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.