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.

Thursday, August 17, 2017

Another Delayed Reaction

You would think with all the algo trading and computers pumping out orders all day, the reaction would be nearly instantaneous, but we've had delayed 1 day dumps, both on "bad" political news, last week North Korea, and this week Charlottesville.  Both are irrational excuses to sell, but frankly, the market is at irrational levels, so it was waiting for any type of psychological trigger to get the ball rolling downhill.

During this month, after my bearish tilt, the only real profits I made on S&P trading was on the long side, holding over the weekend.   It just goes to show you that trading from the long side has been the easier money, and continues to be so.  Of course, this kind of market will not last forever.  But the consensus among the investors that I hear from is that a 5-10% correction is due, and that it is a buying opportunity.  But the feeling I get is that we'll only get a 5-10% correction as the market gets volatile and is forming a top.  You saw that starting from the fall of 2014 going to summer of 2015, leading to the sharp drops in August 2015 and January 2016.

The way the crowd reacts to a pullback reveals a lot about the future direction.  I did not expect such a fuss over a 40 point pullback last week, and the market promptly rallied off that 2440 level.  Even as we bounced back earlier this week, investors weren't buying in and the rally earlier this week felt more like a short squeeze than anything else.  That can explain the strong price action ahead of the FOMC minutes yesterday, as shorts didn't want to hold a position ahead of possible dovish news.

So you have high equity put/call ratios on just a small dip in the market.  It usually means the downside is limited here and is a positive for the bulls.  On the other hand, the terrible breadth and potential negative catalysts (debt ceiling/ECB meeting) in September favor the bears.  I expect the kind of choppy trading like we had in March and April ahead of the French elections, this time ahead of the debt ceiling in September.  So probably a little bit lower, than chop back up a little bit higher, and repeat for a few weeks till the debt ceiling resolution gets closer.

It seems that the top will have to wait after the debt ceiling, and on more positive news flow.  I now expect new all time highs sometime in the fall.  There we probably have the final blowoff top, blasting well through SPX 2500.

See little edge here.  Missed the short as I was too careful on my entry.  You can't catch them all, and I've missed quite a few short term shorting opportunities being too careful, but no regrets as they weren't great opportunities.  May go in small again and buy the dip around SPX 2430-2440.

Wednesday, August 16, 2017

Draghi Wavering on QE Taper

The big news today is sources saying that Draghi will not send a new policy message at Jackson Hole next week.  Many were expecting Draghi to send hints of a QE taper like he did a couple of months ago but he's obviously not in the tightening mood these days.  With the stronger euro, Europe doesn't look so hot anymore.  It was the weak euro after all that boosted European stocks, not improving fundamentals.  In other words, Europe is the new Japan.

Europe is stuck now with permanent low rates.  They have fallen into the low rate vortex in which monetary policy has to rely on QE to have any effect on the economy.  It is something the US barely escaped and it is something Europe will not be able to escape this time around.  The baseline fundamentals are just too weak in Europe.  All the growth sectors (basically just technology) are based in the US, and the underlying demographics and labor inefficiency make European equities a poor long term investment at these valuations.  And of course European fixed income with the negative to super low yields.

The US stock market is benefiting from the weaker dollar this year, as the S&P outperforms the Russell 2000, but relying on a weakening currency for stock market gains is unsustainable.  Eventually other countries get sick of having to take the pain from a strengthening currency and they start loosening monetary policy to combat it.

Europe is stuck between a rock and a hard place.  They are going to have a tough time dealing with a strengthening euro, and you are seeing the first signs of Draghi feeling the heat.  This should be an ongoing story over the next year as Europe struggles to normalize as the euro strengthens.

We are right in the middle of the old range, now just waiting for it to hit the top of the range to put on some shorts.  With these unvolatile markets, 5 SPX points is a big deal.

Tuesday, August 15, 2017

Sell Top of Range

Remember that 2465 to 2480 range?  It was the same old trade day after day.  Now that we're back into the range, I don't think the bearishness from last week's dip has completely gone away.  Yes, it will go away, soon, but it may take a few days.  At which point I think this market will dip again.  Look at what happened to the bond market the last couple of days.  Usually the bonds keep their bid a bit longer even after a stock rebound due to after effects of the safe haven bid.  But bonds have given back all of their North Korea headline gains.

The notable weakness in the bond market so quickly after a rebound should keep stocks in check today.  I don't see a wild run to new highs like you would have seen in 2013 or 2014.  This is a heavier market and the breadth is worse.  So I will be a willing seller at the top of the range, near SPX 2480.  Just waiting for the buyers to get complacent again and we should get towards the top of range.

Monday, August 14, 2017

Back to Previous Range

We are now back to the lower end of that eternal range of SPX 2465 to 2480.  Once again, those that panicked off the splashy headlines are now in a tough spot of whether to buy back higher or be stuck on the sidelines.  However, this time, being stuck on the sidelines is not so bad considering the limited upside here.  With the ECB tapering cloud hanging over the market this fall, as well as the debt ceiling, you probably will not be able to break out higher in September.  The two weeks left this month look like we will be chopping from 2440 to 2480.  I did get long small on Friday but have already sold into the strength today, somewhat early.

In other news, bitcoin is turning into a full blown parabolic bubble going over $4300, another sign that speculation is hot and heavy in the financial markets.  I would fade this thing if I could get easy access to shorts.


Not much edge here, but thinking at least one more trip back down towards 2440 this month.

Friday, August 11, 2017

Delayed Reaction

We had one of those delayed reactions to North Korean headlines on Thursday.  On Wednesday, when the headlines were all over the news, the market gapped down and worked its way back to nearly flat on the day, giving bulls confidence that the worst was over.  Then we got the surge of selling in the indices and an unwind in short VIX trades.  Now we are near that 2440 support that I mentioned before.  It is sturdy support and it is probably good for a bounce here over the next few days.  I haven't gotten long yet but may put in a small long position either short VIX or long SPX going into the weekend.

I am sure people think that its crazy to be long over the weekend with all the possibility of nuclear war but I am playing technical levels and the fear after just one big down day was palpable.  CNBC Fast Money were uniformly bearish and looking for a deeper pullback.  It could happen if you see further volatility unwinds, but that is low probability.  Not going to go crazy buying the dip here, but will probably go in small and look to see what happens next week.  If we go down some more, I will probably buy more.  These are short term swing trades.  Don't want to do anything long term here.

Thursday, August 10, 2017

Soldiers are Faltering

The generals are marching on, but the soldiers are having a hard time following the leaders.  The Russell 2000 peaked out in late July above 1450 and made a 2 month low breaking 1400.  That would be the equivalent of the S&P dropping over 80 points in 2 weeks.  And you can't blame a weaker dollar for this divergence.  The USD index has basically been flat over the last 2 weeks.


I am sure if we get a selloff that the mainstream media and investors will blame Trump and North Korea for it, but the broader market has been selling off for 2 weeks already.  It only has gotten more extreme lately.  Typical of late stage bull market behavior is the lagging small caps and deteriorating breadth of the market.

As much as the market has changed with quants taking a bigger share of trading activity, the underlying tendencies remain.  Investors start crowding into the winners and high growth names as they have a harder time finding earnings growth in the rest of the market.  Volatility is really the only missing ingredient for a top at the moment.  And I am sure that will not last for long as a VIX at these levels makes no sense when the major indices are so far above their long term trend lines and moving averages.  Also, the prevalence of vol selling strategies to generate income probably contributes heavily to this kind of dead market.  You can not tell me an S&P 500 that closes between 2470 and 2480 for 3 straight weeks is normal and random.  It just sets up a spring coiled to go the other way when these vol selling trades unwind.

Human nature never changes.  They are magnets for catchy headlines like Nuclear War when boring headlines about central banks are much more important to asset markets.  It seems like yesterday's bullish reversal from a bad news gap down surprised traders but that playbook has been in play for several years now, just rarely in 2017.  How soon people forget.

We have another gap down today, perhaps it is delayed North Korean jitters (I am sure that will be the rationalization if we go down), but the truth lies underneath the Dow and S&P 500.  Still feel like there will be a pullback down to 2440 but just watching at this point, as I don't like selling short when traders are nervous about war, and definitely not buying this pig unless conditions are near perfect.

Wednesday, August 9, 2017

Volatility Comes In

We've finally shaken up this sleepy market, and who else but Trump to start it up.  You would figure the guy would have lost his credibility by now but the market still takes him at his word.  "Fire and fury" at North Korea was all it took for the market to suddenly get worried about nuclear war.  If it wasn't such a complacent market, this news would only cause a blip and be over with in a few hours but the markets are still feeling the after effects.  The VIX was so low and the range so tight.  The VIX is still low, not even a teenager.

