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!

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.