2010 View

2009 was a year of feast and famine.  It was quite trendy, not the type of market I like.  Not a very good year for me.  2010 should be a less trendy market.  Here are some guesses for 2010.

1. It will remain a bull market.  After some turbulence in January, the bull will resume.  2010 will be a calmer bull market, with fewer sharp rallies.  The most likely scenario is a slow grind higher with momentary sharp selloffs.  Those sharp selloffs will be buying opportunities. 

2. Volatility will be low.  Volatility dies in a bull market. 

3. Dollar weakens.  Fed exit strategy will be slower and much more muted than expectations.  The  main beneficiary of dollar weakness will not be the euro.  It will be the commodity currencies, AUD and CAD.
 
4. Commodities will outperform stocks.  I expect crude oil to lead commodities higher. We'll see $100 oil.  As crude oil goes higher, there will be many skeptics complaining about lack of real demand and lots of spare capacity.  Energy and grains will be strongest of the commodities. Precious metals will be the weakest.

5. The stock market/dollar inverse correlation will weaken.  So will the stock market/crude oil positive correlation. 

6. Asia will outperform US/Europe again.  The Nikkei will outperform the S&P 500.  China will get bubbly.

7. Mutual fund inflows into stocks will increase.  The economy will improve spurring retail investment demand for stocks.  This should steadily buoy the market higher.  After the markets get too high, there will be a massacre in autumn.

8. There will be no year end rally, as the market sets up for another bear market starting in 2011. 

Gap Up Set Up

With the heavy selling in the final 30 minutes of trade, it sets up a decent gap up scenario for Monday as the institutions come in.  History says that there is usually a gap up on the first day of the year.  So I have gotten long looking to sell at the open on Monday. 

Happy New Year.

Position Squaring

I don't know what will happen from now till 3:50 PM, but from 3:50 PM to the close at 4:15 PM (futures close), I am very confident that we will go down hard.  The reason being that position squaring orders for S&P futures will come in at the close, and they will be to the sell side. 

13 Year Gap Up Streak

On the 1st trading day of the year from 1997 to 2009, the SPY has gapped up every single year.   The first 2 days of January are historically very bullish days.  Institutional money flow is the driver for these gains. Get long a couple of minutes before the ES closes at 4:15 ET today and sell at the open next Monday.  Front run the institutions!

Tape Painting

When I was exclusively a stock trader back in the golden days, one of the most surefire ways of making money was to short small cap stocks that surged in the final hour of trade on the last day of the quarter.  A lot of fund managers would gun illiquid small cap stocks higher by 30-60% on the final day of a quarter.  This would bump up their portfolio return for the quarter.  Usually, they would wait till the final hour to start running up the stocks, sometimes waiting for the final 15 minutes of the trading day to buy.  This way, they wouldn't have to buy as much stock or support an inflated price for too long.  It cost them money to paint the tape, as they would have to sell the inflated stock at lower prices later.  The stocks would promptly trade lower after the close, even at 4:02 PM.   They would end up gapping down the next trading day and drift lower. 

I set up a screener tracking any stock that went up more than 10% in the past hour and kept them on my watch list.  It would be total chaos in the final 15 minutes, as I tried to short as much of the tape painted stocks as I could get my hands on.  I would close out the short position either the next day or a few days later for a good profit.  The tape painting was especially extreme in 2000, and has gone steadily downhill over the years.  Technically it is illegal to manipulate stock prices, but it was the wild wild west back in the bubble days.  It still happens, but the number of stocks is fewer and the magnitude of the manipulation is less.  Watch for stocks that are being manipulated higher in the final hour tomorrow.  It is almost a riskfree way of making money.

Finally a Gap Down

We have a 7 day gap up streak that will be broken today barring a miracle reversal in the next hour.  One thing I noticed yesterday were the high index put call ratios on the CBOE and the ISE.  Unlike the equity put call ratio, this is not bullish.  Often, this kind of index put activity preceded a pullback in the market. Seasonality is still very favorable, especially for the first 2 trading days of January.  If we gap up next Monday as I expect, I will likely start building a short position. 

Turbulent January

Most of the predictions for 2010 are for a strong 1st half with a weakening 2nd half.  There are hardly any cries for the need of a "healthy" pullback like there was from June to November.  Most are positioned for further rallying in January.  Sentiment surveys, Rydex fund flows, and put call ratios show very few bears are around. 

Unless we get a boatload of mutual fund inflows in January, we will not sustain this pace.  From past history, the retail crowd usually waits for the economy to get strong before jumping in.  So I don't expect them to jump in yet.  I expect a decent sized pullback in January.   Next week, I will be looking to short strength aggressively.

Case/Shiller Index and Consumer Confidence

Not much to look forward to today, but there will be a couple of data points coming out, nothing major, though.  I am waiting to see if the bulls overplay their hand on a positive surprise, perhaps with the Consumer Confidence number at 10:00 AM.  If we can get that last push higher, I will establish a small short.  I am still hesistant to be an aggressive seller in this low volume environment. 

No Volume

The market is going up in a vacuum.  There is nothing there.  Not many buyers.  Certainly not many sellers.  ES volume will probably hit about 475,000 today.  That is about 1/3 of the normal volume.  You can't put much weight on today's action because of the super low volume. 

Lots of Bulls

Straight from Fast Money Halftime Report.  All bulls, no bears in sight.  All of them are bulls into year end.  Does that mean they aren't bulls next week?  I will wait for a better short entry, but I don't think we have much more upside. 

Slow Upward Drift

No economic news today.  It has been a slow bleed for shorts in this market, as we get steady small gains day after day.  Today is the 6th straight gap up.  One of these days the opportunity will come.  Until then, I will wait.

First 3 Minutes

I'd like to get down to the psychology of the first 3 minutes of trade.  Often times when looking at a chart, traders tend to forget about the first few minutes of trading and focus on the opening range breakout or how a market closes.  Throughout the years, I've noticed that the first 3 minutes of trade at the open has a deeper meaning than most people think.  Those that trade during the first few minutes are almost all institutional.  Institutions don't like to trade too heavily in the premarket for fear of moving the market. They are trading size because if they weren't, they would have traded in premarket already.  They are anticipating a direction for the day's trade, and don't want to be left behind.  Thus, mostly those trading size and urgently wanting to trade are active during this time. 

Let's get down to the psychology of these traders.  These traders don't want to wait for the market to run away from them.  In a way, they are having a mini panic.  It is a greed based panic when opening a position. It is a fear based panic when closing a position.  Since fear is a stronger emotion than greed, it is more likely that traders are closing positions than opening them.  If that is so, the first few minutes of action usually don't last because fear is a strong emotion but doesn't last long.  Greed is a weaker emotion but lasts longer than fear. 

Take this into account when you see the first few minutes of action.  You can get a good read into traders' psychology just from the first few minutes.

Very Overbought

This market has gapped up for 5 straight trading days, and also gone up 5 straight days.  Only 2 of those 5 days have had a gap fill.  This is a very strong market, and has gotten very overbought.  Remember, strong markets get overbought and often stay overbought for a long time.  Put call ratios remain low and there is a lot of optimism right now.  I will wait for a blowoff top to short.  There is no way I am shorting weakness in this market.

Christmas Eve Trading

Europe is closed on December 24, why does the US have to trade on December 24 for 1/2 a day ahead the biggest holiday of the year?  It seems unnecessary, but I don't make up the rules.  I will probably not be clocking in tomorrow, anyway.  Its a sleepy market and I see no edge.  Unless something crazy happens, I'll be taking a 4 day weekend.  Merry Christmas!

Market Should Go Down

But it's not.  Very few bears, overvalued, low put call ratios.  How should we play it?  I usually play it from the short side and wait for reality.  But at this time of year and with the strength of this market, it makes me pause.  The market doesn't want to go down despite indicators flashing danger.  I would definitely not be a buyer here.  But I can't be a seller fighting this action every day. 

3rd Straight Unfilled Gap?

If we don't fill the gap today, that would be 3 straight up days without a gap fill on the ES.  That is not common, and only occurs in very strong markets.  I would not bet on another gap and go with no fill today.  So we should trade down to 1113.5 sometime today.  I am betting that the dollar will weaken for the remainder of the year.  Strong long uptrends like the euro and gold just don't go straight down after hitting the top.  Even if the trend has changed, we should still see a decent bounce from current levels. 