It seems like I threw in the towel on the short a few days too soon, although yesterday's fakeout to the upside looked like it could last a couple of days.  And it probably would have without Trump's words.  These type of events aren't something that you can predict, coming out of the blue.  And long term, it has no effect on the market.  It is more psychological.  If North Korea was actually a real military power, then you might have something to worry about.  A North Korea vs US war would end quite quickly and the uncertainty of North Korea would be eliminated and the market would rally.  It would probably be similar to a Brexit type market reaction, down sharply for a day or two and then a face ripper once investors realized that its a nothing burger.

The news stations on a slow August day had a field day talking about North Korea.  Talking about Trump and nuclear war is irresistible to the mainstream news media, and blasting the news was enough to get traders nervous and selloff the futures.  We are at ES 2465, which is still part of the trading range over the last 3 weeks.  All that happened was the fakeout breakout above 2480 and then a return to the range on the North Korea headlines.

I see no edge at these levels inside that tight trading range of SPX 2460 to 2480.   Leaning towards a breakdown below 2460 to 2440 but not much conviction.  I don't think market participants want to be long heading into the weekend so probably trading heavy till Friday.

Monday, August 7, 2017

Placid at the Top

There is hardly a breeze even at this high altitude.  I have never seen a top so calm.  Which means that it's probably not the top.

Volatility usually happens when you get eager buyers and sellers clashing in a surge of volume.  We are definitely not getting that here, despite the potential bear catalysts in ECB tapering and Fed balance sheet reduction.   The equity market already faced a little heat back in late June when Draghi hinted at ECB tapering but both the bond and equity markets shrugged that off quickly.  Will that same catalyst be able to provide a bigger downdraft the next time?  It is questionable because the market has mostly priced in those events already, with the Bunds going from 0.25% to 0.60% over a few days last month.

There is the China put ahead of the National Congress meeting in the fall because the leaders want to make things look good and will pump plenty of money to do so ahead of the meeting.  So you don't have many worries out there, and I don't considering the debt ceiling a real worry.  That has been more of a political spectacle than anything else.  They always raise it after acting like the world will end if they don't.

The only long lasting downdraft that I can see is if we get that global growth slowdown that I see coming soon.  It doesn't have to be a big one, just enough to affect earnings negatively and inject volatility into the market.  Even a move in the VIX from the 9s to 15 would seem like a big earthquake.  This market has gotten so used to the calm conditions that a 1% down day these days feels like 2-3%.

The calm, overvalued conditions are not what precede a top.  It is unstable, overvalued conditions which do.  Right now, we are not even close to those conditions.  Which is a bit shocking considering how overvalued the equity market is.  Yes, the weak dollar is helping the US multinationals but that comes at the expense of Europe and Japan.  So globally, there are no net effects.

I was short last week and I covered for basically break even.  I gave it a shot on the short side, but it's taking too long for the move to develop and my conviction level has gone down to the point that I'd rather be flat than a little bit short.  Back on the fence and waiting for easier opportunities.

Monday, July 31, 2017

Tough to Time

This thing is taking its time at the top here.  I would have liked to see more volatility up here and some more weakness following last week's post FOMC intraday reversal.  But its reverting back to the same boring small range trade that it has been doing for months.  My conviction has been reduced a bit so I have accordingly reduced my short.  Still think we will go down to 2420 this month, but that probability is going down bit by bit with this kind of boring trade.

Crude oil is getting supported by Saudi Arabia, who seems to be cutting production to keep prices close to $50.  OPEC is basically Saudi Arabia, and they are trying to keep prices afloat ahead of the Saudi Aramco public offering.  Look for crude oil to go back down after the IPO since Saudis don't want to be the only one supporting oil here.

Will be taking a blog break for a few days, next post is likely going to be next week.

Friday, July 28, 2017

2015 Similarities

There are growing parallels to 2015.  First, you have the big inflows into Europe on optimism in the Eurozone.  That helps rally the euro off low levels and drags down the Bunds and Treasuries.  Then the risk parity cracks begin to emerge as stocks and bonds start selling off more frequently, and often on the same day.  Also, the momentum tech stocks outperform the broader market.

Not everything is the same, you don't have the Chinese stock market crash or yuan devaluation, or any worries about Greece.  But you also have much higher prices now compared to 2 years ago.  And volatility was definitely higher and markets choppier in 2015.  That is the one fly in the ointment.  The super low volatility is unlike any long lasting top I have ever seen.  I don't think you can just blame vol sellers for that phenomenon.  Realized vol is still significantly lower than implied vol.   So that takes away my conviction on a long term top, but I think we can definitely have an swing top with these low vol conditions.

I do think as volatility increases, we will revisit that 2480 area again a few times.  But I remain a better seller of rallies and will be reluctant to buy dips.  Yesterday's sudden selloff even caught me off guard, as I expected a quiet day after the first hour was basically actionless.  But there is a lot of complacency out there and air pockets underneath.  Expect to see more of that type of price action in the coming month.

Wednesday, July 26, 2017

Blood of the Bears

The financial markets are built on blood.  After a long bull market, the blood of the beaten down bears is used to feed the next bear market.  And vice versa after a long bear market.

The early bears' pain is the timely bears' gain.  It is difficult to time the top of a market, much more difficult than timing the bottom.  One of the early signs is when the markets go from pricing in better fundamentals to just valuation/multiple expansion.  This phase of the cycle can last quite a while, which is why it is an early sign.  It is a basic ingredient for the next phase, which is the topping phase.
The tricky part about the topping phase is that sentiment actually gets a bit less bullish while prices chop around.  This can fool the contrarian into thinking that there is still a wall of worry to climb, when in fact the wall of worry is blocking higher prices.  There are nuances to this game which makes it so important to develop feel and intuition when trying to predict future price moves.

I hear cliches from traders about "trade what you see, not what you think".  Like many cliches, they have a kernel of truth, wrapped around a lot of myth.  Yes, it is true that if you hate Trump, then you would think the US stock market rally post election is irrational, so not trading what you think would be a good thing.

But if you aren't thinking about the future and only focused on the present price action, that is a recipe for chasing and getting chopped up.  A quote from someone before he became a bloated macro hedge fund asset gatherer, when he was a great trader who made spectacular returns trading macro in the 80s and 90s:

“I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms.” - PTJ

It feels like a market turn is coming soon.  Since we haven't topped out yet and are still making new highs, it is speculative at this point.  But I am looking at the next few weeks where ECB tapering, Fed balance sheet reduction, and debt ceiling are on the horizon.  Those should be bear catalysts.

Monday, July 24, 2017

Europe Lagging

Feels like 2014 and 2015 again.  Europe and Japan have topped out as the US marches higher, led by tech stocks.  Even during a positive year in 2014, there were sizeable dips, one in January, one in August and one in October.  While January's dip was led by US, those in August and October were led by Europe, which topped out way before the US did.  Europe has signaled a saturation of global risk appetite for much of this 8 year bull market.

This time, Europe topped out in May, right after the good news pop from the French elections, and is down about 6% while the US is up about 4% during that time period.  That is Europe lagging the US by 10% over 2 months.

In much the same way that the yen has become a funding currency, so has the euro.  When you have negative interest rates, traders like to short that currency against one that offers a higher interest rate.  So the yen carry trade has morphed into a yen/euro carry trade.  Both are stronger lately.  While a dovish Yellen has masked the symptoms of this FX move, it still hasn't taken the pressure off these carry trades.

Remember back in August 24, 2015, the euro and yen both spiked higher on that infamous SPX limit down day.

By the way, I was watching CNBC Fast Money on Friday and they were universally bullish on tech stocks going into earnings this week.  It feels like a setup to pullback post tech earnings.

Friday, July 21, 2017

Finally Short

It finally feels like it is time.  I have gotten short SPX.  The final catalyst came out.  A dovish Draghi.  The good news is out there for the public to embrace.  Investors scared of tightening central banks have now gotten back into the pool.

The 2500 SPX psychological barrier is also another part of it.  Very few mention it, but most investors who set targets also put in sell orders around those big round numbers.  And the tendency is to put them just before that big round number.  So there should be plenty of this type of big round number-based resistance at these levels.

There are bearish catalysts out there on the horizon as well.  The budget battle/debt ceiling, potential ECB taper announcement in late August (Jackson Hole) or at the meeting in September, etc.  Also seasonally it is a weaker time of year for stocks, from mid July to September.

This is an intermediate term short, looking for a move down to 2420.  It should take a few months to chop around before the trend reverses, so no long term short yet.

