Wednesday, January 17, 2018

Dip Buying Brigade

Was Tuesday's afternoon stock fallout from the bitcoin plunge?  I know bitcoin is not part of the mainstream asset classes, but a lot of retail investors have invested in bitcoin, most of them who aren't particularly rich.  If they end up losing a lot of money, that could have a slightly negative effect on the global economy.  But as we look this morning, the overnight crew has already done their job to lift the stock futures to another gap up.  It shows that you cannot overemphasize the price action from one day.  

Yesterday finally showed the two way volatility this market has been lacking, but until we see actual follow through selling the next day, it doesn't mean anything.  Trying to find meaningful bearish clues is difficult.  We did finally see the VIX go up significantly yesterday, even though the downside wasn't that big.  And this morning, even with a decent gap up, the VIX hasn't given up much of its rally so far in the pre market.  

VIX is now trading at a 1 month high, while SPX also trading near a 1 month high. Bond market remains weak, which definitely is a negative, not a positive for stocks.

I haven't added to my short position, and I need to see more clues line up before I add. On the commodities front, Crude oil has had trouble cracking $65 (WTI)/ $70 (Brent).  The speculators are historically long crude oil, so they are definitely loaded up on one side of the boat.  

Other things like the government shutdown is just noise, and news fodder.  Price action has to speak, not news.  And it isn't telling me enough to really make a big bet.  

Friday, January 12, 2018

When They Talk About Bonds

Here we go again.  Usually on CNBC Fast Money, they hardly ever mention bonds.  Its basically a stock show.  No one really cares about bonds, because they don't move much, and because people put money in bonds for capital preservation, not big gains.  And capital preservation doesn't sell on Wall Street.  Its always about the big gains, so they promote stocks.  Or the fantasy that investing in stocks will make a person rich. 

This week, you've had the "bond kings" Bill Gross and Jeff Gundlach, talk bearishly about bonds, which has filtered to stock people on CNBC.  There has been an underlying bearish tone to the price action and investor sentiment for a couple of months now, and from a longer term perspective, ever since Trump got elected.  So just like this relentlessly rising stock market, with almost no corrections, which I have not witnessed ever before, there has been a corresponding steady drip drip lower move in bonds, which is rare.  Nothing spectacular, but enough to get the attention of the stock guys who usually could care less.  From my experience, those are usually inflection points for bonds. 

If the media was silent about this move lower in bonds this week, I would have been more worried that it could really turn into a big rout and take 10 year yields up to 2.80%, or possibly even test the often mention 3%.  But all this media noise when we barely broke out above 2.50% tells me a top in yields is coming soon, probably below 2.65%. 

I have a hard time imagining the Fed hiking more than 3 times over the next 3 years, much less in 2018.  So if the final rate hike takes Fed funds to 2-2.25%, then the 5 year yield probably can't get above 2.50% (its trading 2.33% now), which means the 10 year probably can't get above 2.70%. 

The reason I don't think the Fed can hike more than 3 times is because stocks are at such a high level, that once short term interest rates get above 2%, that is going to put pressure on stocks, which will feedback to the Fed, who rarely if ever hikes when the stock market is going down.  And with Jerome Powell as Fed chair, a Trump yes man, you can be assured he won't be the one hiking the economy into a recession. 

Back to what CNBC is promoting with its countless mention of this hot stock and that hot stock, and now with bitcoin.  In reality, most investors end up losing, and the big winners in the investing space are those that use other people's money to collect fees and have a free call option for the privilege of gambling their money.  The stock market is basically a glorified online casino.  The HFTs, brokers, and exchanges take their cut of the action and everyone else is left fighting each other in a negative sum game. 

They say stocks go up in the long run, so everyone can be a winner.  Yes, if you just buy and hold an index.  But most people aren't doing that.  Things are slowly changing, and many people have finally figured out that active investing just means subpar performance and higher fees compared to passive investing.  Yet you have the fund managers warning about the dangers of passive investing, when they themselves are a much bigger danger to an investor than the market itself.  Most fund managers trade too much, charge too much, and most importantly, have no edge.  There is a small minority of fund managers with a definite edge in the markets, but most of them are not accepting new money or charge such exorbitant fees that their edge over the S&P 500 over the long run is questionable, especially if they are managing multi billions. 