Death of Volatiility

We had a 5.25 point trading range during market hours.  The overnight session had a trading range of 7.5 points.  The overnight session was almost 50% more volatile than the regular trading hours.  The trading opportunities are limited, so I will be doing little for the rest of the year.  I do believe the dollar carry trade is mostly closed out, and the dollar should weaken for the rest of the year. 

Blue Light Special

Gold, euro, and anything other than the dollar are on a blue light special today.  I attribute this to panicked dollar carry traders who are paying up for their dollars.  I don't think it lasts longer than tomorrow.  I am a shorter of dollars today.

Mad Scramble

Today is probably the final day where there will be decent volume for the rest of the year.  We might get another increase in volume around Dec. 30th and 31st.  Those holding short dollar positions are making their final moves to get out.  With the blatant options speculation ahead of Christmas, I can't picture much upside from these levels.  I will be short heading into the open and expect weakness on the existing home sales data.

Odd Crosscurrents

It is not common to see bonds selloff, stocks rally, and then see commodities selloff with a stronger dollar.  These are not natural movements, and seems like forced selling in gold and forced buying/closing shorts in the dollar.  These traders are closing out of their positions before the volume dies down over the next 2 weeks.  The stock rally appears to be seasonality players buying ahead of the Santa Rally.  I have a feeling today's move is stealing from that rally.  I will look to short tomorrow for Turnaround Tuesday.

Front Running Santa

All traders know about the positive seasonality till year end and beginning of January.  If everyone knows about it, then we should expect traders to position themselves for the rally.  They would be buying today in preparation.  Those buyers today would want to unload next week or the week after.  Rallying now probably makes it less likely that we rally from Christmas Eve to early January.  The put call ratios are extremely low today.

Was That It?

Was the selling that began after the FOMC announcement finished by Friday afternoon?  That is about 2 days of trading.  This gap up is following the same old pattern of buyers coming in on Monday morning gapping up the market significantly.  The post expirations trade seems to be the buy side, but I am expecting some selling in the 1st half of the day. 

Bearish Sentiment in Precious Metals

I like to look at various sentiment indicators from the investing public.  One of them is TheStreet.com's RealMoney Barometer.  It includes 3 questions.  This week's results tell me 2 important things.  Investors are bullish.  Also, a large number of traders are bearish on precious metals.  This is akin to being bearish on gold, and to a large extent, bullish on the dollar.  The correlation between gold and the dollar is very high these days.  This adds another piece to my belief that the euro is oversold, and needs to be bought this week.  I believe it will be higher by December 31st.

Trading Technician

There are a particular type of trader in the financial world that believes in technology.  No, I'm not talking about tech stocks.  I'm talking about the trader that needs to have the fastest computer on the block, a Cray computer clone.  A 6 monitor setup with all kinds of charts, level II quotes and DOMs for various indices, currencies, etc.  This tech savvy trader is usually a chartist, who always follows his indicators and never bothers to understand the market.  It is all about making everything as dry and technical as possible.  He probably fiddles with developing systems and backtesting.  This type loves to look at hundreds of charts per day, and loves to draw trendlines and trend channels when studying charts.  They usually have a disdain for fundamentals or studying market psychology.  They are all about charts and figures and numbers and lines.  They look down on dicretionary traders that trade mainly on fundamentals.   They do tend to be more disciplined than discretionary traders, however.

I call this type of trader a trading technician.  They are quite inflexible and stubborn, which describes how most traders think.  I am also stubborn, as long as the method works.  A lot of trading technicians make money, otherwise they wouldn't be able to afford the equipment and financial/data subscriptions.  But they probably could make the same with half the equipment and charts.  And they could probably make more money if they were more flexible and looked at fundamentals.

I've never been a technician.  I used to trade with a 17" CRT monitor and thought it was good enough, because it was an upgrade from a 15" CRT!  Then I upgraded to a 19" LCD, and then to a wide screen 22" LCD, and thought I was high tech.  Well, now I use 2 wide screen LCD monitors and it seems like plenty to me. 

I can't look at a chart and say whether the index/commodity/currency would go up or down.  But if you tell me the news behind the chart, things become a bit more predictable.  If you also tell me what investors are thinking, what they are expecting, both short term and long term, then the picture becomes even clearer.

Mutual Fund Monday?

It is the obvious play.  It has worked over and over again.  To go long into the weekend and wake up to a nice fat gap up on Monday.  We got the usual weak shorts covering before the weekend.  I am looking for a weaker open on Monday.

Bearish on Dollar

I am short term bearish on the dollar.  What that does to the equity markets, I will not make a guess.  We have decoupled from the tight inverse correlation of dollar and equities.  So I don't suddenly expect us to go shooting higher on a weak dollar.  Maybe the best bet will be to buy commodities.  Despite my bearish dollar stance, today's trade has me leaning towards a gap down on Monday. 

Euro is Sold Out

The fund managers who were short the dollar in the dollar carry trade are getting carried out on a stretcher at the moment.  I imagine great years just turned into good years.  I do think we see a bounce in the euro next week.  What that does for the equity markets is up in the air, but will likely be a positive.  Gold and crude look like they have bottomed.  If the euro starts to strengthen again, those markets will roar back.

Sell Em

This gap up has to be faded.  The action in the euro and gold are speaking loudly.  Risk is being taken off the table, and the last to go will be equities.   I am expecting selling in the first hour, and continued weakness throughout the day.  We may have a little short covering rally in the final hour.  RIMM and ORCL earnings have given this market an optimistic tone which only makes me more confident in my call.

RIMM and ORCL

Earnings beats at RIMM and ORCL pumped up the futures after the close.  This sets up a nice sell opportunity tomorrow at the open if there is a gap up.  The market closed weak and that weakness should carry over into the 1st hour of tomorrow's trade.

Improving Economic Data

The leading indicators and Philly Fed number both came in above expectations.  I am seeing articles touting the positive economic data as a reason for a further rally in the markets.  Well, isn't that why we rallied 65%?  Unless we are going to get another boom cycle like in 2003-2007, most of the money has been made.  The improving economic data helps to explain the low number of bears in both AAII and II sentiment surveys.  Do not confuse the economy with the stock market.  They don't always run together.

Gold and Euro Weakness

Gold is threatening to break 1100 and Euro / Dollar is threatening the 1.43 area.  There are serious undercurrents in this market which are being underestimated by the equity traders.  These type of sharp moves don't happen in safe environments.  I foresee more weakness for the next few days. 

Supply Overload

Supply is increasing.  Demand is stagnant.  Price must go down.  The BAC, C, and WFC secondaries totalling $50B is a ton of supply.  This is on top of the insider selling that continues to substantially outweigh insider buying.  The retail investor is not coming in to load up on overpriced stock inventory like it usually does.  There have been almost no net equity inflows into funds this year. Once bitten, twice shy. 

Its funny, C is priced at around $3 but its market cap is almost $100B!  And WFC's market cap this year is the highest it has ever been.  Dilution eventually catches up to stock prices.  I am bearish on today's trade (expect a sell of the gap down), due to a combination of anticipatory pre-Fed buyers unwinding positions, lack of bears, dollar's Hulk imitation, and overbought readings. 

Europe Overbought

These days, there seems to be more action during the European open than the NY open.  For example, today's opening range breakout happened in the 1st hour of European trade, not during NY trade.  Looking at the Dax 5 day chart, the market has broken out to a new 52 week high but is very overbought.  During the same time frame, S&P has only gone up about 1%.

Time Cover Jinx

I should have known.  Bernanke on the cover of Time meant that we'd probably selloff all day after the FOMC announcement.  The peak of central banking.   It was too easy, and I didn't even bother to think about it till now.

P.S. - We have the Citi pricing tonight.  It is hard to imagine that we'll have another gap up tomorrow.  The market is stalling out here.

ZZZZZZ.....

Volatility has left the building.  Even a Fed announcement can't jolt this market for more than a few points.  I wouldn't play it either way looking at the reaction.  We're basically flat from where the announcement was made. 

Awaiting Banana Ben

The action will be quite dead ahead of the FOMC meeting announcement at 2:15 ET.  We've got strong European action, and that's given us this gap up.  Most traders expect Banana Ben to continue his deflation scare and weak economy spiel and keep rates low forever.  So I expect a sell the news reaction after things are announced.  Plus the secondaries headed our way are a headwind that shouldn't be underestimated.

$50B Matters

That is a heck of a lot of stock to sell into this thin market.  We've hardly had any equity inflows this year and there has been a lot of supply added.  Until the retail investor embraces this market, we will be stuck in a range or go down.  I don't think we can get to 1200 unless the retail investor joins in.  Hedge funds are very long and mutual funds are holding minimal cash.  Seasonality is positive, but fundamentals trump seasonality.  Always.  And the fundamentals of this market are getting worse with each equity offering.

