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.

Still Too Early

This market needs to be given more room to go higher.  Today's highs will likely be revisited soon, so I don't want to push it here and have gotten out of my short position.  FMHR was 2 to 2.  I am neutral on the close, so I will just watch, I don't expect any fireworks.  There are some chinks in the bull's armor that are starting to show.  We are starting to get a bit more intraday volatility, but volume is still too light for my taste.  A good short set up should arrive within a few days, there is no rush to short.

Bears Show Up

The bears know how to be dramatic, they were hiding in the woods and while the bulls were grazing and have ambushed them after they got giddy on the false 1100 breakout.  Looks like bulls will be sidelined for a few hours before they gather themselves for the close.  Market is convulsing at these sky high levels, the air is thin, and that's how you get these sharp down moves.  I am just watching for now, but things are starting to get interesting. 

Zero Gravity

Got your spacesuit ready?   We have liftoff in the futures, approaching an area where there is almost no resistance, between 1100 and 1120.  I don't advocate chasing any breakouts.  There is no news out there, just more dollar weakness, and strength in the European markets.  I will sell to the astronaut wannabes who are buying here around 1100.  But this is a daytrade where I am looking for weakness in the first couple hours of trade.  I do not want to hold short overnight just yet.  It is both a time of great opportunity and also one that requires good timing.  Timing can make the difference between a stress free short and one where you are sweating bullets as the market goes higher.  Gold is a punch filled party where the longs are having the time of their lives.  Unfortunately, I have no position in gold, with no plans on playing it either way.   Today is Veteran's Day, the bond market is closed, so I expect another low volume day. 

Bulls Got What They Want

A low volume consolidation day where the markets remained basically flat over yesterday, despite being lower for much of the middle of the day.  The buyers taking a break means the market is flat, not down.  Flat is the new down in this market.  Those looking for a top have to be patient here. It is coming, but it will have to be on a day that has more volume, days like today usually don't form tops.  The next area of resistance is the 2009 highs, around 1099 on the ES.  That should be the line in the sand in the coming days.

No Edge

At current prices, I don't think there is an edge either way for the close.  I can't picture a major selloff from current levels, but I also can't picture a big squeeze into the close either.  We have come a long way in a short period of time, we are no longer oversold, and starting to get overbought.  Volume is low, which is a good sign for the bulls.  FMHR was 2 to 1 bulls.  Unless something drastic happens, I will remain on the sidelines.

Magic Carpet Ride

Its a levitation act, this stock market. It feels unnatural, almost unbelievable. Why is the stock market going up while the economy is still in a deep recession and has 10.2% unemployment? How can oil be at $80 in this scenario when 3 years ago, with a decent economy, oil was at $60? Its hard to believe, so that's why we've seen the low volume. The buyers are not plentiful, for sure. But there are just so few sellers. Shorts are very reluctant to get their heads bashed in again. Those who don't believe, either sold already or are waiting for that elusive 8-10% correction to buy.  So the rally goes on, until it exhausts itself by going too high and succumbing to the forces of fundamentals. 

Today, we have a gap down and I will not be shorting yet, but we're very close to the highs. We are too overextended short-term to pierce them today, so I will short if we get close to new highs, for a scalp.  No core positions being built today.

Chase for Performance

Today was a classic day after bad news is out relief rally.  We got the bad employment numbers Friday, gapped down on it, and rallied.  Basically that rally has just continued on to today.  All the funds chasing performance bought and had no choice because others were buying.  Now we're right around 2009 highs for the S&P.  It's almost as if nothing bad happened and everything bad over the last 2 weeks has been forgiven.  Very tough to be a short here, I am on the sidelines.  It's back to the waiting game.  I await a heavy volume trading day to put on my core position.  We just might need to make new 52 week highs to get it.

Selling soon

I am anticipation a bit more of a push higher today which I will short.  Fast Money Halftime Report (FMHR) was 4 to 0 bulls for the close.  They all seem resigned to the fact that this market can't go down today. There is a lot of resistance right above current levels, between 1086-1089 on the ES.

Bearish setup in Crude

Based on the Committment of Traders report, the large speculators have been increasing their bullish positions and reducing their short positions.  Their net long position over the past 2 weeks is the biggest for the year.  Also a bad sign is that small speculators are jumping on the bandwagon and going long.  The commercials are usually the smartest money and usually hold the strongest hand.  The speculators will be the first to sell when the sentiment changes. 

Only bad thing about these COT reports is that they are delayed 3 trading days, which means Wednesday, Thursday, and Friday trading action is not included.  On Friday, some speculator liquidation seemed to have occurred as crude sold down despite a positive day in stocks.  Hurricane Ida, weaker dollar, and rising futures have taken crude up in the overnight session.  As I project that equities will go down  in the upcoming weeks, crude oil should go down even more.
Following chart is from cotpricecharts.com.