It is one thing to beat the S&P when a fund manager is trading $100M, its a totally different ballgame when they are trading $10B.  Most of the big edges in the stock market reside in small cap stocks, and in particular, actively traded day trader stocks that have "limited time" liquidity.  "Limited time" liquidity is when a normally very low volume small cap stock suddenly has a price and volume spike on a news release.  These days, most of them are bitcoin related, but they can be various flavors of the month, depending on what theme is hot at the moment.  Anyway, once the excitement of these stocks die down, the volume plummets, so you can really only trade meaningful size is when the stock is in play, or right afterwards.  It eliminates whales from participating in these markets, because they just can't put on any meaningful positions to affect their performance. 

In general, an efficiency of a market runs along a spectrum correlating with its liquidity.  Small cap stocks are less efficient than mid cap stocks which are less efficient than large cap stocks which are less efficient than the S&P 500 index. 

I am still short here, and in some pain, but kept my short reasonably small, so I can weather this out with just a few scratches.  But there will be hell to pay later this year once this pig tops out.  Until then, play it conservatively.  There will be plenty of opportunities to make money on the short side in a few months.  If you are a bear like me, just don't get buried before then.

Wednesday, January 10, 2018

China and Treasuries

China is trying to be the bond vigilante.  It is seeing Trump ballooning the budget deficit with tax cuts and doesn't like it.  The last thing China wants is more Treasury paper coming out of Washington, which dilutes their holdings and encourages yields to go higher.  They see budget deficits going to the moon with entitlement spending rising with the mass retirement of the baby boomers, while the US corporations get fat tax cuts.  It is not a desirable situation for China, as they want to get better prices for the Treasuries they will eventually have to sell to defend the yuan.  And that's not as far off as you would think.  

Their capital controls have effectively stifled international investment and has made China a roach motel for dollars.  They can come in, and but they can't get out.  You think under that scenario any sane Chinese would want to bring home their dollars at 6.5 yuan/dollar, as China keeps printing money to keep their Ponzi scheme going?  Maybe after a devaluation, the dollars come home, but they'll need to entice them with a much higher exchange rate, probably at least 10 yuan/dollar, and more like 12-15 yuan/dollar.  Either that, or have the debt actually be paid off and not rolled over every year.  That's not going to happen, because that would lead to a debt deflation crash, so you will eventually see China having to go the devaluation route, whether they like it or not.  

China doesn't get to defy the laws of economics by being a command economy.  It only lets them delay the inevitable longer than a free market economy.  

I am a bit surprised this China news about an official recommending to halt Treasury purchases caused such a selloff in S&P futures.  Its not as if China has been a big buyer of Treasuries lately, and they probably don't have the luxury to buy much anyway, considering the lack of dollars flowing in.  It does show you how vulnerable this market is getting to any kind of negative catalyst, as higher bond yields are definitely starting to weigh on this market.  And the 10 year hasn't even hit 2.60% yet.  There is no way this stock market calmly rallies if the 10 year gets anywhere close to 3.00%.  Just by that fact alone means that Treasuries can't sell off much from current levels, because stocks will probably also sell off as well.  

Still short, but if we can drop down to the 2730 area, will probably cover and look to reshort at higher levels.  Crude oil at $63.50 also looks like a sell area, with lots of resistance here around the 2015 top.  

Tuesday, January 9, 2018

Irony of the Parabola

Since the closing price in 2017, it has been a straight shot up over 80 SPX  points in 6 days. Despite the big gain in 2017, we didn't see anything close to an 80 point rally over 6 days.  This looks like the bear's worst nightmare, but it may be the best thing to happen for those looking for that elusive top.  If you are leaning short, like me, then it is a bit painful, but if you have managed risk and not plunged in on the short side, the opportunity is just getting better and better.  

In a perverse way, I hope that the market keeps going higher for the next few days, because that will signal that the top is closer, and will cause that much more volatility when the market goes down.  I have sized small enough where I have room to add to shorts or just take the loss and not be affected emotionally.  It is times like this when I am glad to keep position sizes small when fighting such a strong trend.  I will definitely trade bigger when the market gets more volatile and I see more concrete signs of a top formation.  But right now, it is about weathering the storm and having enough capital to operate with on the other side of the mountain.

Usually these kind of parabolic rises after a long uptrend are capitulative in nature.  Yes, it is a capitulation of both shorts and longs. Shorts throwing in the towel, with losses getting too big, and longs throwing caution out the window and diving in with FOMO on the mind.  