Thursday, July 20, 2017

Playing the Downside

The market has "plunged" 10 SPX points from pre market Draghi highs, and is clawing back as I write.  Yes, he was dovish.  But the market knows that unless the ECB changes the capital key rules or goes into buying stocks, they will run out of Bunds to buy in 2018.  So they have to reduce QE or change the rules.  Of course Draghi will never admit that, but that's the main reason they want to taper, not because of a stronger European economy.  Europe is Japan 2.0.  It is unrecoverable.  The European economy will be right back to  near zero growth as the benefits of a lower euro dissipate, now that the euro is heading back up.  Based on the inflows into Europe and emerging markets this year, it seems like retail has fully embraced the "value" in European and emerging market stocks.  In 2015, that signaled a topping phase after a long uptrend.  I see a similar situation here, but with more dire consequences on the other side of the mountain.  Just because this time, the mountain and the air underneath is so much bigger.

There are a few options for playing the downside after the market makes a top.  And I really believe the top is coming soon.  These tops tend to come slightly below big round numbers for the S&P 500.  The 2007 top occurred right under 1600, at 1576.  The 2011 top happened at 1370.  The 2012 mini QE 3 top happened at 1475.  You get the idea.  It would not surprise me to see this market make a top right below the big 2500 psychological number.

You are getting a steady stream of low put/call ratios ever since the French elections removed a pall of uncertainty from the market.  While the super low VIX is not something I like to see when trying to pick a top, I believe that stems from investors selling volatility for income, artifically lowering volatility.  The tech stocks are acting bubbly, much like they did in 2015.  And we have gotten the good news from a dovish Yellen and today, from a dovish Draghi, which provide the final wave of FOMO buying which often forms a top.

I see three good ways to play the downside.  1.  Shorting equity indexes.  US, Europe, emerging markets, they will all work.  2.  Buying longer dated SPX puts, with SPX volatility so low, actually a good risk/reward.  3.  Buying 5-10 year Treasuries, with an equity market correction reducing the odds of future Fed rate hikes.

Wednesday, July 19, 2017

Bubble Times

It will end badly.  But timing the top gets harder when the Fed keeps its cautious rate hiking campaign.  The bond market has called the Fed's bluff.  They don't believe in 4 more rate hikes till end of 2018.  They are pricing in 1.5.  Janet Yellen blinked when the 10 year went from 2.10% to 2.39% and went back to being dovish.  That was the green light for investors to party on and make the bubble bigger.

But that is short term thinking.  Ironically, because of 2008, investors are now thinking short term and unwilling to tolerate big risks.  But that makes them get caught up in buying when things are optimistic, and dumping quickly when things start going down beyond a certain pain threshold.  And with the VIX so low, that pain threshold is pretty low, because investors have been lulled to sleep by such low volatility.  A 10% move down would seem like a shock to the system, when it's a fairly normal stock market volatility.

The end point will be the same.  It is just a matter of how much higher it can go before it gets back to more normal valuations.  And with normal valuations, we are talking a P/E of around 15 times GAAP earnings, not the pro forma nonsense that is used by the Street to tout stocks.  That would put the S&P around 1600 based on 2017 earnings estimates.  A 35% correction from these levels are needed to get to average valuations, which is where the market was in 2013.

After 8 years of a steady uptrend, with only a few corrections, it is hard for most traders to picture a scenario where the market goes down 35%.  All it would take would be for the economy to get bad enough that corporations wouldn't have the cash flow or the borrowing capacity to do stock buybacks.  You can guarantee that there will be equity fund outflows.  So without the buying power from corporations or retail, you will have to get to levels where value investors step in aggressively to counter retail outflows.  That level is probably around 1500-1600.

We have the ECB tomorrow and the Fed next Wednesday.  Those will likely be market positive, so I will probably wait till after Draghi does his usual dovish dance before going short.  We are at levels where the risk/reward is quite positive on the short side so am definitely eager to get started.

Monday, July 17, 2017

Economy and Markets

There is a reason the wealth effect from a rising stock market isn't improving the economy.  It's because most people own a negligible amount of stocks.  It's another one of the reasons why the Fed are clueless.  Bernanke believed in the wealth effect of rising stock prices, which is why he tried to goose the economy by doing 3 QE programs.  He only goosed the stock market.  He thought that people would spend more money if their stocks and funds went up.  The problem with his thinking was the people who didn't need more spending money were the ones who got all the benefits.  The people who did need it got none of them, and in fact got punished with higher rents and home prices.

The wealthy will just keep investing more if they have more money.  They already have almost everything they want.  The marginal utility of a third home is much less than a first home.  Same with cars, electronics, etc.  They don't need more stuff.  So when they got higher stock prices thanks to Bernanke's repeated QEs, they just put it right back into financial assets, not the real economy.  That's why you aren't getting the big inflation numbers despite all the central bank money printing.  All that money is just sitting there in brokerage accounts of the wealthy, or stuck in some luxury real estate.  

It is a little bit like the 1920s, except the average person isn't involved in the stock market.  The financial markets have become its own ecosystem, mostly detached from the real economy.  That is why the stock market would rather have a mediocre economy and low rates than a good economy and higher rates.  Higher rates mean much less wealth for the fixed income portion of the wealthy's portfolios.  A stronger economy isn't enough to offset that.  The market pundits think tax cuts will boost this market further but it would probably be a net negative as it would push up interest rates, which would curtail stock buybacks.   

Labor is cheap now.  There is too much supply of global labor.  That keeps wages low, profit margins high, and fuels the growing inequality and mediocre economy.

The only way the economy gets better is helicopter money.  Universal basic income.  If you gave everyone $1,000,000, consumer spending would rise so fast your head would spin.  Economic growth would skyrocket.  But the power players in Washington don't want it, because that would crush their fixed income portfolios, and they are just fine with the status quo of low rates and high equity prices and will lobby aggressively to maintain it. 

Market is a bit stronger than I expected.  It really does seem like investors were worried about a Fed that was too tight.  Now that monkey is off the back, we are getting a wave of buying.  Not ready to fight it yet, but the higher it goes, the more interesting the short side looks.  

Friday, July 14, 2017

Bad Data is Good for Stocks

We are back to the bad economic data is good for stocks price action.  Retail sales came in less than expectations, as well as inflation, and with yields going lower, stocks are pressing back up towards 2450 again.  It didn't take long for the market to forget last week's worries about higher interest rates.  We are getting to interesting levels on the short side this morning, but I don't want to pull the trigger because of the strength in bonds.  I would much rather just short the market when only stocks are going up.

I anticipate bonds being strong all summer, so it's not going to be easy pickings to short stocks unless data gets really bad.  And right now, data is just mediocre, enough to keep yields from going up, but not so bad that it affects earnings.  The only way I see yields going up for more than a few days is if tax cuts go through.  Oddly, the tax cuts that equity investors so badly want would probably be the nail in the coffin for this bull market.   While tax cuts would be a short term positive for stocks, it would be a long term negative because it leads to higher yields from greater bond issuance.  The small economic gain from tax cuts would be taken away by the negative effect of higher yields.

In 2015, you had an attack on risk parity (bond yields were reluctant to go down as stocks went sideways) which was the precursor to the 2016 down move.  Right now, you don't have that.  You did for a few days at the end of last month, but Yellen went right back to looking away from asset bubbles.

She gave her seal of approval to this bull trend in stocks, which is not surprising because the Fed talks a tough game but usually doesn't follow through.  At least Yellen was honest that the Fed boilerplate message of transient inflation and strong labor markets was just a pretext to put through a  few rate hikes.  Now that the Fed fund rate is back above 1%, she doesn't feel the urgency to keep hiking.  Unless the stock market keeps making new all time highs and busts out over 2500, what Yellen said on Wednesday should be the new boilerplate message.

This year, unlike 2015, bonds are looking bullish and that should make it harder for stocks to go down without some kind of shock to the system, which is lower probability.  I am still leaning bearish, due to valuations, but current financial conditions are still loose enough that stocks could grind a bit higher than expected before getting hit with a correction.

Wednesday, July 12, 2017

Yellen to the Rescue

Here they come again.  The Fed is back with a giant fire hose to blow out a little brush fire.  I guess Yellen had seen enough of the rise in bond yields from 2.10% to 2.39%.  29 bps was all it took to go from hawkish(supposedly) to dovish.  Talking out of both sides of her mouth.  Saying the Fed will keep raising rates and that neutral rate is 3% and saying that not many rate hikes left till they get to neutral.

The market did overinterpret the last FOMC meeting when she kept to the script of balance sheet rundown and another rate hike this year.  That was just her staying on script, not really revealing what she had in the back of her mind.  We got the truth today.  She is worried about low inflation and worries about high asset prices is way down on the priority list.  The tightening theme of global central banks taking back liquidity was dealt a blow today.  It had become popular on TV to say that central banks tightening policy would keep stocks from going higher.  The market was offsides for a dovish turn by Yellen.