Strengthening Dollar

The overnight theme that has been weighing down the market is the stronger dollar.  Gold is weaker as a result and threatening to make new lows since it peaked.  The market reacted quite negatively to the PPI and Empire Manufacturing data.  That happens when you get a negative number and markets are overbought. We remain within the range.  The beat goes on.

BAC, C, WFC

"A few days later St. Paul very kindly came out with an announcement of an issue of its own; either stock or notes, I forget which. But that doesn't matter. What mattered then was that I noticed the moment I read it that the date of payment was set ahead of the Great Northern and Northern Pacific payments, which had been announced earlier. It was as plain as though they had used a megaphone that grand old St. Paul was trying to beat the two other railroads to what little money there was floating around in Wall Street. The St. Paul's bankers quite obviously feared that there wasn't enough for all three and they were not saying, "After you, my dear Alphonse!" If money already was that scarce—and you bet the bankers knew—what would it be later? The railroads needed it desperately. It wasn't there. What was the answer? Sell 'em! Of course! 
The public, with their eyes fixed on the stock market, saw little—that week. The wise stock operators saw much—that year. That was the difference."
- Reminiscences of a Stock Operator, Chapter 8 

WFC joins the money grab and is looking to sell over $10.4B in stock quickly.  The banks are flooding the market with secondaries, by my calculations, the total dollar amount in BAC, C, and WFC secondary offerings is around $50B.  That is $50B that needs to be deployed to suck up the supply.   $50B that can't be used to buy stock already out on the market.

Gap Down

The system fired off a gap down signal at the close.  I would be careful on the long side overnight.  We are near resistance and good news is all out already.  Play the range until it doesn't work. 

Complacency

That would be the perfect word to describe today's action.  FMHR is all bulls, year end rally is a given, Fed will provide easy money forever, Dubai problem solved, .....  I am looking to short.

P.S. - Citi just gave us several more billion reasons to short.  More stock to choke on!

Abu Dhabi News

Abu Dhabi's bailout of Dubai shot up the futures by 12 points overnight but since its been fading a bit.  Just as the Dubai news caused a selling panic, I think today's overnight action was a buying panic and we should trade lower in the 1st half of the US session.

Gold Bulls

The Commitment of Traders chart shows a lack of bearishness despite the recent swoon in gold. The data is from close of trade on Tuesday, so it doesn't include the drop on Wednesday and Friday. Despite the big drop on Friday Dec. 4, it shows that commercials  barely budged from their bearishness and speculators hardly dropped their level of bullishness.  This is unusual behavior among commercials, who tend to fade the short term price movements.  I think its a matter of time before gold drops below 1100. Probably will happen this week. Chart is from cotpricecharts.com.

Traders and Mathematicians

The best mathematicians don't just remember a few formulas and plug and chug to get the answer.   Utilizing a bunch of formulas and copying examples doesn't make a great mathematician. The great mathematicians have a deep understanding behind what the formulas mean, how they are derived.  They have a great intuition about math. 

In the same way, memorizing a bunch of indicators, P/E ratios, and chart patterns doesn't make a great trader.  It is having a deep understanding behind how the stock market works, why certain indicators work during certain time periods, and don't work during other time periods.  It is learning why markets move, and from studying the market, how to anticipate future moves based on the recent past.  This requires a continuous study of technical indicators, sentiment indicators, fundamental factors, as well as psychology.  Through this, a trader develops a strong intuition about the market. 

Great mathematicians have a strong intuition about solving math problems.  Great traders have a strong intuition about predicting future price movements.  The road to trading success lies in blood, sweat, and tears.  There is no magical golden ratio.  There is no holy grail.

FX Action

We are witnessing unusual trading in the foreign exchange market since the US markets have opened. Volatility is high.  This looks like the work of speculators unwinding their dollar carry trade. Speculators are cutting their losses on their dollar short position by selling yen and euro against the dollar.  Now the important question is this: are they mostly done or just getting started?  Remember, the dollar carry trade was a very crowded trade.

The market is still positive despite the stronger dollar.  This is a bullish sign.  The market is stronger than I thought.  I will stay flat over the weekend.

Delay Pattern

Lately, the market has been acting with a bit of a delay. That is, usually when a market wants to go lower, it does so in the opening 30 minutes of trade.  But recently, this market has been rallying at the open and then trading in a range and then breaking down from that range.  Its almost as if all the buyers want to get in as quickly as possible and don't want to wait.  After they are done, the market falls due to a lack of eager buyers.  The way I interpret this is bearish.  The buyers are panicking, not the sellers.  The opposite happened during the summer while we rallied.  We would tend to sell off early in the day after gapping up, but the selloff wouldn't last more than an hour or two and we would rally for the rest of the day.  The market back then was characterized by eager sellers who didn't want to wait to sell.  Back then, the sellers were panicking.

Typical pattern during summer

Typical pattern now

2nd Gap Up

Unless the market is very bullish, the stock market rarely leaves 2 unfilled gaps in a row.  We've had that on this run up, so it can happen again.  But from the past couple of weeks trading, I don't see the bullish initiative required to leave these gaps unfilled.  The sentiment surveys show very few bears.  From past instances, a lack of negative sentiment doesn't usually lead to aggressive up moves.  We have positive retail sales, which provides the excuse to buy.  I expect traders to sell the gap up today.

No Volume

Today has been very light on volume.  Using volume to determine future market direction is often questionable.  But its telling me that there is not much supply out there at these levels.  It is more likely that sellers will emerge on a break down of 1080.  Traders are waiting for the other side to flinch first.  In the meantime, not much action.  A bit surprising considering today is rollover day on the equity futures.

$19B Here $20B There

Pretty soon it adds up to big money.  I am talking about the capital raises by BAC and C.  BAC raised $19B through selling equity.  C is looking to raise $20B doing the same thing.  From a broader prospective, these capital raises soon add up to a lot of supply weighing down the market.  We are still in a tight range and yesterday's trade just reinforced that.  With the gap up, I believe we'll get some bulls to jump on board and drive us a bit higher.  But I don't think it will last.  Gold and crude oil are telling me that this market is weakening, and with very few bears according to Investor's Intelligence, I would be cautious on the long side.

1085 to 1115

Today's trade rejected the 1085 level on the S&P and found value at higher levels.  The momentum has shifted back to the upside, it should last at least till the first half of tomorrow.  We have been range bound for about a month.  A very narrow range of ~ 30 points.

Gold Short Term Capitulation

For those interested in trading commodities, gold looks like it has put in a short term bottom.  The high volume flush out occurred earlier today on the way down to 1117, which feels like a short term bottom.  We may range trade for a few days between today's low and 1170.

Range Saved

This market has reconfirmed the range today as we have bounced sharply off of 1085.  Spain outlook downgrade doesn't matter, and now it looks like we'll squeeze the rest of the day into the close because we couldn't go down.   What a market!

Spain Outlook Downgraded

Spain's sovereign rating has been affirmed but the outlook has been downgraded to negative by S&P.  The futures have dropped 4 points on the move.  Fear is in the air, Spain and Greece are not Dubai.  If these governments default, we will be seeing 100 point down moves, not 20. 

Trade The Range

We are getting closer to the lower end of the narrow range, from 1090 to 1110 that we've been trading for most of the past few weeks.  I don't see anything to change that.  A Greece default scare took this market to 1090, what will it take to break 1090, Germany defaulting?  This is a resilient market, and the volatility is pathetic, so there is no point trading for a breakdown just yet.  But the sentiment is not one that supports a strong rally.  So range bound trading is the best bet.

Greece Jitters

The downgrade of Greece's sovereign rating to BBB+ was a factor in gapping us lower.  After selling off from Friday's high to today's low, over 30 points, the market is not at an enticing level to short. I would wait to short at higher prices potentially on Thursday.  I would have been more impressed if the market went down on no news.  Greece gives sellers and excuse to sell and that's usually not a good time to sell.  I'm sure it will be a bigger story later when the market is more vulnerable, but I don't see it happening this week.

Neutral

You cannot overstay your welcome on the short side, today is another day of that proof.  We could go lower, but its a hard fight for the last few yards.  I am neutral on the rest of the day, but I have a feeling there will be a short squeeze in the last couple hours of trade.