Really the worst thing that could have happened for bears is a continuation of a low volatility grind higher, just prolonging the rally.  But the speed of the rise is a good sign that while the top will happen at a higher level, there should be a lot more volatility once we get there because of all the air underneath.  The air is getting quite thin up here, with SPX at 2757, a level that I would never have imagined would happen back in 2016 or even last year.  Yes, you will get a one time boost to earnings growth in 2018 because of the lower corporate tax rates, but as soon as you get a Democrat in the White House, there will be pressure to get those corporate tax rates back up. 

Today, we finally saw 10 year yields break out above 2.50%, as it has been hanging just below that level as the pressure from the relentless stock rally eroded bond sentiment.  This rise higher in yields will act as a brake on the SPX rally as this stock market cannot handle much higher rates, regardless of what you hear from the pundits.  The only reason the stock market was able to rally so strongly last year was because 10 year yields didn't go up with the stock market.  If the 10 year had actually rallied like the 2 year yield in 2017, you would have had 10 year rates above 3% and that would have been a rally killer.  

For the shorts that can withstand the early storm in 2018, they will be rewarded well later in the year when there is payback for all this greedy excess in stocks.

Monday, January 8, 2018

China Shoes to Drop

The hot new theme for the past few months has been global reflation.  With WTI crude over $60 and the metals steadily rising, global investors are piling into materials, energy, and other "value" areas since tech is too expensive.  These value names are loaded to the gills in debt, and their return on equity over the past 10 years is horrible.  They have consistently lagged the S&P 500 during this 9 year bull market.  And they are in one of the sectors which don't have quasi-monopolies like the tech names. 

I mention the materials because they were being touted on CNBC Fast Money on Friday as being a good place to put your money because tech is overextended and expensive.  It is coming to this.  Reaching for the laggards which have worse fundamentals hoping these dogs with fleas will catch up.  And usually they just keep lagging, because in the late stages of a bull market, the growth names usually outperform value because they are the only ones able to hold up as economic growth starts to flatten out. And contrary to what you hear from the CNBC cheerleaders, economic growth has been stagnant, stuck around 2% growth for years. 

The sad part is that this mediocre growth has been achieved by pushing global yields to historic lows along with QE, encouraging more debt.  And the masses have obliged by piling on more debt.  Oddly enough, in the country with one of the highest interest rates in the G20, China.  That is where the financial imbalances are building.  Chinese private debt (corporate + household debt) to GDP is exploding higher, now well over 200%.  Japan, US, and Europe are all around 150%.

Nonfinancial corporate debt growth since 2006.  Its all China. 

The above charts are as of middle of 2016.  The numbers have only gotten bigger since. 

China is the gorilla in the room when it comes to iron ore and copper demand.  It has provided the marginal growth for the global economy via debt expansion for the past 9 years.  I know they say that its a command economy and they can paper everything over by cutting rates, printing yuan, and backstopping everything, but you think the owners of the debt will just stand still holding assets in yuan when the yuan gets devalued?  It is ticking time bomb and what happened in 2016 is totally forgotten.  That was just part 1 of the China crisis.  Part 2 isn't far off. 

SPX has been on fire this 1st week of January.  I was completely off on my expectations for the new year.  I am still short, but I will look to exit as gracefully as possible on any 20 point pullback.  I underestimated the equity inflows for the new year and the crowd excitement for this market.  We are clearly in a bubble blowoff phase, which is something new.  Before, there would be a grind higher, but with pauses along the way.  Now its a mad rush into risk assets.  The fundamentals haven't changed, so there will be give back of these moves in a few months.  But it definitely will not go down quietly, and the top will take longer than expected.

Thursday, January 4, 2018

Risk Seeking

Nothing is 100% certain in this business.  That is what allows individuals using mere discretion to make money by clicking mouses and pressing buttons.  If trading was 100% certain, the robots would have taken over a LONG time ago.  There in lies the paradox of trading.  You want the edges to be big enough and consistent enough to make a decent profit, but not so big and consistent that they can be done by a robot with just rudimentary AI. 