How quickly those emails from Trump Jr are forgotten.  Now the bulls will think its clear sailing.   Overall, the conditions are still the same.  I never was banking on a hawkish Fed to take down the stock market.  That's not going to happen this time around.  They are chicken littles who will coddle the stock market if it has a tantrum.  My bearish view was more fundamental to overvaluation, low economic growth, and investor positioning.   Those things are still there.  I would like to see a slight break above SPX 2450 to all time highs to put on my shorts.

Monday, July 10, 2017

Fed is Late Again

They did it again.  Same mistakes, different time.  The Fed has set a pattern for their monetary policy which is:  they react to economic weakness quickly and react to economic strength slowly.  They will cut rates in 50 bps chunks at every meeting, and even between meetings, because they can't wait a few weeks.  You ever see the Fed raise rates between meetings?  For interest rates, it is  the staircase up, elevator down.

Starting with the Greenspan years, you had the 2004-2006 rate hiking cycle, in 25 bps increments, as the housing bubble was getting bigger and bigger.  They started too late and went too slowly.  Now the Bernanke/Yellen years.  Stretching out tapering over a year.  And that was with a 3 month delay because they hinted at it during May/June 2013 and should have done it in September but didn't do it till December.  Did they ever start QE gradually and build it up to full size in one year?  No, it was huge from the start.

And you wonder why the bond market doesn't believe the Fed when they predict 1 more rate hike this year and 3 more rate hikes in 2018.  Because the Fed overreacts to market weakness, and will either stall their rate hiking campaign or go to cutting again if we get a correction.  And odds are high that we will get a correction.  Don't believe the Fed when they say they are worried about high equity prices.  They will change their tune as soon as the S&P drops 10% and start worrying about stock prices getting too low.  They are Tony Larussa (retired micromanaging baseball manager) on steroids.
It has been a painfully slow rate hike cycle, and the Fed has lost their credibility when it comes to controlling asset bubbles.  They have babied the markets for so long, there is a expectation built in for  them to come to the rescue on any big dips.  And they will again.  Just like they did by delaying rate hikes in 2015 and 2016.  Now they have suddenly gotten brave with their 25 bps hikes every 3 months as the S&P has only gone up.

The financial pundits really do have a short memory.  They suddenly fear the Fed and their tightening cycle hurting stocks when they should be more afraid that the market is just a big fat bubble whether rates are at 0 or 3%.  

It looks like another boring summer day.  "Goldilocks" nonfarm payrolls number got traders positive again on stocks.  That shouldn't last for long.  Expect a move down this week to take back those Friday gains.  Chop continues.

Thursday, July 6, 2017

Relentless Bond Selling

They are crushing them again today in the bond space.  Led by the Bund, which is leading this selloff as the Europeans are starting to freak out about ECB tapering.  Draghi opened up a little crack in the door for tightening and traders have busted it wide open.  The equities keep reacting negatively to the higher rates, a bad sign considering where we are in the cycle.

This is reminiscent of what happened in May and June of 2015 as a German Bund bull market came screeching to a halt, at 7 bps, and rallied into the 90 bp range.   It was a preview of the risk parity fiasco of August 2015.  By the way, the SPX topped out in May of 2015 at 2134.  After that, stocks really couldn't go anywhere, and chopped around for another 3 months.  This is something that has been on my mind all year, the similarities to a 2015 type market, as the market tops out and chops for months on end, and then drops suddenly.

I don't know why those financial experts on CNBC think that low Treasury yields are something to worry about.  We had Treasury yields going lower for most of this year till last week, and the indices were doing great.  Now that you get this bond selloff since Draghi opened his mouth last week, you have a more volatile stock market that can't find any upside.  No, it is higher rates that stocks have to worry about.  And also a bunch of other things, which are a bit less urgent.

The recent price action is a signal that there are way too many assets in risk parity strategies.  Stocks are very fragile at these price levels, considering its sensitivity to what is happening to bonds.  I was listening to a podcast the other day and I heard a pension fund asset allocator talk about risk parity as a risk mitigating strategy that they use as a hedge for equities.  How about just having less equities and more cash in the portfolio?  Oh yeah, they need to meet their target annual return of 8%.  Good luck with that at these asset price levels.

There are way too many funds using long bonds as a hedge for their equity holdings.  It leads to these short term dislocations when bonds don't go up when stocks go down.  As volatility has died out, VIX as an equity hedge is now frowned upon, especially with its heavy negative carry.  The fund managers have smartened up, and gone to bonds as a hedge.  But this sets up vulnerabilities that you have seen recently.

The biggest pain trade right now is an explosion higher in VIX, which would lead to a cascade of selling in stocks, and muted upside in bonds.  The VIX sellers would be panicking as volatility exploded only exacerbating the situation.  That is what happened in August 24, 2015, but this time, the move could actually be much bigger with so many more assets in risk parity and so many more bearish on VIX.

In the long term, the stock market weakness on weaker bonds will keep the Fed from tightening much more, because they will be much less hawkish when stocks are going down.  So while I view this stock market price action as bearish for stocks, I think it is long term bullish for bonds.  These bond selloffs tend to last about 2 weeks, and then peter out.  So we could be getting closer to a bond bottom by early next week, depending on what happens with nonfarm payrolls.  A strong nonfarm payrolls number will probably make the bottom come quicker, perhaps even by tomorrow.

By the way, Nasdaq is going down much more than the S&P 500 on down days recently.  Also, biotech has been popular.  Chasing high beta sectors is late cycle behavior.  The fund managers chased tech stocks higher to catch up to the averages.  Now they are loaded up to the gills and have to sell when they start feeling the pain.  I expect volatility to increase this summer as the topping process continues, setting up a nasty correction in late summer/early fall.

Monday, July 3, 2017

Tightening Theme

There is a new theme out there in the markets.  The bond guys have caught on to it, expecting tight monetary policy from the Fed and after last week's Draghi speech, the ECB.

Most of the time, you get news stories that try to fit into the price action.  When you see a sudden selloff in the bond market, which also coincides with a weaker selloff in stocks, the knee jerk reaction is to blame rising rates and hawkish central banks for the weakness.  But higher rates were mostly ignored by stocks post-election in November and December.

The key here is investor positioning.  Back on November 9, right after Trump won, investors were cautious on stocks.  Also, there is a big difference when SPX is at 2100 and at 2440.  At 2100, the market can absorb higher rates, but at 2440, higher rates will cause equity volatility.  That is what you saw last week, as what Draghi said didn't seem significant.  Draghi had to come out more hawkish because the equity markets are rising and as the ECB runs into mandated percentage limits for the purchase of bond issuance for Germany.  Unless they increase the percentage of issuance that the ECB can purchase, they have to taper, or start buying more corporate bonds or expand the program into stocks.  The natural thing for him to do at this point is to downplay lower inflation and talk up future inflation.

The bond market didn't take his words well, even though it wasn't anything news breaking.  When you have had a torrent of bond ETF inflows this year, and more aggressive long speculator positioning, the pain trade was for bonds to weaken in the short term.  And today, you get a stronger ISM number and with economic expectations back to being relatively low, you are going to get more economic upside surprises, which also reinforce the bond weakness theme.

In the long term, the central banks tightening despite mediocre economic data only makes stocks more vulnerable to a nasty drop.  We got the first signs of that last week.  But this macro background of tighter monetary policy works slowly, and in the short term, they can lead to bear traps.  It is something to keep in mind, but it's more important to see the SPX uptrend flatten out more, and to see day to day volatility increase.  That is your sign that the market is saturated with buyers and sellers are starting to meet demand more eagerly.

This is a US stock market holiday week, and the beginning of the month, both positive forces that can last a few days.  Perhaps by Friday, these positive factors will disappear and we'll see what the sellers can do.  I am expecting a drop to 2400 to be fairly easy work, but below that level, the dip buyers will get more aggressive and since they haven't had too many opportunities to buy deep dips over the past 2 months, they will be out there providing a bid between 2350 to 2400.  The game plan is to short strength  from Friday onwards, hopefully near all time highs around 2450.  My threshold to short is lower now.  No longer waiting for the perfect conditions.

Thursday, June 29, 2017

Topping Process In Motion

The global equity indexes are too high.  They can only sustain high levels if interest rates stay low.  It is all one big connected market place.  You cannot ignore the bond market if you want to predict the stock market.  Since risk parity strategies are en vogue on Wall Street, it seems appropriate that you get the topping process started with bond weakness leading stocks lower.