Weak Day is Due

We haven't had a weak day from open to close in ages.  I think we are due for one of those days.  This gap down feels like the real deal, and the market should sell off for most of the day.  Crude oil has been a laggard, and the euro is starting to crack against the dollar.  That brings down the weak dollar plays, which has been the support for this market.  I expect selling from the opening bell, with weakness for most of the day. 

Selling on Good News

Even Banana Ben couldn't rescue this market.  It sold off into the close, and now it is clear that this market is exhausted on the upside.  Fed Ex has come out to boost the futures a bit with positive earnings guidance.  But good news is sold these days.  A big down day is on the horizon...

Bernakes Gooses It Again

With Bernanke, you can always expect dovish talk.  Yet traders still act like its news that rates will remain low for a long time.  Today is a typical tight range day, and I don't expect even Banana Ben to be able to cause a sustained breakout.  By trading sideways, we've actually worked off a slight oversold reading from Friday afternoon.  Tomorrow I expect aggressive selling intraday.

Tactical Outlook

In a range bound market like this, thinking tactically can be better than thinking strategically.  If this market is having trouble above 1115, then you have 10 points of possible heat to take when shorting at 1105.  The market has proven that it has trouble going over 1115.  It has also proven to have rejected 1080 as a level.  Unless one is betting on this market breaking new highs, you have to lean short above 1100.  So you are risking 10 points for 25 points of downside at 1105.  Also, if odds are that we'll likely test 1067 before 1140, then you have to lean short.  Let the market do its thing.  No need to be perfect timing it at this level.  Market has spoken.  It doesn't want to stay above 1115.  Trade accordingly until proven wrong.  Sustained trade above 1115 proves you wrong.

Less Dumb Money

The trading is getting harder.  There is a feast and famine cycle to trading.  Usually after a feast in a market, it turns to famine.  For ES traders, July 2007 to March 2009 was the feast.  Now is the famine.  The volatility has gone straight downhill.  To these eyes, the moves are harder to predict.  The markets don't go down as much when getting oversold, and don't go up as much when getting overbought.  The dumb money has been wrung out of this market by the volatile trading in 2008.  Those that chased moves in the fall of 2008 got killed.  Mean reverting moves dominated from mid October 2008 to the end of the 2008.  The chasers got crushed during that time and were likely wiped out.  The volatility was extraordinary, and trading volumes went through the roof.  There were big winners and big losers.  The mean reversion traders took down big profits, but probably gave back a chunk of that this year, which has been trendy.

The stock market is like a poker room, eventually the money goes to the best players.  But the house takes a very significant chunk of the money in play.  Therefore, you will have more losers than winners.  The losers eventually go broke.  Unless you get a new supply of bad players, the games get tougher.  Well, we have destroyed a lot of losers in 2008.  New losers will come back to replace the old ones, and some of the old losers will come back after building another stake.  But the losers will be slow to come in because of the bad economy. 

Right now, the game has an unusually high percentage of past winners battling out against each other.  That has made the game tougher.  The trading is more disciplined.  The losers that were there to sell after the markets got very oversold, or buy after the markets got very overbought are history.  That helps explain some of the lessening day to day volatility.  And the lower volumes. 

Buying Exhaustion

The volume was epic today on the ES.  We reached 2.9M contracts traded, which is what I wanted to wait for before I put on my swing short.  So here was my checklist for a top:

1. An increase in volatility and failure to penetrate and maintain new high levels.  We had a sharp selloff yesterday on top of the sharp selloff today.  Thursday had a 18 point intraday selloff.  Friday had a 23 point intraday selloff. Check.
2. An increase in volume on a volatile day where the averages don't close too far up or down.  Check. 
3. Selling on positive news.  The nonfarm payrolls report was exactly what the bulls were waiting for and they bought it.  But they ran out of ammo and couldn't hold the fort for the 2nd consecutive day.  Check.
4. Gold sells off hard.  Gold was a key holding of the momentum fund manager and it cracked big today along with a stronger dollar.  It is down $55 as I write, or 4.5%.  Check.

I expect a gap down on Monday with follow through weakness throughout the day.

Topping Process

The kind of volatility and volume that we get today is a sign of topping.  Even with the positive nonfarm payrolls report, this thing can't crack 1120.  The markets don't want to go higher, and those who missed the train are trying to get in at any dip.  The volatility and volume of the past 2 trading days is an important sign of institutional distribution.  Now the easy money will be made on the short side till Christmas.  Any rallies up to 1115 next week will be an absolute gift.  For the rest of the day, I expect the market to rally into the close.   As for Monday, I think a gap down is more likely than a gap up, but no strong conviction.

Nonfarm Payrolls Pop

The numbers are out, and the bears are scrambling to cover.  It was apparent that the bears got a bit too bearish ahead of the number.  It is a crapshoot, but the jobless claims number coming in lower over the past couple of weeks was a hint that this number was not going to be as bad as expected.  Now the picture is muddied up a bit, it looks like we could go higher today, but we should see a little weakness from the opening bell, and then we'll probably keep chugging higher as bulls buy back what they sold yesterday. 

I believe the top will come sometime early next week, so I will hold off on the swing short.  But it is time to just stick with the short side from now on.  But at these levels, it is too risky to go long.  Dollar is unusually strong this morning after the number, and gold has sold off 2.5% below 1200.  This is a bad omen for coming days. There are unusual currents floating around at the moment.  I would stay away from the long side.

Index Call Volume Surge

There has been a notable surge in call volume over the past 30 minutes at the CBOE, with over 300,000 call options traded during the past half hour, compared to less than 80,000 puts traded.  This coincides with rising equity put call ratios throughout the day as the market goes lower.  I expect a gap up tomorrow after the nonfarm payrolls report comes out.  But the action in the financials today after the BAC news is a negative sign for the coming days.

Topping Pattern

What we have seen the last 2 days is intraday trading that is consistent with a broad topping formation.  You get early buying which pushes the indices to new highs, only to fall right back down below the open and trade below the open for most of the day.  This is the 2nd day in a row for this pattern if we close below 1110 on the ES.  This throws a wrench into my topping out on Friday prediction.  I do think we will have intraday weakness on Friday, but it probably won't be the top of this rally.  I will wait to put on my swing short, but I am probably going to get bolder with my daytrading shorts in the coming days.

BAC Payoffs Off TARP

The news of the day is B of A paying off TARP, partially through selling a bunch of shares in a secondary offering.  I guess that was expected, but I don't see how issuing $19B in shares is a positive.  I am looking for early weakness off the bell, and then a steady uptrend from midday to the close.  I believe the jobs number will push the market higher premarket on Friday, so I will be setting up accordingly.  Gold and the S&P are both setting up for good shorting opportunities soon.  I am thinking Friday will be the day to put on the position.

Preparing For Friday

This market is setting up for a bear capitulation on the nonfarm payrolls report.  The bulls are hardly giving bears any room to breathe, and I expect there to be strength in the 2nd half of Thursday and pre-market Friday.  Gold continues on its parabolic run.  It reminds me of crude oil in 2008.  Fund managers are continuing to pile in.  I think things could come to a head on Friday in both gold and the S&P.   As for overnight action, I am neutral, and don't expect any sizeable gaps. 

Coiling Up To Spring Out

We are a critical juncture in the market, we've gone sideways for the last few weeks, and are close to the long term objective of 1120 for many traders.  The convulsion last week serves as a warning sign about future market action.  The market always gives hints about its future direction a few days before it makes it move in earnest.  This happened on June 5 before the swing lower starting June 15, and October 21 before the swing lower starting October 23.  These were 10 day swing moves, that were 70 to 80 point moves on the downside.  I see a similar set up now that we've reached a level where the market is struggling to break out.  We may have a false break out which could be the perfect spot to get short for the next ride down. 

Gold Parabola

This is the momentum market in these times.  Gold has gathered an extra amount of prestige in this precarious economy.  It is the new barometer of speculative excess, like crude oil was in 2008, like the Nasdaq was in 2000.  There are outrageous price targets out there, $1800, $2000, $3000, just like there were outrageous targets for crude oil like $200, $250, $300 during its run up.  Like oil, the gold run up will end badly, but from what price?  I do believe gold will go up even higher next year as the fundamentals behind the move are solid.  Central banks are adding to stockpiles and investors are seriously considering adding gold as a bigger part of their portfolios.   There is a growing attractiveness of holding something that provides both protection against inflation and a "supposed" hedge against market crashes.  The second point can be disputed, because I believe gold is now firmly interconnected to the weak dollar story, as seen by its weakness last Thursday. 