You need times like 2017 and now, to throw the robots off the scent, to get traders to abandon historically robust models because they aren't working over the last 12 months.  Times like these are uncommon.  A VIX staying below 10 while the market rallies relentlessly with not even a 3% correction are rare.  It is times like these which make traders ignore the inherent risks of sudden price declines, and instead chase riskier strategies like selling volatility to make their returns. 

You can't just hold bond and expect a risk free 5-6% anymore.  So rather than lower their return expectations, investors are going out on the risk curve, from government bonds towards corporate bonds, leveraged loans, subordinated debt, etc.  From cash to equities.  If you are a follower of financial Twitter, I am sure many of you have seen the charts of the dropping cash allocations for individuals and funds, back to late 1990s levels.  Also mentions of the low equity put call ratios.  Retail is buying into this market, and bullish.  I can clearly see the shift in the tone on Stocktwits, from skepticism about the rally in 2016, to outright optimism due to tax cuts and the "strong" economy since the fall of 2017. 

Or you can just look at the chart of the S&P over the last 2 years.  50% move off the bottom in early 2016.  And even at that bottom, at SPX 1810, the market was overvalued based on historical P/E and P/B measurements.  There is so much overvaluation built into this market, a lot of potential downside energy is stored here.  It is hard to predict when the dam breaks, but the risk seeking attitude of investors tells me that its not far off.  I started a small short yesterday, and down a bit, but will hold for a pullback.  I will give the trade at least 2 weeks to work out, and may add more if I see a bit more of a rally.

Tuesday, January 2, 2018

Europe Looking Horrible

The European markets can't handle a strong euro.  At 1.20 EURUSD, the European equities are struggling to keep up with the US.  The paper napkin chartist in me sees a double top made last year, One in May and one in November.  The ECB is tapering bond purchases and showing few signs so far of worry about lagging European stocks and a stronger euro.  The European stock market is pushing as far as it can to force the ECB's hand.  They don't want to see QE end, and they are signaling their dissatisfaction by selling off despite a US market that grinds higher.  

You would figure with the automatic inflows into equities, the European markets would be stronger, but they are down again today, despite Hong Kong going up 2% and Asia strong overall.  The action in Europe shows you that QE isn't everything when it comes to driving stock prices.  Otherwise, Europe should have outperformed the US since 2015.  Clearly, they have lagged badly.  

With the big gap up today, I am going to be shorting this morning, small size, to test the waters, because it seems like all the good news catalysts are behind us and the price action the past 2 weeks shows enough heaviness to interest me on the short side for short term trades.

Thursday, December 28, 2017

General Complacency

The market has gone up for so long, and without any scary corrections, that investors are getting greedy.  Their demand for puts is down and the demand for calls is up.  Take a look at the long term chart for the CBOE equity put/call ratio.  It is at extremely low levels. 

The chart resolution is bad, but we're basically at the lows of the year and hovering there for weeks now.  Usually these type of low equity put/call readings are fleeting.  But they have lasted all month.  Ever since tax cuts have been passed, there is a growing optimism about 2018 which looks overblown. 

Many investors will be reluctant to lock in capital gains for 2017 when 2018 rates will be lower, so there is probably a fairly big supply of waiting sell order in early January.  Counteracting that, there will be of course some automatic inflows that often start at the beginning of the year.  But I am leaning towards a pullback in early January, so I think next week will be a good time to start a short position.  Not expecting any big pullbacks, but it should be some range bound trading to start the year, with current levels near the top of the range. 

The uptrend has lasted for quite a long time, so I don't expect it to change to a downtrend right away. It will take a few months of choppy trade before it tops out.  So it should be a good market for counter trend traders in 2018. 

Friday, December 22, 2017

Manipulation of Inflation

I find it fascinating how the masses believe everything spoon fed to them by the media.  It permeates into financial research, and muddies the reality of the current financial and economic situation.  I don't wear a tin foil hat, but I also don't take for granted everything told by the public as being straightforward and true.  Sites that reveal the true nature of the government statistics like Shadowstats are ignored as biased and fringe economic research. 

One of the most basic economic statistics, inflation, as measured by the CPI, has undergone drastic changes in its calculation over the years.  From the 1980s to the early 1990s, the CPI went away from having a fixed basket of goods to being an adjusted basket of goods that used substitution effects for higher priced items to another "similar", but lower priced item to suppress the inflation readings.  The government also used hedonic pricing to deflate a newer, more expensive item as being less expensive because it had better features.