Just like Tuesday, when bonds and stocks both fell hard, we have the same situation again today.  Yesterday was the day that dip buyers came roaring in, like salivating hound dogs buying up everything.  Now that those eager buyers are out of the way, We get back to selling.  These are the kind of moves that are the hallmarks of a topping process.  It is hard to call the top, but it's not so hard to identify the topping process:

1. Usually you get a flattening out of the uptrend and increased day to day, week to week volatility.  Definitely happening this week.
2. More speculative, high beta stocks are in favor.  A few weeks ago it was the Nasdaq 100 stocks.  More recently it has been biotech.
3. Breadth narrows as the fundamentals worsen, leading investors to pile into the few stocks that still have good growth and fundamentals.
4. Put/call ratios get low, and stay low.  That has definitely been happening this month.
5. Bullish sentiment has topped out.  This is the tricky part.  Contrary to what most contrarians think, investor sentiment usually tops out before the stock indexes do.  This can be rationalized by the breadth measures.  If most stocks in a portfolio start going down, while the index remains higher, naturally the mood will sour a bit.  This also happened, as there was a lot of bullish sentiment at the end of last year and early this year due to Trump trade, and more recently, with Macron winning the French elections.

This topping process can last several months, like 2015, or be briefer, like 2007.  3 to 6 months seems to be the average length.  If the topping process has started this month, that means that we will form a big top this year and enter much weaker markets in 2018.  That aligns with my long term view of the market.

There is still time to wait for a good entry to short, preferably on a rally back towards all time highs.  But for those active traders, it is now a much more favorable market to short rallies, with a high probability of a dip within a week.  Equities feel saturated now.  And the central banks are not looking to help right away.  A big difference from the 2010, 2011, and 2015 tops.

Wednesday, June 28, 2017

First Cracks in Risk Parity

Yesterday was a significant day in the markets.  For the first time in I don't know how long, we got a big selloff in the bond market along with a big selloff in the stock market.  This happened quite often in 2015, as Bunds led the weakness in the fixed income space.

We had Draghi talking about not worrying about deflation anymore, and talking about the current economy reflating.  Well, it seems like he didn't like the reaction in the bond market, because the ECB has retracted his statements to state that his outlook wasn't hawkish, but more neutral.

These central bankers are such micro managers, they have turned into daytraders.  They are watching every tick out there.  It makes me believe that the market has it right this time, ignoring the Fed dot plots which say 4 more hikes by end of 2018.  They know that the central bank put is at a high strike price.  Despite what they say about an inflated market, or worries about financial stability, they have the market's back.  They built this monster.  They're going to try their hardest to keep Humpty Dumpty together.

It seems we've finally gotten to a point where bonds have gone too far given current economic conditions.  Stocks will have to take a break going higher now that we've reached resistance in bonds.  A rally back towards 2450 will be a shorting opportunity.  I am guessing that we'll get one soon.

Monday, June 26, 2017

Risk Parity Heaven

The volatility is super low.  The stocks are rising.  And so are the bonds.  These are perfect conditions for risk parity strategies.  They hedge equity risk by buying long term bonds.  It has been the right strategy this year.  Going long puts and VIX futures/options is going out of style.  The performance drag is too high, so funds have found cheap and actually positive carry hedges in the form of long bonds.

This is not a foolproof strategy, but it is nearly foolproof when the Fed put is out there.  It is always out there.  The question is where is the strike price?  Obviously, investors believe the strike price is much higher than what the Fed wants the market to believe.  If the S&P went down to 2300, would the Fed stop interest rate hikes and balance sheet normalization?  If so, then the market has it right.  If not, the market is being too complacent here thinking the Fed will rescue the market on any market corrections.

On the one hand, it seems the market is too complacent when it comes to the vulnerabilities of the stock market, thinking long bonds will go up enough to cover a sharp drop in stocks.  It's very possible that while long bonds go up in an equity market correction, but not as much as it has in the past 10 years.  The 30 year yield is not at a point where you will get explosive moves up in bonds.  In fact, I think you would more likely see a steepening of the yield curve where the shorter term maturities rally strongly on an equity market correction, while the 30 year rallies only mildly.

We have a gap up Monday in SPX.  And bonds are also higher.  And VIX is dying out there.  It is the overflowing with liquidity trade again.  Until bonds actually start going down, the equities are not likely to go down much, if at all, even with the complacency building up.  It's a dead market and a tough market.  A good time to sit on your hands and wait for a good setup.

Wednesday, June 21, 2017

Bonds Will Be the Signal

The relentless rally in the long end of the bond market continues.  The Treasury yield curve is aggressively flattening ever since the market interpreted Yellen as being hawkish.  Let's not pretend like the Fed actually watches the real economy.  If they did, they would be doing nothing.  They would have done nothing for the last 3 years because nothing has really changed.  No, they look at the stock market and the stock market is telling them to tighten.

I am waiting for one of two things:
1) VIX rising with the market.
2) Bonds selling off when stocks are flat to down.

We are not getting either at the moment and that makes me reluctant to short.  Market tops can seem to last forever.  I've learned that a market gives you many opportunities to short a top but few opportunities to buy a bottom.  So there is no rush to short and miss out on the top.  There will be plenty of time to get in there and blast away at the short side at good levels.

I will be taking a blog break for the rest of the week.  Will be back next week.

Monday, June 19, 2017

Still Waiting to Short

It is getting closer to the right conditions to short but I continue to be cautious.  10 year yields are still too low, and I would like to see the put/call ratios come down a bit before I proceed.

I am surprised at the healthy gap up post opex today, as usually post opex during the summer is equity negative.  I figured there would be some more nervous hands coming into this week after the dip in tech stocks and with a hawkish Yellen.  It almost seemed like too good of a set up to short.  I'd rather short when there is a lot of good news, not when there is worry.  Last week, I could feel that investors were a bit worried.  It showed up in the market data statistics.

It's looking more like there needs to be another test of the highs in SPX before we can get another move down.  I will wait wait it out at least another day or two, and reassess the situation.   The last thing I want to do is short too early in this dull grinding up  market.

Friday, June 16, 2017

Fed Normalization

The crowd has interpreted a lot from the FOMC meeting on Wednesday.  The consensus is that the Fed is hawkish and barring a big correction in the stock market and/or lower inflation, they will remain on the war path towards "normalization".  I put quotation marks around normalization because I think ZIRP is the new norm, and should not be considered extreme policy anymore.  This isn't the 20th century.  In the 21st century, ZIRP should be considered the baseline.  NIRP should be considered accomodative, and PIRP (positive interest rates, even 1%) should be considered tight.

I believe the crowd has overreacted again to the Fed.  In the statement, they stated they are monitoring inflation closely.  Codeword for they are worried about not reaching their inflation target.  Or Fed speak for they will probably not hike in September.  The Fed was boxed into a corner this meeting.  The Fed funds futures were pricing in a 90+% chance of a hike, and of course, they will hike if the market prices it in.  They don't want to spook the market in either direction, but especially in a hawkish direction.  What if the Fed funds futures were pricing in just 50% odds of a June hike?  Then I think they would have gone their normal dovish route, and not hiked rates.

You had the 5-30 yr Treasury yield spread shrink from 109 bps to 102 bps since the meeting.  The bond market is pricing in more hikes into the belly of the curve, and saying that will lead to lower long term rates.  I believe this is an overreaction.  Despite what the dot plots say, the economic data is telling you that the Fed will have a hard time pushing forward with normalization.  The Citi Surprise index has been dropping like a rock.  CPI, retail sales, and NFP have been lower than expectations.  It seems like the rate hikes are starting to work in slowing down credit growth.

Don't even get me started on balance sheet normalization.  The hints they are giving are of a turtle like pace of reducing repurchases that you will likely see another recession before they can even reduce the balance sheet 10%.   Then in that recession, what took them 2 years to reduce will be made up in 3 months of QE.  It is like worrying about how you will spend all your stock market gains in 20 years when the S&P goes to 10,000.

Right now, the stock market still doesn't show any overt signs of weakness, but its a matter of money flows into equities, a FOMO trade gone into overdrive.  But the signs are starting to creep in that the equity uptrend is near an end:

- The suddenly spastic one day dumps that happened on May 17 and again June 9.
- The lagging Eurostoxx despite continuous heavy inflows.
- Crude oil trading at $45.
- 10 year yields rising yesterday despite S&P being down 15 points intraday.

Just like 2015, it is not going to collapse without giving the dip buyers a few pullbacks to snap up.  Then suddenly the next pullback turns into a trench, like August 24, 2015.  I see a similar situation here.  I see the pullbacks becoming more frequent, the resistance above more defined, and then the bottom falling out into a panicky selloff down to SPX 2260-2280.

Wednesday, June 14, 2017

Pent Up Demand

The release of pent up demand in the bond market has been explosive since the March FOMC meeting.  From election day in November till the March FOMC meeting, allocations to the bond market were either moved to cash or the stock market.  You have to remember that since 2008, most of the inflows into financial assets have been to bonds, not stocks.  This is a secular trend that will last for many years, as the developed world population ages, and goes towards less risky assets.  It doesn't hurt that you have had massive QE in the US followed by Japan and Europe.