We are close to the point where gold becomes a good short for a swing trade. There are limits to how high markets can go parabolic in the short term, and gold is pushing those limits right now.  At $1210, gold is probably a good swing short here.   Initial downside target of $1170, and then at $1150.

Need to Break 1120

This market released a lot of its selling pressure by selling off on Friday.  Yes, just 1 day.  But that was enough to panic a few weak hands and get the increase in put/call ratios necessary for a short term bottom.  Days like today come after the weak longs are flushed out.  Now comes the process of breaking down the wall of worry and rebuilding complacency among the longs.  The only scenario where I see a good risk reward short opportunity is on a break above 1120 which gets everyone bullish.  The nonfarm payrolls report could be the catalyst for that final blow off top.  In that case, I would like to see heavy volume and low put call ratios.  In the meantime, I wait.

Secular Bear Cyclical Bull

 This article sums up what I feel about the current situation.  We are in a cyclical bull market, I will not deny that.  But I don't think this is 1982.  No, I think its more like 1976.  Valuations don't support a launching of a new secular bull market.  In the past, secular bull markets arose from long consolidations and very low valuations.  There is a very good article below which shows past stock market history and compares it to where we are now.  An excerpt below is very prescient about the current situation.

As to the current business cycle position, Chart 4 shows that the stock market has been advancing for nine months while the economy is just now coming out of a deep recession. For their part, interest rates and inflation are near their lowest levels of the cycle. The shaded area flags where we are today indicates stocks can be expected to continue to do well as economic growth strengthens, and ultimately interest rates and inflation turn up.  Corrections will develop along the way but tactical asset allocation continues to call for stocks to be emphasized in portfolios.

http://www.riskcenter.com/story.php?id=19282

ISM Index

The ISM index will be closely watched at 10:00 AM, and should move the market a bit one way or the other.  Economic data has come in better than expected for the past week, but it hasn't elicited a strong upward reaction in the market.   We have gapped up big, with strength coming from Japan, where they have promised more liquidity in order to fight deflation and the strong yen, and in Europe.  The Dubai worries were another buying opportunity.  It is getting quite old, but every dip is being bought, and it is hard to fight that tendency. 

But negatives are creeping up.  According to Investor's Intelligence, the number of newsletter writers who are bearish are at their lowest levels since 2007.  The performance divergence between the S&P 500, Russell 2000, Nikkei, and the Eurostoxx 50 is the widest it has been all year.  American large caps are leading this rally and there are few followers.   This market is getting narrower with small caps badly lagging.  It continues to be a chase for performance.  Today's the 1st day of the month, which is usually a bullish day.  I will wait for extreme strength to short.  Otherwise, I am just going to wait. 

Die Hard

This market is doing its best job to frustrate the bears to the point where they all just give up.  If Dubai World couldn't do it, what will it take?  Long established bull trends die hard.  The sell set up will need a few more days to line up.  After a shock like we had last week, it takes a few days for the bulls to get totally comfortable.  The best time to sell is when the bulls are relaxed and comfortable.  We are not there yet.  I suspect a good jobs number on Friday will go a long way towards establishing that objective.

A Little Fear

Despite the flat indices, there is a bit of fear noticeable in the equity put call ratios, which are high for the 2nd consecutive day.  It is usually a positive to see higher put volumes in a flat tape.  I expect the market to oscillate for the rest of the day. The Dubai fears, although downplayed, still have some traders nervous, and that's usually enough to put in at least a very short term bottom.  Strength in crude oil and the return of dollar weakness means risk is being put back on.  I expect the next 20 points to be higher.  But I am not playing the long side because I expect the move to be the last hurrah for the bulls, and a risky play.

Another Mutual Fund Monday?

We've got the futures moving in a wide range overnight, going up to 1098 during Asian hours, to fall down to 1084.5 during Europe, and now back to 1093 as I write.  The action speaks to the mixed picture in the market.  We aren't overbought anymore, but we're not at levels of fear or weakness that makes for a good buy opportunity.  There is also end of month/beginning of the month liquidity factors that are in play for the bulls.  We've had very strong Mondays over the past several weeks, and we are slightly up on the futures in anticipation of that.  The Dubai situation I suspect is just another wall of worry that the bulls will climb.  For now.  It has awaken credit problems which have largely been ignored during this rally and should resurface again.  Overall, I see us more likely to go higher than lower, but its almost a toss up.  I will watch and wait for a better setup.

Big Swing

"I always had or felt that I had to make my daily bread out of the stock market. It interfered with my efforts to increase the stake available for the more profitable but slower and therefore more immediately expensive method of trading on swings."
- Reminiscences of a Stock Operator, Chapter 8

Daytrading is profitable, but it can take away one's focus from the more important pursuit of catching the big move, or swings in the market.  I always felt like money came easier when I anticipated the coming intermediate term trend and rode it for all its worth.  The current trend is clearly up, but we've been going sideways for a few weeks, and a new directions seems to be emerging.  I want to catch the next 60 points.  In order to do that, I have to ignore the next 10 points, and not let it distract from the bigger goal of catching the next swing.  Which I believe to be down.

On Friday, I underestimated the strength of this market and the power of momentum.  The momentum of this market is still up, so traders will not panic easily.  I paid the price for my errant call.  Now its time to wait for my next play.  I will cut down on my daytrading so I can focus on positioning myself for the next swing.  It may be more immediately expensive and slower, but it will eventually be more profitable.  It should also prove to be less stressful as I won't sweat over a few point move against me, like I do when I'm daytrading.  The money is made in catching the big move, not a few little moves here and there.
 

Rough Times

Well, we expended a lot of effort to lose 20 points on the ES in 2 days.  That must have been the hardest 20 points on short side that I've ever seen.  If you were not overnight short on Wednesday, you missed it.  I run out of expletives when it comes to describe this market. It is horrible for a bearish trader like me who likes to play past market patterns.  The moves are not that predictable and the underlying strength is noticeable.  I don't know if this is a bull market, but it certaintly isn't a bear market.  It seems to have  changed character to a range bound market, a market that doesn't like to go up or down much.  ES above 1105 induces weakness and ES below 1085 induces strength.  A very narrow range to play.

Unfortunately, today expended a lot of the fear component that was bottled up for several weeks.  That makes me hesistant to short aggressively.  Psychologically, it now becomes trickier.  Investors are no longer completely complacent, and they are not fearful.  The only strategy that I can build from the past 2 days is to wait for the complacency to rebuild itself by the market going sideways/higher for a week and then go short again.  And that short will be to hit a double or a triple.  I am looking for 60 points in that case.  If we fall hard before then, I miss the move and wait for the next high percentage setup.  Being patient is better than forcing trades when things are not going well.

Feel Like OJ

That was a giant bear trap and I got squeezed looking for a selloff.  Time to wait for the next chance.  It is still too early to get aggressively short.    This market is not ready to panic just yet.  Betting on others to panic often doesn't pay.  Another opportunity awaits next week.  I will wait.

Not Much Panic

I think the last thing the bulls want to see are the futures rallying ahead of the US market open, from European trade a few hours earlier.  It seems like that is the best tell of sentiment.  When futures are going down towards US trade, the sentiment is bearish.  When they rise ahead of US trade, the sentiment is bullish.  I think most people are viewing this selloff as a buying opportunity.  I think its too early to be thinking long here.  I see 1060 in the cards by next week, easily.  I would not rule out a move to 1042 by the end of next week.  Dubai is just a symptom that the world economy is not as healthy as the markets make it seem.  I think we're in for a bumpy ride today and next week.  I will not be going long and will be staying on the short side.

Don't Be Complacent

I guess the market does the best to fool the crowd.  If I see complacency from the CNBC crew on Friday, that will be icing on the cake.  A big selloff in the face of complacent investors.  Dubai default is just an excuse to sell.  This market wants to go lower to remove the froth that has been building.  There are too many bulls on the momentum train right now and the market will do its best to shake them off.

A gap down of over 30 points after a 52 week high!  This market is changing character.  The signs are all there, bad breadth, lagging crude oil, rampant gold speculation.   Surprisingly the move starts in overnight markets.  In any case, the genie is out of the bottle.  Get ready for lower prices in the coming weeks.  The year end rally is NOT a given.

We're Going Lower

This type of move off the 52 week highs usually mean we're not done with the selling.  A 25 point down move is a bit of fear, 41 points is borderline panic and it doesn't subside in just 1 day.  We'll probably selloff on Friday and probably oscillate on Monday.  Around 1060, there is support in the ES and that could be a momentary pit stop on the way down to 1042. 