As you can see, based on 1990 calculation of the CPI, the CPI should be closer to 6%, not 2% as is being reported by the government.  The government has an obvious incentive to suppress inflation readings lower, because it allows the government to provide lower cost of living adjustments for Social Security and other government benefits, which are adjusted annually by the CPI reading.  This also has the effect of allowing the government to issue bonds at lower interest rates, because the reported level of inflation is lower.  For the politicians, it allows for the real GDP readings to be inflated higher, because inflation is being manipulated lower. 

What is interesting about the above chart is that since the early 2000s, the difference between 1990-based CPI and officially reported CPI numbers has widened, from about  2.5% to almost 4.0%. 

This brings me back to what seems to be a growing fear in the current market, about potential inflation next year.  It is funny, because searching for higher inflation in the CPI is like looking for the right card to choose when playing 3 card monte in the streets of Manhattan.  They are trying to find something they can't because its a rigged game.

It leads to some really inane arguments on CNBC about how the Fed should get rid of its 2% inflation target.  When the premise is all wrong, since PCE and CPI inflation as the Fed measures it is not really inflation.  Its a butchered, manipulated government tool to reduce government benefits and hide the debasement of the dollar.

Is 2% inflation at all times absurd? Billionaire investor Druckenmiller thinks so

CNBC's Kelly Evans spoke to Stan Druckenmiller, who said he thought the Fed's mandate for 2 percent inflation was absurd. Jim Cahn, Wealth Enhancement Group; Stephen Guilfoyle, Sarge986; and CNBC's Rick Santelli discuss Druckenmiller's comments.

Wednesday, December 20, 2017

No Fear

Gradually, like the shifting sands in the desert, you are going from doubt and pessimism to acceptance and optimism.  It has taken over 8 years for the transformation of investor psychology.  The scars from 2008 are still there, but the rally has been so strong, so long, and without enough corrections to scare investors.  I remember back at the beginning of 2014 when there were doubts about the stock market going up without Fed QE.  I don't hear those doubts anymore.  Not many people are worried about the ECB tapering QE and the BOJ reducing their QE purchases.  There isn't even much concern about the Fed raising interest rates almost every quarter. 

A steadily rising, low volatility up trend will give investors confidence about stocks.  Rarely do the daily buyers and sellers care about valuation, its about what is going to happen in the next hour, the next day, the next week, the next month.  And it has been up, so they extrapolate the past 8 years into the next 8 years.  It's the monkey brain that humans have not completely evolved from which still lingers.  It's why you have recency bias, why so many people believe in fake news, and why hearing repeated proclamations about how strong the economy is from CNBC and financial social media makes investors believe it.  In fact, US GDP growth has been basically stuck in a narrow range around 2% since 2010. 

Now with the tax cuts about to be passed, the optimism is through the roof as analysts extrapolate all the after tax earnings growth in the coming years, forgetting that the new tax rates are not permanent.  The investor sentiment surveys, which I usually ignore, are at astronomical levels, which is something I cannot ignore.  The put/call ratios have been very low for the past 3 months.

I remember back in the late 1990s when No Fear bumper stickers and t-shirts were so popular.  It is no coincidence that it happened late in an economic expansion with a booming stock market.  It is something you would have never seen in 2008.  It feels like a similar mood now, as consumer confidence readings hit extreme highs, as credit card debt explodes higher, just like the late 90s. 

Unlike the 2015 top, which led to just a 15% correction in the SPX, the amount of froth and optimism is clearly greater this time around.  Once we top out in this uptrend, which I expect in 2018, what follows will be a bear market, not a correction.  Until then, I will play the short side conservatively in order to preserve capital for when the real profit potential arrives.

Monday, December 18, 2017

1999 Flashbacks

The SPX strength is relentless.  There is widespread optimism about the global economy and Fed rate hikes are being ignored as a negative catalyst.  With tax cuts due to pass this week, no one wants to be short when it is officially in the books.  Also, with the big gains for the year, most investors will be withholding their stock sales to push their capital gains to 2018.  This should create an upward drift for stocks for the remainder of the year.  Will not try to fight this uptrend for the remainder of the year.  There are easier battles to take.

I will be interested in the short side starting from January, as the delayed selling should kick in.  Plus, after tax cuts, there is not much of a positive catalyst, unless you think infrastructure will get passed in 2018.  With Trump's low popularity and with tax cuts already passed, the motivation to get it done by Republicans will be low.