Squeezing Sleeping Bears

Market keeps spanking the bears, even while they're asleep.  The hard core shorts must be masochists to endure this kind of beating over and over again for the past 8 months.  Well, I used to be one of those hard core shorts.  But I've adapted after being conditioned to sell rallies from fall 2007 to spring 2009.  I am still bearish, but shorting when the market is at 1300-1400 is different than shorting it when its at 1070.  Thanks to the jobs report, I was able to avoid some pitfalls on the short side as its a good practice to avoid shorting after such anticipated bad news.  I have shorted small into this big gap up here.  Shorting big gap ups when there is no news is kind of dangerous.  I would much rather be shorting a gap up after good earnings or good economic data. 

Stealing the RTH move

RTH = Regular time hours, which is 9:30 AM - 4:00 PM EST.  This is a phenomena that I've noticed over the years in the S&P futures.  It basically accounts for much of the premium one collects for willing to take overnight risk in equities.  They all have positive biases.

• 4:00 PM - 4:15 PM:  After the stock market closes, 15 minute of trade just in the futures market, volume is still heavy, last minute squaring up of positions and setting up for the next trading day.  Usually after a strong down day, you can get a flush out at 4:00, and then trade higher over these 15 minutes.  Opposite for strong up days, but the trade lower is usually fairly muted.   In bullish markets, very positive bias.  In bearish markets, slight negative bias.
  

• 2:00 AM - 3:00 AM:  The hour before the European markets open, and after Japan and Korea have closed.  The ES likes to make stealthy upmoves during this time period and this is where much of the overnight premium is collected.  Volume is light so it doesn't have a lot of meaning, but risk takers bid up the futures a bit after being confirmed that armaggedon didn't happen in Asia (half-kidding).  

• 7:00 AM - 8:00 AM:  This usually only applies when the futures are negative.  After weak trade in the European session, American traders looking to fade the gap down come in to lift the futures up a bit. 

Following is a chart comparing day trade to overnight trade based on a statistical study.

Growth of a $1 investment in night returns (close to open, heavy blue line) and day returns (open to close, thin green line) from 1993 to 2006 in the S&P 500 Spider (SPY) exchange traded fund.

Trend Lines

Drawing trend lines to support a bull or bear case is common in this industry.  And probably one of the most useless exercises.  Technical analysts love to draw trend lines.  And the TA junkies eat it up.  A few problems arise.  Do you use linear or logarithmic charts?  Depending on the individual, lines can be drawn in hundreds of different ways for the same chart.  A slight change of the slope of the trend line can make a huge difference on the position of the trend line on the right side of the chart.  See chart below.

I find looking at charts useful. Such as finding support and resistance zones and recognizing certain patterns. But trend lines are useless.  Successful traders that use trend lines are successful because of other forms of chart analysis, fundamental analysis, or statistical analysis.  Not because of drawing a bunch of lines on a chart.  If someone tells you to buy or sell a stock/currency based on trend lines, don't walk away.  Run away.

Patience

I am patiently waiting for the bulls to overplay their hand next week.  I will be looking to establish an intermediate term short position, as long as it is above today's close.  I want to wait for the negativity after the jobs report to wear off and sell when the crowd gets a bit more optimistic.  It might take till middle of next week.  I am waiting for things to come to me, I won't force any sales in this market.  I still believe that the character of this market has changed, and I will be trading off that negative bias for the next few weeks.

Positive into the close

Mixed results on Fast Money Halftime report, both buy and sell calls along with a stay on sidelines call.  I am however leaning positive into the close and expect a slow grind higher. 
With investors relieved that the market didn't implode after the jobs report, we should slowly get that relief rally in the afternoon and on Monday.

BDW

Boring day warning.  Flashback to 2005.  Go take a nap or start the weekend early.  All signs point to another listless session with a narrow range for 10:30 AM to 4:00 PM EST.  Expected range of 4 points for the rest of the session...get away from the computer!

10.2%

The unemployment rate has put a little fear into investors.  How quickly sentiment changes based on a single month's employment number.  It shows how fragile investor sentiment is.  After yesterday's big up day, I am hesistant to buy even with a decent discount to yesterday's close.  And I am hesistant to sell in the hole after all this gloom and doom from the employment report.  I am leaning more to the long side today but I will likely just be watching.

Optimism ahead of NFP

There is a little bull move ahead of the nonfarm payrolls and I will be awaiting the announcement with sell orders just in case the bulls get ahead of themselves.  I am going to be selling strength after the announcement, looking for weakness at the open in case of a gap up.  With a gap down, I will just stay on the sidelines.  With trades, I will remain nimble not looking for home runs but trying to catch a few points here and there.   The time for home runs will come later.