Thanksgiving Day Massacre

Who would have thunk it?  A 25 point move down in the ES on Thanksgiving Day?  I don't think you can script it any more unpredictably.  I don't know anyone who saw this coming, I expected a gap down of a few points, not 25.  This is not because of Dubai World.  Here are my thoughts on the current situation:

• We got overbought and investors got too complacent expecting a Thanksgiving rally.  Market doesn't make it that easy. 
• Sentiment readings are too bullish, not enough bears.
  
• Short sellers were scared to get short ahead of the holiday.  This market is lacking in weak shorts.  Only shorts left are strong hands that will not cover easily.  
• Eventually, dollar weakness becomes a cause of equity weakness, not strength.  It eventually scares away investors who fear global currency instability.  
• Weakness in crude oil, bad breadth, divergences showing failure to make new highs in Japan and Europe during November. 

However, the lows around 1083 are solid support in overnight hours and I think the damage has been done in the overnight markets.  We'll probably make a slight recovery heading towards 1090 going into Friday morning in the futures. 

Friday Trade

I expect there to be a little gap down on Friday based on the price action and the price level.  But I do think Friday will be strong because there will be nobody around and the bulls will be the ones manipulating trade, not the bears. 

Weakening Dollar

If I told you that the dollar index would be down 0.8% and crude oil would be up 2.3%, how much higher would you expect the market to be?  1%? 1.5%?  Well, we're up 0.25% in the S&P right now as I write.  Financials are weak, and the only thing holding this market up right now is that shorts don't want to be short over Thanksgiving and the weekend.  Oh and it doesn't hurt to have no volume, which is a good way to stop the selling.
I don't know anyone except the most hard core shorts who remain short right now.  Most traders are either long or on the sidelines.  With a lack of weak shorts, I don't see any big short squeezes.  The remaining shorts are not going to cover on a 2% up move.   I am feeling a strong down draft coming, timing it is tricky, but I see it happening within the next 2 weeks.

Game Plan

Its a fight for field position, the bulls are not giving up any ground, so as smart bears, we need to yield, and with the Thanksgiving holiday preventing much from happening, bulls can paint the tape as they wish.  I think Friday will be the day to put back on the shorts.   I am watching for now. The sentiment numbers from Investor's Intelligence points to there being too many bulls and very few bears.  The market is ripe for a fall.

Jobless Claims 466,000

That is the number that will get the bulls coming out in droves.  Now that we've got job losses under control, what else is there to worry about?  Plus its Thanksgiving holiday.  A rally is a given.  Isn't it?  Well, I am going to be fading this happiness ahead of Thanksgiving, I see poor risk reward on the long side at 1110.  The ducks are quacking and I am going to feed them.  Michigan consumer confidence and new home sales are also due about 30 minutes after the open.  We have the dollar weakening again, and gold squeezing higher again.  This perpetual money machine of weak dollar and higher asset prices is starting to reach a crescendo, I don't see this lasting much longer.

Japan is Oversold

I expect the Nikkei market to make an attempt at a recovery, it has taken a drubbing over the past couple of weeks while the US, European, and Chinese markets have glided higher.  It could provide a sparkplug to the ES futures in overnight trade.  It is closing in on the lows that it made in July, around 9000-9200 area.  The S&P was trading around 870-890 at the time!  So the Nikkei has gotten too cheap relative to the S&P.

 

Strong 5-Year Auction

The trading is getting slow we are working a 3 point range over the past 2 hours.  There was a strong 5 Year Treasury auction and the market had a very small pop.  I don't expect any fireworks for the next 3 hours.  Fed minutes are coming out at 2:00 PM, but that's not likely to be anything spectacular.  Today seems like a battle of the bots.  Don't have a strong opinion on the rest of today's action.  Just watching and waiting.

Bearish Signs

Typically on a day like Monday, with a big gap up and subsequent squeeze in the 1st hour, its not common for the market to slide down for the rest of the day.  It is abnormal price behavior.  There are no set rules in the stock market, but there are patterns that usually signal weakness or strength.  Yesterday, despite the up 1+% number, showed weakness to these weary eyes.  Also, crude oil underperformed and a wide range, going from high 79s to low 77s while the stocks were sliding slowly lower.  Finally, we had bulls being stubborn, with the put call ratio very low, especially the equity put call ratio.  Also, we were turned back forcefully from 1111 again.  We are topping out here, and the next 40 points looks like its going to be down, not up.

Stuck In a Range

This market keeps getting turned back around 1110, there seems to be no mad dash to seek higher levels.  In the meantime, I expect us to trade in a range of 1080 to 1110 for the next few days, and from that range trade, we should find our next direction.  The market seems toppy, crude oil is struggling anytime it gets to $80.  Crude oil is the barometer for how much liquidity can trump fundamentals.  The widening contago is a sign that end demand is not very high.  I keep hearing about this Thanksgiving rally and positive seasonality, which probably explains today's rally.  I think we've front run the turkey rally and those expecting others to buy at higher prices just because its Thanksgiving sounds silly to me.  I would not be surprised to see lower prices on Wednesday.

Premature Holiday Optimism

The put call ratios have crashed down, the equity put call ratios are below 0.5 on the CBOE.  The overall put call ratio is low at 0.64.  On the ISE, you have the ISEE index at 217, which is heavy call buying.  The market made its top in the first hour on the existing home sales data and have been slowly sliding down.  The bots and fund managers are trying to front run each other ahead of the "Thanksgiving rally".  All the buying happened in the first hour and prices reflect a lot of optimism.  Fundamentals are not strong enough to keep S&P above 1100 for long.  I am bearish for the 2nd half of the day.

Jumping the Gun

The institutions couldn't wait to buy ahead of holiday seasonality and the futures have ramped up 1%.  Above 1100, the buyers are hesistant, and I don't think that's going to change this week.  Last week's pattern was that of an upside down U.  I believe this week's trading will be shaped like a U.  Unlike last week when we opened around 1100 after gapping up 1%, this time the market has already failed at breaking out above 1100 so today's action should be quite different than last Monday's.

The market still has not worked off the levels of optimism over the past couple of weeks.  With the general complacency and lack of fear, I don't see any strong squeezes higher.  I would be surprised to see a gap and go  move today. Today's project is for the market to sell off during the first half of the day with heavy resistance right above 1100. 

New Market Environment

In the past, it was absurd for traders that made money to write books and reveal their methods.  That has changed since the 90s, maybe because the markets have gotten bigger and the edges have gotten smaller.

Mean reversion used to be the key to profits in the stock market, until hedge funds started to take over the world and institutionalize those strategies.  It still works, just not as well as in past markets.  Same can be said for trend following the commodities market back in the 1970s.  Once a strategy becomes popular among the institutions, be it trend following or mean reversion, it ceases to be as effective.  In some cases, they turn into negative EV (expected value) strategies.

As a student of the markets, I view systems trading as an admission of defeat.  A trader is admitting that a rote system is better than he is.  Systems don't adjust to market conditions or have any "AI".  To say that a system can beat a good trader who can analyze scenarios for news/earnings, factor in psychology, feel the price action, and adjust for changing conditions effectively is saying a lot.  I've always admired traders like Paul Tudor Jones, a person who put his whole energy into trading, who didn't rely purely on charts or fundamentals, but traded on feel based on market fundamentals, investor psychology, charts, and past experience.  There are guys like Jim Simons who program systems to make consistent profits but he's constantly changing the systems and reanalyzing results with a team of geeky programmers with quant backgrounds.

The war out there in the markets gets more and more competitive.  The speed of the market is much faster than even a few years ago.  I'm not talking about reactions to news or economic data.  I'm talking about intraday and swing patterns.  Swing patterns that used to last 3 days is compressed into 2, obvious intraday patterns are gobbled up immediately and leave the hesitant behind.  For example, this past week, I projected an intraday reversal on Thursday.  Instead, the selloff started during Asian hours, instead of in the middle of the day on Wall Street.  These days, pullbacks in uptrends during bullish days are almost nonexistent, like a stairstep up pattern, up and then flat, up and then flat.  Same with bearish days, down and then flat, down and then flat.  The bots have run amok in the thinned out field and have taken away the emotion of trading.  Fear and greed are now computerized into programs which make buy and sell decisions based on blackbox signals.  The only way to win in this game is to constantly adjust to the new environment, yet still maintain a sufficient amount of conviction.