After some profit taking at the beginning of 2018, we should have one last strong rally to form the final top, some time in the spring.  It is extremely difficult to predict tops, so this is just a broad outline that I have for the coming months, things will probably be quite different than I expect, but in general, we are very late in this rally and things should get choppier as we form a top.

Unlike 1999, there is not the unbridled retail enthusiasm for stocks, and you don't have the flood of IPOs and supply that hit the market like you did leading up to the top in 2000.  So the top will be trickier than it was back then, but the institutions are basically all in on stocks.

I expect bitcoin to make a top after the SPX, so probably summer or fall of 2018.  I will have a different mindset when trading the markets next year.  If things go according to projections, it will be less waiting, and more trading.

Friday, December 15, 2017

Lagging Global Stocks and Extreme Valuations

The SPX rally is ongoing as the Eurostoxx,DAX, and Shanghai Composite lag badly over the past 2 months.

The stronger euro and the built in structural weaknesses in the Eurozone and China pulling back stimulus is being overlooked by rear view mirror analysts who rave about global growth and a tight labor market.  A tight labor market is not a sign of a strong economy.  It is a sign of a shrinking percentage of the working age population relative to the total.  The developed economies:  US, Europe, and East Asia are getting older, reducing the working age population, thus fewer workers available to support a growing number of elderly, keeping unemployment rate low.  That is not what strong economic expansions are made of.

That is why the Fed funds rate is 1.25-1.50%, even after a 9 year bull market.  If short term interest rates were anywhere close to 5%, you would have a deep deep recession.

The US stock market is in the most vulnerable position since 2008, as the exorbitant  stock valuations leave very little margin for error.  Even if there is just a flattening out of earnings growth, stocks will be punished because they are priced for perfection.  Reported earnings (GAAP, not the NON-GAAP operating earnings nonsense) for the S&P 500 is $107 for the trailing 12 months as of November.  The market is currently priced at a trailing P/E of 25!  The only time you had such a big multiple during an earnings expansion was in 2000, when the S&P went up as high as P/E of 28.  Even the top in 2007 was less expensive, with a trailing P/E of 18.

So you have a high probability of a bear market within the next 2 years, just based on the optimism and high valuations, with low earnings growth.  By the way, stocks are priced off of perpetual earnings, and these corporate tax cuts will last 8 years before they expire.  The budget deficit will be so massive in 8 years that I am sure there will be a BOJ type of ongoing QE by the Fed at that time to keep interest rates low.

The VIX has gotten obliterated today.  It is now down to 9.5, near the lowest levels of the year.  The VIX shorts have been getting paid handsomely, even without VIX going lower, just by rolling over their shorts with the steep contango.  You would figure that the VIX longs would have had enough and demanded a flatter VIX curve for taking on long volatility positions.  It seems like there is more risk holding a long volatility position than a short one!  Its an upside down world, as the lack of volatility is perpetuating ever larger vol adjusted stock positions at funds, keeping the uptrend going.

It looks like we will finally get the tax cut bill passed next week.  There has been so much hype about these tax cuts, that I can't imagine that they are not priced into the market.  Isn't that what the Trump trade was all about since November 2016?

Shorts will have their time in the sun soon enough.  The bitcoin mania has masked what is probably the more insidious bubble:  US stocks.

Wednesday, December 13, 2017

Fed Optimism and Rate Hikes

The market loves to make the same mistake over and over again.  The key to making money in the market is not trend following or being a contrarian.  It is to repeat a strategy that keeps working because of a market bias.  For example, all of the gains for the S&P since 1993 have been from overnight gap ups.  If you only went long during regular market hours in the S&P, you would have made no money, despite the market going up 500% during that time period!  That is a simple strategy of just going long S&P at the close and selling at the open.  The reason the strategy has worked so well is because stock traders are afraid of overnight gap risk, and those who take that overnight risk collect the premium. It is an irrational fear, because the market can easily go down rapidly during regular market hours, as the flash crash in 2010 or even the massive dump in the S&P on Flynn news a couple of Fridays ago. 

This brings me back to the Fed.  There is a market bias of believing the Fed and not believing the interest rate markets when it comes to future rate moves.  The Fed has always been overly optimistic on raising rates, and usually they fail to deliver on their promises.  In the few times that they do deliver those rate hikes, it is because the S&P is screaming higher.  And no, the S&P isn't always going to trade like it did this year.

