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!

Wednesday, April 26, 2017

Bull Bore Continues

The energizer bull market goes on and on.  It is a bit tiring to see the same old action, predictable as it is, even when one is on the right side.  But you can't force the market to behave the way you want.  The market will do what it wants to do.  And right now, that is to bore everyone.  

I sold S&P into the rally yesterday, and I am back to a neutral view.  We could pullback a bit, here, but probably only a little bit.  If we did, it would just set up a rally in the first week of May.  The VIX is actually probably overpriced here even at 10.7.  It is that dead of a market.  Think more boring version of the first half of 2015.  

I have a bit stronger view on the bond market, which is negative over the next few weeks.  In June, we are likely to see a ECB tapering announcement and FOMC rate hike and balance sheet taper talk.  Plus, we've seen heavy inflows into bond funds so far this year.  Lastly, you will start to see more concrete tax cut plans coming out (not vague tax plans like today) over the summer, another thing that will weigh on bonds.  Trump has lost some credibility with his poor execution, but he seems determined to jam through a budget buster of a tax cut through Congress.  

Monday, April 24, 2017

Lessons from the French Election

The way to become a better trader is to learn from experience.  Usually the memories last much longer if money is on the line.  The stock index futures and the euro rocketed higher on the news of the expected, Macron 1st, Le Pen 2nd.  On the surface, that makes no sense.  Isn't the market supposed to price in the expected outcome?  Yes, if the other outcomes are such low probability or low impact that they don't factor into the overall positioning ahead of the big bad event.  But this time, the fear of a Le Pen Melenchon 2nd round battle was enough to get investors hedged up by either selling index futures, buying bond and gold futures, selling the euro, or selling the French OATs.

The Brexit vote and the Trump victory had a lot to do with this.  Both were considered unlikely events and they both happened.  This led to investors' distrust of the opinion polls leading up to the French election and the fear of Frexit under Le Pen or Melenchon, who was surging in the final days.  And with the general propensity to sell the supposedly risky asset ahead of the event (a.l.a. Treasuries ahead of a FOMC rate hike announcement, stocks ahead of French election), most of the time, there is pent up buying demand after the event is over, regardless of the outcome.  It is only logical that those who already sold ahead of the event, probably don't have much to sell after the event.

The French election has been considered a risk event for months now.  The buildup was not as great as I expected, with Syria and North Korean distractions, but it did heat up in the past several days.  That in itself told me enough that there was a decent discount being built into stocks due to that uncertainty.  Now that most of the uncertainty is over, although there is still round 2, the markets aren't dumb. Macron is an extremely heavy favorite over Le Pen in the next round because the lead is so sizeable and well beyond the margin of polling error.

It gets harder now.  The easier trade was to get long ahead of the event.  Now it is more even, although I would still favor the long side.  I am not expecting much from Trump's tax announcement on Wednesday.  It will be very general, at best.

Friday, April 21, 2017

Chopping Up Both Sides

There is no clear one sided trade.  It is a choppy mess, but this is what it takes to get the market to bottom if it isn't going to have a scary flush lower.  If they can't scare them out, they will wear them out.  It seems like we've been in this slow weak grinding distribution phase for weeks and weeks.

Investors are trying to resist the easy temptation to get bearish due to geopolitics, French election uncertainty, and weakening economic data, but it is wearing them down.  There are only so many false hopes and rallies that you can have before the bulls just give up and say they will sell and wait it out.  Based on the ETF and mutual fund outflows, it looks like we're at that point.

Eventually, perhaps in May, when corporate buybacks come back and the French elections are over, you will get that push back towards 2400.  Until then, I think the rallies will be contained within the same range that we've traded since the beginning of the month.

Slightly bullish here, I am long some S&P.  The odds favor the bulls here, but they aren't overwhelmingly favorable.