Trying To Be Perfect

This week's trading was an example of the negative aspect of seeking perfection.  Let's say your plan is to sell at 1115 on the ES.  The market goes up to 1112 and and turns down that day, going down to 1108.  The next day it only goes up to 1109.  The following day it only goes up to 1109.  The next day it crashes down to below 1090.

I missed a 20+ point move trying to be perfect with my entry.  I had ample opportunity to sell it at 6-7 points below my target sell price.  And pick up 20+ points of a downside move.  I was trying to be too perfect.  So I missed the whole 20+ point downside move.  Often times its just better to go in with a 1/3 position or 1/2 position and sell a little lower than you want to.  Especially if you have a lot of conviction about the intermediate direction.  I ended up selling at much lower prices on Friday because I didn't want to miss a further move down.

Also, trying to collect all the moves by micromanaging trades can often be more costly than just sitting tight.  You know its a trend down day, but you want to cover and reshort higher 1 hour later.  Well, if its ends up being a strong trend down day, you usually won't get much of a chance to reshort higher.  That's the fault of trying to catch every little move micromanaging to the extreme.  

Bottom line, if you have a lot of conviction about a trade set up, don't be so picky with your entry price.  But, from my many experiences, if the trades is going in your favor, do be picky about your exit price. 

Monday Should Be Ugly

The options expiration action kept the bears at bay, and with this low volume, options expiration games took control of the final hours of trading.  With the opex out of the way, I expect a hangover on Monday.  The key theme of this week was to get the bulls complacent with the false break over 1100, and then set up weakness for next week with Thursday and Friday's price action.  We are nearly unchanged on the week, I am sure bulls are very confident, maybe too confident, with the Thanksgiving holiday coming up.  But this market is showing signs of weakness which should be fully exposed on Monday.

Feeling Like a Kodiak

The action is clearly bearish.  I shorted earlier in the day and I will ride it out for all its worth.  FMHR has 3 to 1 bulls, despite the sluggish action. I am seeing call buying increasing over the past couple of hours.  The volume is very low, despite it being options expiration.  Looks like the sellers are waiting to sell a rally.  The market seems to be setting up for further selling.  I am bearish here for the close.

P.S. - If we don't have a selloff in the next 3 hours, due to options expiration effects, I expect heavier selling on Monday.

ICE Dollar Index Futures

A fat finger error is being blamed for the massive selloff around 7:05 AM ET.  The dollar index futures on ICE skyrocketed, and now a lot of the orders are being canceled.  In any case, the aftereffects are lingering, and I think this market has suddenly turned skittish.  I will hope for a gap close to sell short.  I think we're getting set for some turbulence.  We are overbought, market has turned, and we're on day 2 of the pullback.  I'm looking for losses today and/or Monday. 

Pullback Pattern

The pattern since the March lows has been for the market to get overbought after rallying, pullback for 2 to 3 days, with most of the losses occurring during the first 2 days of the pullback, and then launching higher again.  The chart below shows the pattern, look closely at the pullbacks, the biggest losses usually occurred on day 2 of the pullback, which would be Friday.  The pattern suggest to get short around the open on Friday and wait for weakness later in the day or on Monday.

Time to Sell

Playing long now is very dicey.  I have looked at all the indicators and charts, despite tomorrow being an options expiration, there should be one more very negative day either Friday or Monday.  I don't expect much upside from the ES close at 1094.25.  The gap fill at 1067 is beckoning, and any chance to get on the short side tomorrow close to 1099 will be a gift. 

Limited Downside Today

FMHR was 4 - 0 bears, with one of the bears a sell on weakness call.  I see limited downside today and expect a little squeeze into the close.  A new feature has been added, which shows the Bulls Bears for the close for Fast Money Halftime Report (FMHR).  It is on the side bar.

Missed It

The market is throwing curveballs, the gap down and selloff was not typical action following the past 2 days of low volume trading.  I totally missed this down move.  The volume has come out like gangbusters.  Is it possible to get rid of the overbought reading by going sideways for 2 days followed by 1 whack?  I would not count that out.  I don't see a good risk reward to chasing the market here on the short side.  If I had to choose, I would rather go long than short.   But today, we'll probably trend down a bit more before having a little short covering at the close.  

Sticky Situation

Market is too high and overbought to go comfortably long, but we've gapped down and too negative this morning to go short.  Sometimes the best trade is to do nothing.   I didn't see the price action that supports a gap down and sell scenario. Crude oil is only down 0.37, and dollar is slightly stronger.  We've got downgrades of INTC and TXN.  Not exactly the catalyst that should plunge this market lower.  The options trading the past few days have not shown any extreme call volume, that one would expect for a market near 52 week highs.  It seems like we've got a wall of worry.  I do believe that we will rally from the open and fill the gap.  But I will look to short before this week is over.

Short Squeeze Imminent

The action today tells me we are not done with the rally.  I expect a short squeeze tomorrow that should be the final capitulation.  The sellers are demoralized, there is no ammo on the sell side and buyers are still not loaded up, as seen by the low volume.  Once the buyers bring in the volume, that should be the top.  We will likely have a strong 1st half of the day tomorrow. 

FMHR is Bearish

The Fast Money Halftime Report (FMHR) had more bears than bulls for the close, and I don't expect this market to fall apart today, so I expect this market to settle down before rallying into the close. 

Too Quiet

The bots are trading amongst themselves because no one else seems to be trading the past 2 days.  ES Volume was less than 1.5 M yesterday, the lowest since October 12, which was Columbus Day.  Today the trading is just as slow.  Considering the move that we made over the past 2 weeks, and especially on Monday, this is bullish action.  The dollar and the markets seem to have lost their connection, the dollar was up a decent % yesterday, markets were flat.  Dollar is down a decent % today, markets are slightly lower. 
The next move from this little range is probably higher.  But I can't make myself buy the market with the bullish sentiment out there.

More Bulls

This market is not going down.  This is a very stubborn market and it is testing the patience of the most die hard bears.  The volume has been so low throughout this rally that the bull fuel is not all used up.  There is no high volume spin that I like to see at market turns after a long rally.  There is not enough volatility.  I want to wait for these signs before I put down my core short position.  I will only short on strength here, this is too strong an up trend for me to short weakness.  1120 will be an ideal spot to get short before Friday.  As expected, Investor's Intelligence sentiment has gotten a bit more bullish as the market has gone up.  Bulls are up 1.7% to 46.1%, bears are down 5.4% to 21.3%.  Most fund managers expect clearing sailing ahead till year end.  I think there will be bumps along the way. 

9 Point Range

We had a 9 point range from top to bottom today for the ES session, from 4:30 pm ET Monday to 4:15 ET today.  That is an extremely narrow range.  Of course, the light volume is a negative for the bears after yesterday's rally.  Usually after a 1+% up day, narrow trading means that there is acceptance of current levels for now.  The most likely scenario I can picture is a move higher to test 1120 tomorrow or Thursday, and then fall back lower till early next week, and then a Thanksgiving Day rally next Wednesday.  I will be watching for one last gasp run up before the buyers exhaust themselves. 

Fed Says No Bubbles

Bernanke, Kohn, and Yellen all say there is no bubble in the asset markets.  These clowns don't have a clue about asset markets.  They exist to bail out banks and to flood the market with liquidity whenever the stock market goes down.  The Fed is hell bent on blowing another bubble.  On the sentiment front, I am hearing more investor talk about overvaluation as S&P has surpassed 1100.  Yes, stocks are overvalued but that doesn't really help my trading.  I will not short off that.

I noticed that the dollar etf, UUP, is up 0.72% while the S&P is down just 0.28%.   I will not be short just yet, but I am getting more bearish and I doubt we go much higher.  Tomorrow or Thursday should be day to lay the hammer down.  I hope to see some volatility on one of those days to signal that we have reached a top.  If there is little volume or volatility, the short signal will be weaker.  I will probably just be watching today till the close.  FMHR was 2 bulls, 1 bear, 1 neutral.

Healthy Pullbacks?

No one wants to buy the top, but many want to buy a pullback, when the pullbacks continue to be shallow, the trend is not vulnerable, and likely to continue.  Deep pullbacks within a long uptrend (more than 3 months) are signs of topping and signal a trend reversal a few weeks to months down the line.  Healthy pullbacks is an oxymoron, the more pullbacks and recoveries, the weaker the uptrend. Strong markets do not let you in.  Well, this market has had a habit of not letting buyers in for most of this rally, but things changed from around middle of September.  On the daily closes, we had a 35 point selloff from 1013 to 978 in August, another 35 point selloff from 1029 to 994 in September/October, a 46 point selloff from 1067 to 1021, and a 58 point selloff from 1091 to 1033 in October.  It is looking like a megaphone.  The pullbacks are getting deeper and after an 8 month rally, plus increasing bullishness and complacency, that is a big warning sign that the trend is about to change. 