People don't want to stay in cash for long, they need to get longer in duration and down in credit quality to get yield.  That is why corporate bonds are so popular, because it provides extra yield without having to take bigger risks as with equities.  All that demand that was postponed because of fears of massive tax cuts and infrastructure spending have been for naught.  Now that bond investors feel less fearful of a big rise in interest rates, they are piling back into bonds.

I have not been bullish enough on bonds this year, although I did manage to capture much of the move higher from March to April.  I missed the second wave higher in May/June.  The though process was simple.  I didn't think stocks would go down much, if at all, and would likely grind higher or be range bound in a tight range, at worst.  Therefore, the upside in bonds would be limited and since bonds were overbought, I thought it would give me another opportunity to buy at lower prices.  But bonds started to go up with stocks in late May and early June, and the plan went awry.

This little episode over the past month was a big missed opportunity.  Also there was a  sudden surge in the number of speculators getting long 10 year Treasury notes, and I viewed that as a contrarian signal.  It is a contrarian signal only if the market itself is not in the middle of a strong trend.  When in the middle of a strong trend, the market will go where it needs to go, with or without speculators along for the ride.  Right now, bonds are in the middle of a strong trend higher.

One can come up with reasons, such as underperforming economic data or the dissipation of the Trump trade, but the main underlying reason is the demand for fixed income at this time and at these levels.  It reminds me to never lose sight of the big picture when trading.  You want to put on trades that you are comfortable holding long term, not just short term.  It helps to avoid trying to capture every little squiggle, even those opposite of your long term outlook.

We have an FOMC meeting today, it should be a boring one.  The Fed is still not in a position to be overtly dovish because of the strength in the stock market.  But that is the direction they will be heading towards, because their dot plots for 5 more rate hikes till the end of 2018 is grossly misaligned with the pricing in short term interest rates markets.  And just like 2016, I expect them to come back towards the market's point of view, which means they will have to talk more dovish going forward.

I am getting more interested in shorting the S&P now that we've retraced the down move from Friday.  Usually opex week during a futures expiration month is bullish for stocks, so I will wait to see what Yellen says, and will hope that there is a pop higher which I can short with confidence.  I will be leaning short for the rest of the month as long as we are above 2420.  A move to 2400 is probably right around the corner.

Monday, June 12, 2017

Volatility Rising

These are just baby steps, but volatility is coming back.  I haven't seen that kind of out of the blue Nasdaq selloff since October 2007.  What I mean is that the Nasdaq was rising steadily, everything was fine, and without warning, it just dumped a load, not at the open, when it usually would happen, but during the middle of the trading day, after S&P had hit an all time high.  And on no news.

It's funny.  Nothing bad happened on Thursday after the Comey hearing.  And when the supposedly scary news about the UK vote leading to a hung Parliament (whatever that is) led to a small spike down in futures, it rallied all the way up till mid day US trading hours on Friday.  And then the dump on no news.  A perfect way to trap those who waited for the all clear sign to buy.  They were greeted with nasty little selloff to head into the weekend.


I don't want to make too much of one day, but we've been seeing a lot of volume go towards stocks that are going down and not that much volume go to stocks that are going up for the past few weeks.  And the ones that are going up got stopped in its tracks on Friday.  The selling pressure was building underneath the surface, as the indices showed that everything was fine.  Energy trades like a dog with fleas.  Similar to summer of 2015.  You know what happened soon after.

Fast Money on Friday was complacent, and viewed the Friday selloff as a one off move, nothing meaningful.  They seemed to want to buy the dip.  I disagree.

I've been cautious with putting on shorts but Friday was a clear signal that it is time to be less cautious to short.  I still want to wait for a couple of rally days before I short, but I won't be waiting for all time highs anymore.  A move to SPX 2435 would be enough to get me interested.

Bonds are not acting that strong considering the recent equity pullback.  It could be combination of 3/10/30 supply coming up, Fed meeting on Wednesday, and more bullish positioning by speculators.  I see limited upside and downside for bonds at the moment.  Looking out beyond the next few weeks, I would look for a continued move lower in yields as the economy is just not as strong as most traders believe.  We are late cycle in the economic expansion, and the Fed is putting the final nails in the coffin with their belated rate hikes, which should have started in 2013.

Think stocks rally from here into the FOMC meeting on Wednesday, but not playing the long side.

Friday, June 9, 2017

That Elevated Quickly

Wow.  Not very common to see a massive Friday afternoon Nasdaq selloff after hitting an all time high earlier in the morning.  What's even more interesting is that usually bonds would be screaming higher on this kind of equity selloff but its only been able to work its way back to unchanged on the day.

The weakness in the bond market while equities were flat was the tell.  This stock market is heavily dependent on low rates.  When there is any kind of bond market weakness, the air is just too thin up here above SPX 2400.  Not enough oxygen to keep the pumps going when money becomes even slightly more expensive.

That is why you will not see a big bond selloff to say 3% 10 year because then the wealth effect central bank game would be up.  And there is no way central banks are going to throw in the towel at this point.  With the world up to their eyeballs in debt, any significant move lower in bonds is enough to pressure equities lower.

After today, Nasdaq is officially on my short watchlist of macro markets.  The hot money is in Nasdaq, and whenever the hot money starts to crack, it grabs my attention.  This down move (with bonds not going up) only strengthens my conviction that we are topping out this month.  Get ready to short any rallies next week.  Best to put on a short during opex week, as post opex and corporate buyback blackouts (from Monday June 19) could be painful for longs.

No Worries

Well Super Thursday (ECB meeting, Comey hearing, UK vote) is past us with nothing but quick little dips that were all buying opportunities.  Same old, same old.  Now we are making marginal new highs this morning, and I can only say that this is feeling very toppy here, with very low put/call ratios and without much acceleration once we reach new highs.  The market looks overbought and exhausted, running on fumes.

I am trying to hold back on laying out the short till next week, but it is very tempting to start here with SPX trading 2442.  Bonds are finally starting to selloff and that is a good sign here that the move higher is not going to last long.  It seems like CNBC optimism on bonds did the job in forming the top for this move.  I expect 10 year yields to trade 2.15 to 2.25% for the next several days.

The second half of the year should trade very differently than the first half.  The complacency is so thick you can cut it with a knife.  Expecting a lot more volatility in the second half, as these kind of up moves in emerging markets and Europe are signs of investors reaching for more beta and catch up plays.  A bad sign for the intermediate to long term.

Wednesday, June 7, 2017

Bonds vs Stocks

Was looking at some CNBC videos yesterday, as there is plenty of downtime in this sleepy market.  You rarely get CNBC pundits talking about bonds.  It is a stock focused network, and rightfully so, because talking about bonds is pretty boring.  Stocks are where the action is.  But you had a lot of talk about bonds yesterday.  If you look at the chart of the 10 year yield, you can guess that it was bullish talk about bonds.


The interesting thing about this bond market move over the past few months is that stocks are also rising.  This happens more often than people think, as stocks and bonds are not as tightly correlated as believed.  Just looking at what happened from 1995 to 1998 as the 10 year was downtrending as stocks skyrocketed.  Same thing for the 2009 to 2012 period.

Since CNBC is talking about bonds, one can guess that the up move is over.  Yes, probably in the short term.  But I actually believe that bonds will rise in the intermediate to long term, looking out more than a few months.  It is getting clearer that the bond market overreacted to Trump's election and it was sell first, ask questions later.  The reflation trade has mostly been hype, as inflation hasn't upticked like many expected, and growth has been mediocre.  And this is supposed to be the easy part of the cycle, as inventories are re-stocked, after destocking to lower levels in 2016.

I have said this before, but all else being equal, a strong bond market is a positive for the stock market.  The amount of leverage on corporate balance sheets has been increasing steadily, and anytime they can borrow at lower rates, it is a bonus.  Some may interpret the bond market strength as a sign of future stock market weakness.  That is what I heard from a couple of CNBC guests yesterday.  But its more often the opposite.  In any case, using the bond market to predict the stock market is not very reliable.  But if you had to make a guess, bond market strength is better for stocks than bond market weakness.

The put-call ratios have been quite low the last few days.  That's usually a short term indicator of weakness.  Sure enough, we got a little bit of weakness on Tuesday.  I still don't think its the right time to short just yet, as I'd rather play it conservatively on the short side.  Next week could be a good time after the Fed shows their hand.  There are some events tomorrow, the ECB meeting, UK vote, and Comey hearing.  Usually the market comes away higher after those type of events, not lower.  So expecting a rally tomorrow and Friday.