Wednesday, April 19, 2017

Now They Are Talking

They are finally worried about the French elections, with round 1 just a few days away, and round 2 in just over 2 weeks.  I thought the worries would come up sooner but the market was caught up in Syria and North Korea and didn't have time to worry about France.

However, the market keeps finding those intraday bids just when you think the bottom would fall off equities for a change.  Yesterday, we had that intraday dip down to 2333, and the offers were snapped up by the dip buyers like hungry hippos.  Again.  As I mentioned before, there is an army of dip buyers waiting for weakness to buy stocks, and willing to sell back on a 20 point pop.  It keeps happening.

There is still a lot of complacency out there, and who can fault them.  The market refuses to go down more than a few points here and there.  There is no real sustained selling that would put fear in the minds of the buyers.  The put/call ratios don't signal any kind of fear.  Fast Money traders are calm.

Despite the small drop in the S&P, we had a huge rally in bonds.  The shorts look like they are finally capitulating in full force, and they are the last marginal buyers in these type of situations.  I see very little upside in bonds now, with the last major event, the French elections, about to conclude in a couple of weeks.

I have no edge in predicting the French elections, but I do know that odds are high that there will be a lot of buying when all is said and done.  France will stay in the euro regardless of who is their president.  That is why I started buying late last week and will look to add longs on further weakness which I am hoping for.

Monday, April 17, 2017

Geopolitical Fear

There is nothing more scary to the retail investor than the prospect of war.  You don't get big headlines with talk about Fed balance sheet reduction.  So the big fear was that North Korea was about to do something big over the weekend.  Well, they showed off a new rocket, and then launched one that went nowhere.  It must have been a fairly embarrassing weekend for North Korea, as they just failed in their display of military might while Trump and the crew dropped the mother of all bombs in Afghanistan, mostly to show off.

You got a sell into the close on Thursday ahead of the 3 day weekend on those geopolitical fears.  With nothing eventful happening, you get a small gap up, and with Europe still on holiday today, I don't expect any big moves.  More weak economic data took Treasuries to that 2.20% 10 year level, which put a lid on the up move.  I am keeping an eye on a possible short in the Treasuries as geopolitics is one of the better risk reward fades.  As I've said many times before, war is bullish for the stock market, and not really bullish for the bond market.  Uncertainty is the only reason people buy bonds on geopolitical tensions.  It is not based on any true fundamental basis.

I am in accumulate mode for equities, and will add more if we go lower.  French elections uncertainty is still there, but Le Pen seems to be losing her momentum and have had weak debate performances.  By mid May, with the French election uncertainty out of the way, we should be seeing a higher SPX and lower bonds.  It is still a strong uptrend in equities, and the past few weeks has been a pause to shake out weak hands in financials and other hot money sectors, and to consolidate the big post election rally.
Bullish for the next few weeks.  In the short term, we could have a little more volatility, but I would view dips as buying opportunities.

Thursday, April 13, 2017

Leaning Long

It is going to be difficult to get any kind of panic in this market just yet.  The uptrend in the equity indices is too strong for any panic to occur just yet.  It takes time to form a top, and the best strategy until this market changes behavior is to buy the dips.  The market has had ample time to selloff more, but it refuses.  There seems to be an army of dip buyers waiting to pounce on any weakness.  That is why I have given up on the short side for the time being, waiting for the bulls to get more positive.

I got out of my bond position on the strength yesterday, expecting 2.20% 10 year yields to be a resistance area that bonds will have a hard time busting through.  I can definitely see a reversal in yields back towards 2.60% if the French elections go as consensus expects.   The French elections are the wildcard, but it seems like regardless of who he gets elected, France is going to have a difficult time getting out of the euro.

The equity put/call ratios have been elevated the past few days, VIX has been moving higher, despite the low realized volatility.  There may be one last down move, perhaps down to SPX 2320, which would be a buying opportunity.  I don't see 2300 in the near future unless Le Pen wins French election round 1 by a big margin.  Over the next few weeks, expecting a grind higher from these levels into May.  2015 seems like the best template for this market, choppy at the top, but grinding higher until you get that big crack lower.