This market won't quit

I have to hand it to the bulls, they really took the bears to the cleaners today, which I didn't expect ahead of the employment report.  On top of that, sentiment is still bearish, as the equity put call ratios were rising for most of the day as the market was rising.  Tomorrow, after this action, I have no idea what will happen.  But there is usually a positive bias for overnight trade in the futures ahead of the nonfarm payrolls report.

Bearish sentiment

The AAII sentiment survey came out with 22% bulls, -12% on the week, and 56% bears, +14% on the week.  Investors have gotten sort of bearish here and Fast Money's Dennis Gartman says he's net short, and I don't feel comfortable being on the same side as that guy. 
Fast Money Halftime Report has the shorts covering their shorts before the bell, and I didn't hear one sell recommendation into the close.  I may take a little stab at the short side at higher levels.
After the nonfarm payrolls report, and armageddon is taken off the table, I expect recent bears to capitulate.  We should then have that final leg of this counter trend rally next week where I will put on my short position.

Back to boring trading

Here we go with another classic from the summer.  After the initial hour shake and bake to the upside, we get the 5 point range snoozer till the close.  A good day to do nothing, or for the brave, to go long and see how much they try to squeeze the bears ahead of nonfarm payrolls.  I am staying on the sidelines.

Big Gap up

This gap up is begging to be faded, I don't think we'll have a big ramp ahead of the employment report tomorrow, thus I will be fading the gap up open and looking to cover mid day at lower prices.  We should sell off initially and then close strong ahead of the big number tomorrow.  We are ramping in the futures due to the strong push up in Europe after the ECB announcement of keeping rates the same. 
I will give the bulls room to run till early next week before I put on a bigger, longer term position.  Till then, I will be making mostly just quick trades.

Ticking time bomb

The bulls have a few more days left in their counter trend rally before the ticking time bomb goes off again.  We are still a bit oversold and will have worked that off by next week.  Post employment report relief and sheepish mutual fund money should pile in early next week to form a top.  Strong resistance lies just above yesterday's highs and should prove to be a formidable barrier next week.  My preliminary daily outlook is early weakness and then late day strength. 

Not high enough

I was waiting to sell this afternoon and the market refused to go high enough to fill my orders.  Oh well, that is the drawback with trying to get premium prices for entries. 

This Fed announcement surprised me with such a weak close, I expected a stronger close but this market seems to be much weaker than I give it credit for.  The market got exactly what it wanted from the Fed, no change in language or action, totally dovish, but market still couldn't rally on it.   Bottom line, this is a weak market.

CSCO earnings are out and the market is running up on the news, futures are going higher as I write.  That sell opportunity may come later.

Establish medium term position

I am looking to establish a medium term position into strength today.  At these levels around 1060 SPX, there is a very good risk reward for being short.  Once I establish this core position, I plan on holding it and trading around it.

Showing some weakness

Over the past 2 hours, the market has started to fade a bit, not a common occurrence ahead of the meeting.  I think this is a bad omen for the post - Announcement initial reaction.  It firms up my belief that the first move will be down.  Fast Money Halftime report was 1 pre Announcement buyer and 1 buyer, 2 no decisions.  Kind of inconclusive, but bodes well for a quick selloff after the announcement.  But I think it will bounce off that initial reaction as I posted on the chart yesterday.

ES 1049.50

That is the high from Monday, and was resistance in the overnight Globex session.  If the bulls can bust through that level, there will be open field running and bulls will try to squeeze the bears for all its worth.  If there is a slight selloff at the open, I will be bidding out there.  The late bears are  set to be squeezed ahead of 2:15 EST as usual.  After the announcement, all bets are off, and we probably sell off.  The trend is still down in the short term and we are working off the oversold readings.

The economic data to pay attention to before the FOMC is the ADP jobs number coming out at 8:15 AM. 

Archives from Previous blog

Here are the archives from my previous blog, Market Cynic.

Wednesday, November 4, 2009

Missing the gap up

I trade to try to catch as many moves as possible, up and down.  But tonight's gap up is a move that I should have captured based on post-election tendencies, pre-Fed, and the European markets having gone overboard on the sell side yesterday.

Also like in 1994, after the Democrats took over the White House, the Republicans had a lot of success in the following election.  In general, there is a tendency for the other party not in the White House to gain seats in the next election.  I should have expected another repeat for the Republicans. And we all know that the market loves Republicans, at least in the short term.
Unless something horrible happens in Europe, this will be a sizeable gap up and will probably not let anybody in unless they pay up.  And I will not buy into a sizeable gap up in the morning just to get long for a few hours ahead of the Fed.  If it dips, I will buy it but I'm not chasing this market on the long side.  In fact, were it not a FOMC meeting day, tomorrow's gap up would be a good short set up for a quick trade. If we trend up ahead of the announcement, I will short right before 2:15 PM to capture the expected initial drop.