Monday, June 5, 2017

Economy Slowing Stocks Don't Care

The initial economic thrust off of the 2016 mini dip in economic activity is running on fumes.  The inventory restocking cycle off the destocking in 2016 has mostly played out.  The economy is now running closer to its natural level, with no pent up demand.  You have seen that playing out in the economic surprise index over the last few months.


This shows you Wall Street getting ahead of itself in projecting increased consumer/business confidence into stronger hard data, and that hasn't panned out.  Also, you are getting the usual lagged effect of the few Fed rate hikes appearing in the economy.  Yes, even going from 0.5% to 1.00% is meaningful to the economy.  I continue to believe that the neutral interest rate for the economy is closer to 0% than PIMCO's new normal 2% that they often espouse.

The higher global debt ratios amidst a slower growing economy requires lower interest rates.  Otherwise, you get a scenario like Europe post 2008, pre NIRP, when you had really slow growth because the interest rate levels were too high to support such an indebted economy.  Now that NIRP has worked its way deep into the Euro financial system, it has boosted growth to levels that are long term unsustainable, but feels good while they pump.

In the next 12 months, you will see the other side of the complacency, as fear and worry will makes its way back into the markets with a vengeance, as the value buyers will only be willing to put in bids if you get back under 2000 in the SPX.  There is a lot of air underneath, it just doesn't feel dangerous because of the super low volatility.  But when the hedge funds and the index fund fans start seeing minus signs in their asset holdings, they will get nervous, like they always do.

Itching to get short, but will probably wait till the FOMC gives another dovish hike and inadvertently pumps this balloon even more.  SPX 2450-2460 area looks like a strong sell zone.

Friday, June 2, 2017

Tailwind from Rising Bonds

The market is enjoying its Goldilocks scenario.  The bond market is rising as the stock indexes hit new all time highs.  This weak nonfarm payrolls number is only making it better.  The bad news is good news theme continues.  The stock market wants low rates, and this NFP number is helping to continue that trend.

The last thing this market needs is a hawkish Fed as the economy is just mediocre, and with fiscal stimulus getting pushed back further into the future.  This nonfarm payrolls number all but guarantees that the Fed will tone down on their hawkish talk, and although they have pretty much committed to a rate hike in June, it probably puts them off the table in September and probably December.  And if the stock market tops out soon, as I suspect, then June could be the last rate hike of this cycle.

At the end of a long bull market, you would expect the crowd to be fully on board, and enthusiastic about stocks.  But a mediocre economy and deep scars from 2008 prevent that from happening.  It could be one reason why this bull market has lasted so long, because there hasn't been a huge burst of equity inflows by retail to exhaust the buying power.  It has come in small increments, along with heavy inflows into bonds, helping to keep the bond market strong, which in turn supports the stock market indirectly.

How does this bull market end?  The most obvious way is for the economy to get weak enough that corporate profits start dropping meaningfully, more so than in 2015/2016 when oil was going down.  A financial shock from China wouldn't really be a big enough hit to the US.  It would have to be more internal in nature, such as the US economy entering recession.  It will happen eventually, but until then, you will not get a bear market unless you see a bubble form and then pop.

I just have a hard time seeing a bubble form with the economy just not strong enough to lift investor psychology into buying stocks with reckless abandon.  So that means we can have 5-10% corrections, or even 15% corrections like late 2015/early 2016, but not a downtrend into a full blown bear market.

SPX is above 2430, I see perhaps 1% upside and then we should chop into a range from 2450 to 2400 for a while.  That is my not so confident forecast, as the low volatility makes it harder to predict market direction.

Wednesday, May 31, 2017

Marginal Highs then Flush

They are piling into a few large cap stocks and driving up the averages.  The Nasdaq 100 looks bubbly, but the Russell 2000 just chops around.  This happened for a couple of years in the late 90s and also a bit in 2007.  Usually Russell 2000 underperforms when stocks are going down, not up.  Also bond yields are trending lower despite rising stocks.  This has been going on for almost 3 months now.

The macro signal takeaway from this action is that the US economy is not as strong as the media advertises, so investors are piling into the few stocks that have decent growth, although very overvalued (FB, AMZN, etc).  This is very late state bull market price action.  It backs up my thesis that we are in a 2015 like environment, where the market chops around near the top and gets heavier and heavier until it eventually crumbles.

There is still room for this thing to go up a couple more weeks, perhaps as much as 2%, but the odds are favoring shorts more and more as the days pass.  Hard to pick a top in this bull, so you have to have nearly perfect shorting conditions to enter short.  I would wait for another week or two, if the market is closer to SPX 2450, then you can short with confidence, knowing that the upside will be extremely limited at that point, and vulnerable to a cascade lower.

With rates staying low, there is no rush to short here.  If the 10 year starts acting weaker, and yields go up to 2.4-2.6% area, then you could have a pullback.  If bonds act strong, you will see limited weakness in stocks as lower interest rates support the leveraged corporations.

It is a boring daytrading market but I see potential for a short in a couple of weeks.  Laying low till then.

Wednesday, May 24, 2017

Bitcoin and CNY

They are going out pretty far on the risk curve these days.  Bitcoin is around $2400, Ethereum, the new hot Bitcoin wannabe, is rising even faster.  Back in 2013, when Bitcoin was on the rise, the stock market was bullish and the bond market was bearish.    This time, it is a bit different.  While the stock market is bullish, the demand for bitcoins seems to be from those looking to convert from CNY to dollars, using bitcoin as an intermediary.



The Chinese demand is the big driver here.  It doesn't paint a pretty picture about the value of the yuan, and how artificially supported it is by the Chinese government.  That cannot last long term, and their capital controls are only a temporary stopgap measure, before finding the true value of CNY.  I view the true value of CNY to be about 50% less than current value of 7.  So CNY/USD ~ 14.



On the road to yuan devaluation, there should be a boom in Chinese exports as the cheaper currency should help make China more competitive again versus lower cost manufacturers.  It should be deflationary for manufactured goods, which will help consumers but hurt non Chinese producers.  This is something that should play out over the next 2 years.  The signs of Chinese weakness are already showing, as the PBOC has pumped in massive liquidity this year to keep Humpty Dumpty together ahead of the National Congress meeting in the fall.

As for the S&P, it is now day 5 of the rebound, and we are at 2400.  This looks to be close to the top, as the put/call ratios are now very low again and the drop last week almost completely forgotten.  I see good risk/reward for a short here, with a target for a move down to 2375.  Just looking for 25 SPX points, but that feels like a lot in these low volatility times.

Monday, May 22, 2017

Chopping like Spring of 2015

The big rally on Thursday and Friday after Wednesday's big drop has proven that this market is committed to trading sideways.  And just like you had the Fast Money traders nervous on Wednesday, they are back to praising this market's resilience on Friday.  All it has proven to me is that its likely to chop around until a nasty fall later this year like 2015.

As the equity market has gone sideways, the bond market has been going up.  The bond market isn't buying the market consensus view that we will be having a lasting economic recovery or a big fiscal stimulus.  Usually the bond market is right.

The big inflows into Europe and emerging markets is a warning sign that risk taking is back in style among asset managers.  Almost all of them who come on TV are pumping European stocks.  That usually happens when the primary driver of the global equity boom, the US, is viewed as overvalued, so the "clever" fund managers are buying "cheap" European stocks to get better returns.  It is working this year, but will it keep working?  I have my doubts.  The ECB is likely going to be tapering asset purchases soon, and the European economy is just not that strong, and the European stocks aren't that cheap, being priced at 15 times forward earnings, compared to 19 times for the US.  I would rather pay 19 times forward P/E for US than 15 times forward P/E for mediocre Europe.

It feels like a safe market to sell rips now, with 2400 looking to be solid resistance, and seasonal factors favoring selling here.  True, there is not that great enthusiasm for stocks, but there wasn't that enthusiasm at the 2007 and 2015 tops either.  I assumed that the lack of bullish sentiment in the 2015 summer period meant that equities could keep grinding higher but I was completely wrong then, underestimating the weakening fundamentals and the high complacency amidst a market that didn't have a sustained correction for quite a long time.  That is where we are at right now, although the late 2015 early 2016 selloffs did a lot to reset positioning to more cash heavy levels.  That has been completely reversed and we're back closer to 2015 type of positioning, with lots of interest in European and emerging market equities, and heavy ETF inflows.

I would be a seller here near 2400, to cover on dips back down towards 2350.  Play the range, we're probably going to be chopping for a while.