I am leaning bullish, and have nibbled a bit on the long side.  Will add more long if we get that move down to 2320.

Tuesday, April 11, 2017

Selling Picking Up

The VIX is one again a prescient predictor of upcoming equity weakness.  The VIX acted stronger from Friday when the SPX was still chopping around breakeven levels.  Yesterday was also another day when SPX was trading slightly higher to lower and VIX rallied anyway, in front of a 4 day trading week (Good Friday is April 14).  And then you have today.

The dam burst and VIX is now the highest since November.  The French elections, Trump uncertainty on foreign policy, no signs of tax reform imminent, etc.  It finally caught up to the market.  The intraday dip buyers have had a field day the last couple of days, with sharp rallies intraday.  I don't think that will happen today.  Put/call ratios remain fairly low for such a weak day.  Looking for more selling.  SPX 2330 is a support level, below that you have the lows from 2 weeks ago at SPX 2320.

It's too early to buy the dip, but I am planning out a BTFD strategy as I write this.  Probably will start with some buys from 2325 down to 2300, if we get there.  Looking to exit long in Treasuries at that time as well.

Monday, April 10, 2017

Focus on French Elections

The next big event are the French elections coming up in April 23.  That is round 1, and it looks like Le Pen will be favored to take 1st place in that vote.  It could put a little scare into financial markets if she wins more of the vote than expected.  If the US elections give us any clues, it is that you cannot underestimate shy voters of radical candidates.  The weak global economy has left behind a lot of obsolete workers.  It is not purely a US phenomena.  It could mean a higher vote numbers for a far right candidate like Le Pen.

We are stuck in a small range, but vigorously moving back and forth in that range.  The VIX futures for April have been strong recently, even though S&P hasn't gone anywhere.  It looks like French election risk is starting to be priced in.  The next step is for the S&P to go lower.

Bond moves on Friday are a bit puzzling, it should have been trading much stronger on a weak nonfarm payrolls report and mediocre equity action, but it traded lower, significantly.  The 2.30% level was defended again, and the bears won this time.  I am still expecting a break of that 2.30% level, as the French elections near.  Buying Treasuries looks like a good swing trade for the next couple of weeks.

Overall, fairly boring market.  Not much opportunity these days, so won't be looking for much if I do put on a trade.

Friday, April 7, 2017

Knee Jerk Reaction

As soon as the news came out that US bombed Syria, the SPX plummeted, and gold, oil, and Treasuries rallied.  People forget that World War II is what helped boost the US economy coming out of the Great Depression.  Or how about the Iraq war in 1991 and 2003, both which led to big rallies in stocks in the coming years.  Not that there will be war, but if there is, its actually better for stocks than if there was peace.

The clearer heads are prevailing at this hour, as the SPX has made back all of the knee jerk losses and oil has retraced most of its after hours gain.

If there is one thing we've learned in 2016, is that the market is much more efficient and quicker in going to its natural level.  The markets are smarter.  It may have a knee jerk reaction to news, but it doesn't stay at that irrational level for long.  That is what we saw on election day in November, and yesterday after hours on Syria.

The retail chicken littles will have a field day being bearish because of Syria, and they will be wrong again.  Not that they matter, because they don't have enough assets to matter.  Of course you have the Fast Money crew get all beared up because of this, and they will also be wrong again.  In the end, those that are using news headlines to guide their trading decisions pay the price.  It is boring stuff like Fed policy that really matter, not the splashy headlines of military attacks or Trump quotes.

I am getting more convinced that any fear based bottom made this month will be shallow, and will lead to new highs by May.  The stock buyback blackout period lasts for another few weeks, and then corporations will be back providing support to their stocks.  We've still got a few more months to go in this bull market, even though its the final stage.  I have switched my bias to a buy the dips mode, and will have to have almost a perfect scenario for me to short the SPX.