Fast Money Curse

Bulls were 4-0 on Fast Money, and we are getting the reversal in the indexes that one would not get unless you get the blatant bullishness that you can only gauge on a place like Fast Money.  At these levels, the bulls have very little room for error.  There are not strong longs or strong shorts.  Everyone is a weak holder in a game of musical chairs.

P.S. - A market that can be shaken loose by Meredith Whitney being bearish again is one that is wanting to go lower.  I will be looking to put on another bearish position soon.  Odds for a gap up tomorrow are low.

Money Coming In

Today's action is not about any news or fundamentals.  Retail sales ex autos came in less than expected, and total retail sales beat expectations.  Empire Manufacturing Index came in below expecations of 30.00, coming in at 23.51.  The way the market reacted to Bernanke's talks about the dollar shows the strength for today.  The market initially sold off on a rally in the dollar and then bounced back strongly.  Traders have seen through any tough talk about dollar concerns. They know the Fed will do nothing about the weak dollar for a very long time. 

Monday is basically a chase for performance.  Fund managers coming and deciding that they need to keep up with the averages and they are buying aggressively.  This could even continue on for the first part of tomorrow, but  the buying would be exhaustive, as we are overbought and have gone up 80 points in 2 weeks.  I will stand aside today, and then look for a spot to sell on Tuesday. 

Throwing in the Towel

I am out of my short position for now, I will reevaluate tomorrow to see how far this market can go above 1100.  Above 1100, there is no serious resistance till 1120.  Bulls will have their day today, I don't expect any reversals, in fact, I expect a trend day higher throughout the day.

Curious Strength in the Futures

Most of the gap up so far can be attributed from a move that occurred from 6:00 PM EST Sunday to 7:00 PM EST Sunday.  Bascially, if you didn't buy the ES from 6:00 PM to 7:00 PM EST, then you missed most of this gap up move or even lost money. This kind of move that is this strong is quite uncommon without any kind of news, this is usually a post earnings event type of move.  Crude oil is lagging the ES again, and the European markets after gapping up, have gone slightly lower.  I am projecting weakness in the 1st half of the day based on resistance at 1100, European trade, and failure of crude oil to rise strongly in the face of strong equity futures.  

Optimal Bet Size

One of the unique aspects of risk management is that it is not linear.  Doubling your risk doesn't normally double your returns.  And reducing your risk in half doesn't normally reduce your return in half.  Below are 3 charts that show returns for 2 good traders that have a 100% return over 2 years.  There is trader A, a risky trader who takes bigger risks, and trader B, one who takes smaller risks.  Their returns are the same for their usual bet sizes.  But if you reduce their bet size in half or double their bet size, the returns change drastically. 

Trader B's returns scale up better when more risk is taken, but scales down worse when less risk is taken.  I think most traders that have lasted more than a few years have returns more similar to trader B than trader A.  These traders should take more risk. 

What I'm trying to show here is that there is an optimal bet size for trades.  You bet too small, you will have less than optimal returns.  If you bet too big, you will have less than optimal returns.  But what I've noticed is that compared to the risk management literature, the bigger your expected returns, say 100% return over 2 years, you should be willing to bet big and deal with big drawdowns.  But not too big.  Look at the double volatility chart.  Good aggressive trader A gets crushed despite doubling up on risk compared to conservative trader B. Traders should look at their own returns over the past few years and decide, am I optimizing my growth rate of account value?  I would guess that most good traders are too conservative.  If you are not a good trader, betting small is the best way to go until you learn to become  a good trader.

 

 

Following Kelly

In professional gambling, the Kelly formula is frequently used to determine the proper wage size to maximize bankroll growth rate. The formula is:

f* = The fraction of a player's bankroll which should be wagered.
b = Odds the player is receiving on the wager. 1 to 1 odds would be 1.  2 to 1 would be 2.
p = The probability the player will win the wager.
q = The probability the player will lose the wager.

For even money bets, or 1 to 1 risk reward trades, formula can be simplified to:

f* = 2p - 1

Most gamblers view Kelly betting as being very aggressive and many gamblers like to bet half-Kelly to minimize variance.  Based on this formula, most good traders are underbetting their bankroll.  I would venture to guess very good traders have a 60% probability of winning on their 1 to 1 risk reward trades.

f* = 2(0.6) - 1 = 0.2.

So these traders should be willing to risk 20% of their bankroll in that case.  Or 10% in the case of half-Kelly.  Personally, half-Kelly seems to be appropriate given the tail-event risk of trading in the financial markets not found in blackjack.  But I often hear 2% or 3% of a bankroll should be risked on any one trade.  I believe that's way too low for good traders and it will take you too long to make good returns.  In order to make money fast, one has to bet big and deal with some drawdowns along the way.
There is a Kelly calculator that shows you the proper wager based on probability of winning and odds for winning.

Bear Time

I have put on my bear suit. I gave the bulls as much time as they needed to jam up this market.  With the struggle to overcome 1100 and the negative divergences in breadth and crude oil, I am looking for a turn.  The only drawback is that I didn't see the kind of enthusiasm that I like to see when we were around 1100.  Sure, the put call ratios were low and there was some complacency, but I didn't see the heavy volume turnover that I like to see for a longer lasting top.  Thus, I expect the weakness to last for only about 3 or 4 days.  I am projecting a gap down on Monday kicking off next week. 

Don't Get Fooled

Today's action will seem bullish to many traders as they head out for the weekend.  I see it differently.  I see a market that is overbought and has serious resistance at 1100.  That doesn't make me a bear for today, because I think today will be another short squeeze Friday.  But come early next week, bears should be able to pick up some points as the market retraces some of the rally.  We've gone up from ES 1026 to 1103 over 2 weeks.  A 50% retracement of that move next week would not surprise me, which would be 1064.5.  FMHR is 3 to 1 bulls to bears, with the bear not very enthusiastic.  I am looking to reverse my position by the close.

Weakness in Crude

Well, this market is hanging tough despite crude oil selling off in the past hour.  I view crude oil as a canary in the coal mine.  It is telling me that the speculative fuel for this rally is running low, and stocks are near the end of their rally here.  But I have decided to dance between the raindrops and I am bullish for today, as short covering comes in and longs decide to add exposure before Mutual Fund Monday.  The European markets were basically flat from today's open to current prices.  Yet S&P futures are up on the day.  That is what you call the overnight premium.

Back to Monday Levels

We are getting a pullback from the 8 day uptrend, ahead of a Friday in which traders will likely not want to be short ahead of the weekend.  There is good support around 1085, which makes it a compelling risk reward at these levels.  If we fall below 1080, then I am wrong, but I believe we will have a strong Friday.  I have gotten long near support and will be holding overnight.  I will close out the trade sometime tomorrow. 

Buying the Dip

If the market can go a bit lower today, down to around 1085 area, the lows for Tuesday, I will look to go long for a trade to hold overnight.  I don't think we're gonna roll over just yet.  I don't see the dollar rallying much further, and I expect traders to cover shorts, and get long again on Friday hoping for more fund buying on Monday.

Getting Closer

The weakness premarket and the reactive up then down reaction to better jobless claims numbers tells me we are running out of fuel on this leg up.  I am still just watching, and will not be too active in the opening hours.  One thing I have noticed over the past few days is that Japan and Korea have been seriously lagging the US and European markets during the up moves in October and this month.  It was not that long ago that the Asian markets were outperforming the US markets.  The weaker dollar doesn't help these markets.  Oil has also been lagging on this up move as well.  Negative divergences are creeping up, but that by itself will not stop this market.  We need a bit more time for investors to shift into their bullish positions before things change.  A close above 1100 will get me more bearish in the short term.

Make It Eight

Today was the 8th consecutive higher close for the ES.  Once this market gets going to the upside, it doesn't let any buyers in.  Buyers have to pay up or they can't get in.  Volume is low, which means not many investors have jumped on or jumped off, and turnover is low.  Basically those who held through the dip in late October/early November are still probably holding now.  A logical conclusion from this is that stocks are in stronger hands than they were 3 weeks ago in middle of October.  That's why I am waiting for higher prices to get short.  This is not a double top scenario.