The market bias now is that the Fed is going to hike 3 times next year and flatten the yield curve.  The market has fallen into the trap of believing the Fed again.  The Fed is always going to try to cheerlead the market by giving overoptimistic projections of the economy and interest rate hikes.  They are in the business of providing confidence to the market, not in correctly predicting future rate moves. 

Betting on the Fed hiking rates 3 times in 2018 is like betting that the S&P will go to 3000 next year.  Because if the S&P isn't going up, the Fed will stop their rate hiking cycle dead in its tracks.  I have a much more bearish view on 2018 than most so I am bullish on bonds.  The fear of inflation is still present in the market, and that is keeping yields higher than they should be given how late cycle this economy is.

Do not be surprised next year if Powell comes in and is dovish as the stock market struggles to go higher.  If for some reason he wants to try to raise rates as the stock market struggles in 2018, he will invert the yield curve in a hurry, exacerbating the downfall of this market.

Looks like it will be a no touch market for the S&P for the rest of the year.  Its fitting to cap off the year with more of the same boring grind higher.

Monday, December 11, 2017

First Dip Bought and Bitcoin Thoughts

Of course, they were going to buy that first dip off of the SPX 2665 high.  Same thing they've been doing all year.  Plus its December, a bad time to short.  The dip buyers came out of in bunches, protecting 2625 level and grinding the market back up.  As I have stated before, I will only take perfect short setups, and a move back to 2660 this week will not be a perfect short setup.  There is a big difference shorting a euphoric gap up into new highs on good news (high probability trade) and shorting the same level coming up from a short pullback with no news (a coin flip).

Market participants have turned their focus away from the stock market towards bitcoin.  It really shows you that there are a lot of loud market observers, but not a lot of loud market participants.  Its like you have a few people in a casino playing baccarat and a bunch of people watching those people gamble.  If I had no plans on trading bitcoin, I wouldn't pay any attention to it.  But I am very interested in getting involved on the short side in the future so I have been watching the action from afar, waiting for the CME opening on bitcoin futures and also bitcoin ETFs to possibly short.

I will not play the long side in bitcoin, because I don't like to trade with a short term view.  I want to be able to hold my position long term, and that is something I refuse to do long bitcoin.  The bitcoin longs will have their profits front loaded in this parabolic rise higher, so if you are going to be long, you have to be long on the way up, not when it is consolidating.  Those looking to buy a bitcoin pullback are the ones who will be absorbing the risk.  Whenever there is a pullback, there is always a risk that the uptrend is over, and prices keep heading lower towards its intrinsic value, close to zero.

I am on the sidelines here and probably not doing much for the rest of the year in S&P futures.  Bonds are trading in a tight range, and not that interesting either.  No wonder they are talking about bitcoin, there is no action anywhere else.

Wednesday, December 6, 2017

Back to the Cave

Ok, that was a nice little mid hibernation beef snack for this bear in hibernation.  I covered the short and back to flat.  I am not on an aggressive short prowl yet, and I wasn't even looking to short until the conditions were near perfect,and the good news big gap up on Senate tax bill passing was irresistible.  Unless there is a screaming short in SPX, I don't plan to revisit until January. 

I don't want to make a big deal out of the past 2 days, but it is days like Monday which give little hints that the top is near.  I don't recall so many traders getting so bulled up over something(tax cuts) that has been advertised for so long.  Earlier this year, I was waiting for the tax cuts to be priced in before I got aggressive on the short side.  The move over the last few days from SPX 2600 to 2660 went a long ways towards pricing in those tax cuts and getting investors excited about the market.  If you look at the TD Ameritrade Investors Index, a measure of how much buying the active traders there are doing, it is going parabolic.  A lot of investors on the fence jumped to the bull side in November.  It is at the highest level ever recorded, over the past 7 years.

Europe is back below the post French election levels seen in May, and China H Shares have gotten destroyed over the past 2 weeks, dropping 7 percent, going back down to September levels.  Also, for those looking at fundamentals, copper took a beating, as copper dropped 4.6% yesterday, the most in any day in 3 years! 

China is slowing, Europe looks like it can't handle a stronger euro, and yield curve continues to flatten.  2018 will be very interesting indeed.