Wednesday, April 5, 2017

Beach Ball

The bears have tried to keep this thing underwater, and it is just so hard to do it.  The buyers just lift the offers effortlessly.  The down moves come grudgingly, with high put/call ratios and the crowd getting bearish on any pullback days.  It is a horrible market for those who thrive off of volatility.

The ultimate top is still ahead of us.  With tax cut goodies coming down the pipe, in some way, shape, or form, the market can smell it, even if the media tries to take bulls off the scent trail.  Trump will get his tax cuts, come hell or high water.  Unlike health care, which he could care less about, he wants those tax cuts for the rich.  He wants to eliminate the estate taxes.  And the Republicans never met a tax cut they didn't like.  Revenue neutral is not going to happen.  The deficit will be blown out big time, and that is exactly what Trump wants.  A deficit financed stock boom.

The market is not worried at all about those French elections.  It is surprising, considering the results of Brexit and the US elections last year.  Anyway, it is looking more like a long chop period, like 2015 before you get a change in trend.  This could take 2-3 months of chop before we drop.

You have to be careful with SPX shorts in this market, despite the small cap weakness, the SPX has hung above support levels around 2350.  I wouldn't want to get short until everything lined up:  complacency, low put/call, overbullishness, and technically extended.  We have some complacency, but I don't see any of other 3 things.

Bonds are making higher highs and higher lows as we get closer to that important 2.30% 10 year level.  Many people are eyeing that level for a change in trend.  If we break through, you will see a lot of stop loss orders flood in and that could take us quickly to 2.20-2.22%.  I remain bullish, but with an eye on the exit on the next multi-day thrust higher.

Monday, April 3, 2017

Already Breaking Down

The first day of any quarter is usually a day when a torrent of automated money flows go into the stock market, helping lift the indices.  Today is not following the script.  And when a market doesn't follow a bullish script, it usually means there is a motivated seller out there.

I don't know why they would decide to dump stocks today instead of on Friday, at the end of the quarter, but the market tone is getting more risk averse, but with stubborn bullishness out there, it takes time for the market to finally make a firm bottom.  Last Monday was likely not a firm bottom, that can be relied on as a signal for a lengthy rally.  Today goes quite a ways to prove that point.  It is going to be messy this month, at least till you get enough weak hands to sell stocks and transfer them to strong hands.  That usually takes lower prices, and some fear.

What would be the fear event?  The obvious one to me would be the French elections, with Le Pen still having roughly a 20% probability of winning, according to the bookmakers.  But I am hearing that Le Pen supporters are quite passionate on social media, and they seem to be more motivated voters than the Macron/Fillon supporters.  I am sure the worries and risk aversion will increase as we get closer to the elections, probably peaking about 1 or 2 weeks ahead of the vote.  So perhaps sometime next week.

Oddly enough, I am hearing very few mentions of the French elections as a reason to de-risk, which means that there is still plenty more downside ahead near term.  I am still eyeing SPX 2300 as a much better support area for a dip buy.  This market still trades heavy, despite the intraday morning rallies.  We are barely above last Monday's close, despite seemingly rallying every morning on a gap down.  The unusual thing about the gap downs last week was that Europe was relatively strong, which would usually mean a gap up for the SPX, but that didn't happen.

Bonds are trading very strong today, stronger than what would be guessed by a 15 point drop in the SPX.  The short unwind is continuing in earnest, and by the time you get to mid April, it should mostly be complete.  That is where I will look to exit bonds.

Missed the short in S&P, thought we could get a rally to short today, but the market isn't complying.  Will not force the issue and short in the hole, but do think we will be lower than current levels by the end of the week.  I may entertain buying a dip if we can get to around 2300 next week.  If we get there this week, I may enter just 1/2, and wait to buy more next week.