last week, and the market is acting very strong even though we are overbought.

The past week's jump just emphasizes the extreme importance of catching these bottoms and being long when the initial thrust begins.  That is where most of the reward is in being long.  As you hold for longer into the rally, the rewards get smaller and the risk slowly rises.  That being said, it is still only a week into the thrust.  Still plenty of time left in this one.  Expecting more strength in the coming days.

Monday, October 5, 2015

Stairs Down Elevator Up?

It is an atypical stock market.  The rallies come quicker and swifter than the selloffs.  The Friday reversal was mythical.  Like a phoenix rising from the ashes.  Actually, it was just a lot of shorts caught offsides and panicking out of their positions.  The most heavily shorted stocks went up the most on Friday.

We are getting more short squeeze today, and the market went straight up off a gap up open, giving shorts no opportunities to cover lower.  What is so frustrating about these type of markets is that you go straight up, flat line for a bit, and then go straight down.  Good for trend followers, but horrible for counter trend traders.   And the rallies are quicker than the selloffs!  It is not normal, as stocks usually should go down faster than they go up.  What this type of activity tells you is that most of the  selloff was caused by a lot of hedging and short selling, not real cash selling.

What you are seeing is the unhedging and short covering, and it happens quickly, because the fund managers can't lag the averages, and FOMO plays a big part in their actions.

We are close to resistance here around SPX 1980-1990.  I would be surprised if we kept going up, but am not interested in testing that gut feeling by shorting. I have gotten out of longs and will wait for the next pitch.  The easy part of the post crash trading is now over.  As traders get more comfortable and less emotional, the trading becomes more unpredictable.

Friday, October 2, 2015

It's a V

How dare I doubt this bull market.  This morning was a giant fakeout.  About the biggest fake out I have ever seen in the market.  If we had rallied strongly straight from the opening bell, it would be more plausible, but after an hour of trading, we were actually down from the gap down open.  The scared money has already sold.  We are on the right side of the V.  I do have some long exposure, but I am not as long as I want to be.

I expect a test of SPX 1990 by next week.  But ultimately, we are on a mission towards 2040.  I expect that to happen by the end of the month.  The market got everything it wanted, lower interest rates, a higher stock market, and the Fed now likely on hold till 2016.  The nonfarm payrolls report will be forgotten by next week as the under invested hedge funds need to get long to catch up.  It will be a mad scramble for stocks in the coming days, do NOT fade the rally.

Choppy Bottom

It is not going to be a clean V bottom where FOMO plays a big part in motivating investors to buy stocks.  The psychological damage along with the still high valuations make this bottom much different than previous bottoms that you saw in 2010 or 2011.  Back then, you had the potential of the Fed increasing their balance sheet to suppress bond yields and pump more liquidity into the system, but this time, they are clearly waiting for much lower stock prices before even hinting at another QE.  That means the Fed put is way out of the money, unlike previous bottoms, when they were pretty much at the money puts.  Plus, valuations were much lower and the bull market much younger back then.  You cannot compare 2011 with 2015.  2015 is a much riskier market, although seemingly less scary.

This nonfarm payroll report isn't that bad, 142K jobs, which is within the margin of error of consensus at 200K, but the reaction is much more important.  This is a very fragile market, and any slight signs of a weakening economy worry investors that a possible recession is coming, or at least slowing growth.  I wouldn't overreact to this report, but clearly this is not going to be a V bottom like the past, where you didn't even have to get sentiment too bearish before the market made a V and rocketed higher.  I initially thought we would get a V bottom after seeing Wednesday's price action, but Thursday wasn't as strong as the close would indicate, and you had too many daytraders looking for a gap up today, for what reason, I don't know.

In any case, I would still look to buy deep selloffs, but this is still not a market where you can chase strength and get paid on swing trades.  Perhaps a dip buy if we get to SPX 1870-1880 range.

As for bonds, I expect us to get to 1.80% on this upswing.  Remember, bonds trade like tankers, once they get going, they are hard to stop, even if equities strenghthen again.  Bonds usually top significantly later than when stocks bottom.