Thursday, May 18, 2017

Waiting to Get Long

Yes, it is the obvious trade, but it is the high percentage one.  A waterfall decline can come anytime, theoretically, but usually not this early in the chop phase.  Yesterday was savage, and it means that a one day wonder decline is out of the picture, but it doesn't mean that you will be getting an extended dip.  It was only in March when we finally stopped going up every day, and just this week when we've rejected that SPX 2400 area as being strong resistance.  For such a strong extended rally, and a really long bull market, it takes a lot more choppiness to finally go down in earnest.

I am not long yet, but I am looking for a spot to get long close around SPX 2340-2350.  I expect this dip to be brief, but upside should be limited to 2390.

Wednesday, May 17, 2017

Hit the Ceiling

And it isn't that high.   There is very little potential upside in this S&P market.  Same goes for Europe or emerging markets.  They are all near the top of their moves.  The risk/reward for longs is getting worse.

The excuses don't matter.  It's because of Comey.  Trump is getting impeached.  It will delay tax reform.  Etc.  The market got too comfortable post French election, and it needs the periodic dips to keep the market honest and the bulls on their toes.  That is how the market operates in the absence of a significant supply/demand imbalance.   The market is sufficiently high and saturated that it has trouble staying up for long without these little dips.

Although we are still getting equity inflows and some buybacks, the IPO supply has been increasing lately, and that is what weighed down on the market last week.  Seasonally, it is also getting to be a bad time of year, as we approach summer, and ahead of a potential ECB tapering announcement and another FOMC rate hike.

On the positive side, the VIX tells you that a big drop is very unlikely.  It remains very low, and reluctant to go higher.  The first sign of market stress shows up in volatility, as volatility rises along with the market.  That is far from what we currently have.  Another positive is the strength in the bond market, which is a positive for all interest rate sensitive sectors.

I am not in the "will be a big bubble" camp.  It feels more like a chop in a narrow range for a few months, and then drop situation.  So not outright bearish, but definitely not bullish.  Sort of like 2015.

By the way, the market may be inactive, but that's not necessarily a bad thing.  The less volatile markets while less profitable, are definitely more relaxing and less stressful.  One can't always be in top gear.  The active times will come again.  It is sometimes good to be able to trade less and observe and not worry about missing any opportunities.

Monday, May 8, 2017

They Bought the Rumor

The Street knew Macron was going to win, so they bought ahead of the French election results, hoping for a payoff on a Macron win.  Well, the payoff happened the few days before the election result, as fund managers were buying up Europe and shorts were covering quickly ahead of the weekend.  Now you have a bit of the hangover from that buying binge.

The market is too calm for it to go down right away, with VIX at 10.1 right now, but there is too much complacency for it to go up much either.   With crude oil and industrial commodities weak, it is easy to say that China is weakening.  That is obvious, but what is less obvious is whether the equity and bond markets really care until something serious happens.  And nothing serious has happened yet.  Eventually, China will blow up but their leadership is trying to delay the crash as long as possible.  Which means they will probably go right back to loosening the short term markets there.


 I feel like I have been repeating myself so I will refrain from putting out any more posts until there is a material change in the market.  Since a big bubble seems very unlikely, it is time to think about the next big trade in the coming months.  It will likely be a bear trade.

Friday, May 5, 2017

China Again

The source of the weakness this week is China.  Apparently, any mention of deleveraging send the rats fleeing ship.  Of course the overnight weakness in crude oil was faded.  When have we actually had sustained overnight weakness into the opening US bell?  It's been a fader's paradise lately.

Also got word that Dennis Gartman is worried about a correction.  It seems like the weakness in crude oil got to him.  It just means that we have that wall of worry which this stubborn bull will climb.  China weakness will matter when the strong indices actually flinch on it.  Right now, they are rightly ignoring it because China affects commodities more than it affects the S&P.

The crude oil weakness is another thing that points to similarities with 2015.  So I expect similar price action, as we chop near the top.  No trades imminent.

Wednesday, May 3, 2017

Not Doing Anything

There is almost no movement.  It is an investor's market.  Not even a swing trader's market, much less a daytrader's market.  They are squeezing out as much volatility as they can.  Unfortunately for bears, when the VIX is hovering around 11, you don't get much downside action.  Of course, you don't get much upside action either.  Back in August 2015, the last time we got a sharp break lower to end an uptrend, the VIX was trading around 14.  In 2014, when you have decent pullbacks in August and October 2014, the VIX was trading between 13-14.

There is almost no precedence for a sharp drop when VIX is trading at 11, or even 12-13.  It needs to be above 13 to have some precedents where you saw near term significant weakness.

This is an unusual market.  I see very little downside, but also, very little upside.  Even though VIX is at 10.7, it seems overpriced here.  It's a boring market, and we can only wait for things to get more active.  In the meantime, we wait.

Monday, May 1, 2017

Bit Like 2015 But Worse

With the way that we've been chopping around the past couple of months after a big up move, it reminds me of 2015.  I hesitate to say we will move the same way, because obviously some things have changed, but technically, and price action wise, this looks like a more subdued, lower volatility 2015 redux.  The only difference this time is that you have a potential fiscal stimulus catalyst in the form of "massive" tax cuts, which will likely not be revenue neutral.  Back in 2015, there was nothing to look forward to.  Now, there is, which makes a big difference psychologically for the equity investor.

The equity market always thrives on hope, and carrots in front of it.  The carrot is that massive tax cut.  That is the only thing better than 2015.

Fundamentally, aside from that, everything is worse, not better than 2015.  Worse valuations.  Worse demographics (getting worse slowly year by year).  Worse economic situation in China (more debt, more pressure on yuan).  And most of all:  worse monetary policy (higher interest rates, tighter, potential balance sheet/QE reduction).

Something to think about when considering trades over a longer term time horizon.  If you are long equities, be quick to take profits at this level.  If you are short, and can hang on to the position, then you will eventually get paid.  Don't forget the big picture, and remember betting on a bubble to happen is betting on an outlier event that usually doesn't come.

Friday, April 28, 2017

Longer Time Frames

In a slow market like this, the best trading strategy is to extend out the time frames.  If you are moving size, daytrading doesn't work anymore.  Sure, those trading up to a few thousand shares will be able to get in and out without alarming HFTs into action.  But those trading bigger size face slippage problems when daytrading in low volatility HFT infested waters.  Only with higher volatility, can one overcome this size handicap because of the bigger profit potential.

In general, it is better to focus on trading individual stocks in a bull market and trading the indices/futures in a bear market.  Some may disagree, but it is a good habit to look for new markets to trade, to find pricing inefficiencies and patterns in places that are less familiar.  That way, if you can find edges in more markets, it gives you more opportunities, which is helpful in slow markets like this.

This reminds me of a past post, where slow times reinforce the need to make as much as possible during active times:   Feast or Famine

It in times like these where I am reminded of the importance of making hay when the sun shines.  You absolutely have to kill it and be greedy when the opportunities are there because once they are gone, it will be hard to make anything when markets turn bad/dull/unpredictable.  A good post on Elite Trader made in August 2007 (a GREAT trading market) that still sticks in my memory:


jdeeZERO05: can't ask for more volatility than this. I crushed my profit target already, i'm going to the bar. this fucking rules.

RM: Quitting early after a big gain is the second worst trait a trader can have. No offense, but you'll never be rich.

jdeezero05: have fun giving back your profits, not my game.
...
to me it makes sense to learn to crawl before you even attempt to fly. 20 YM points a day is my goal. When I've hit that I'm done. If i got a hundred on the week I've been done. 15 point stop, if I get down 40 points on the day i'm done. 120 points down for the week, i'm done for the week. Haven't had that happen yet with this style management yet though. 5k account, 1 car. This morning though, I rode the trend, tried to jog for the first time. Could be done for the week if I want. The remainder of this week has no emotion at all. Market is going to have to entice me with the highest probability setups I can get to risk what I made today, all the pressure is off now on the week.

To me this is exactly why most traders fail. Good look getting "to the moon" when you can't even crawl without falling on your face. Not saying thats your situation, but giving me that advice is just shit advice, no disrespect.


RM: A surefire recipe for permanent piker status if I ever saw one.

For some reason I'm in the mood to do you a favor and take the time to explain what you're doing here:

My job is to collect strands of beads off the streets of New Orleans. I need to collect 500 strands every year to make a living, so I figure I just need to collect 10 strands every week.

The past few months have been tough- I've had to work pretty hard to collect my 10 strands/week. However, this week is Mardi Gras, so there are currently beads all over the place for the taking. The streets are flowing with a massive bounty- beads are literally everywhere! I've already managed to collect my 10 strands within the first five minutes of Mardi Gras week. This is great! I've already made my weekly quota, so naturally I'll now be taking off the rest of the week. Beads crunch under my shoes during my walk home, but I don't bother to pick them up. Why should I bother? After all, I already have my weekly quota in hand, so the pressure is off. Time to hit the bar!