Tuesday, November 3, 2009

Game Plan ahead of FOMC meeting

Ahead of the Fed, I am going to wait tomorrow morning and enter into a long position.  I plan on selling this a couple of hours before the announcement.  I have no idea what the Fed will do, but it won't be anything earth shattering.  Without them moving on rates, it comes down to language, and that doesn't mean much at this point.  The most likely scenario I see is a dip on the initial announcement, and then a strong rally and then minor selloff at the close.

FOMC most likely scenario

Posted by MarketCynic at 11/03/2009 04:26:00 PM

4 - 0 Bears

The traders are all bearish for the close on Fast Money despite the recent up move we've made on the market.  I feel like we're going to trend a bit higher and then have a fake out move to the downside and then finish strong.

Looking to get long

I am flat and now waiting to buy at lower levels.  Any sell off from current levels should find support in the mid 1020s SPX.
Once the range bound trading is broken, and there is a bit of fear, I will swoop in to buy.
Despite the stronger dollar, crude oil is flat and equities are only down 1/2%.   I will have a bullish bias for today and tomorrow as we get set for the Fed.

Still too early to be buying aggressively, so I will wait to get a good price or let it go without me, no worries.

Flat and waiting to short

Anything around 1042 on the SPX is a great spot to get short, after the gap fill, I expect weakness. As I am writing, the market is already starting to fall apart!  Oh well, that short is going to have to wait.  If they can push this sucker up back to yesterday's close, I will be offering supply.

Berkshire buys Burlington Northern

This was the impetus for the jump up in the futures at 7:30 EST.  This shouldn't have any effect on today's trading.  We went from a big gap down to a small, which is not a common occurrence.  There are willing buyers in the market at these levels.  I don't expect much upside or downside today.  I will be selling rips and buying dips today.  I expect the volatility to be more muted than yesterday.  We may rip higher in the 1st hour or two.  Overall, it should be a choppy day.

Big gap down

The trading yesterday with the heavy intraday volatility/strong close after Friday's strong down move tells me the selling is exhausted.  The Europeans are catching up and selling out of fear ahead of the FOMC meeting, I think the US traders will rally this market higher at the open and we should see this market fill the gap today.  Right below current levels is strong support in the 1020s, so I have initiated a long position.

Monday, November 2, 2009

High energy day

Usually when a downtrend runs into support, a battle takes place between the bulls and the bears.  There was good volume, good volatility, and the market made slight gains.  It felt like a market that was exhausted on the sell side.  A short term bottom is right around the corner, something that might last a week or so.  I will look to buy weakness in the morning tomorrow.  I have no opinion on gapping up or down.

Got flat

Not much more downside today IMO.  So I am flat.  I am not long however, I think we can selloff a bit more or go up from here, no strong feeling either way.

If we get down to low 1020s, I will be getting long.

Reversal

We just had a nasty reversal, there were still a few of the Fast money guys looking to get long into the sell off.  It was 2 - 2 bulls vs. bears.  I am holding my short position, I like what I am seeing so far.  Will wait and see what happens for now.

I have to fade this

Market popped higher on the ISM beat at 10 AM and its starting to fade already after squeezing higher.   I've got to fade this move and have gotten short.  After the carnage on Friday, I can't see a repeat of Thursday on the cards, especially ahead of FOMC on Wednesday.  Let's see where this market goes in a few hours.

Futures are fading

CIT bankruptcy news was probably known by the big boys on Friday and they sold ahead of the news, and were covering in pre market.  What was shaping up to be a big gap up has withered away in the past couple of hours as the US markets get ready to open.  I still believe we will see lower prices than on Friday, but  don't forsee a trend day at the moment, but I am not ruling it out.  We may drop down initially to fill the gap and perhaps test the 1028 SPX area.  That should be strong support and I don't think we can get through it on the first test.  I will be waiting to buy in that zone.

Sunday, November 1, 2009

1974-1975 Analog

The oil shock in 1973-1974 helped to trigger the bear market of 1974.  That bear market ended in December 1974, and a sharp rally in 1975 occurred.  The oil price shock in 2008 was a factor (not the main one of course) in triggering the bear market of 2008-2009.  This bear market ended in March 2009.  Unlike most people that look at stock market history, I think the similarities between 1974-1975 and 2008-2009 are much greater than between the 1930s and 2008-2009.  Taking a page out of Paul Tudor Jones in Trader, the video, I have used the Dow daily charts in 1975 as a guide to trading in 2009.  The correlation is quite high so far for the last 7 months.  In 1975, the market had a furious rally off the December 1974 bottom and topped out in July 1975, which is 7 months.  In 2009, we have topped out in October, which is 7 months off the March low.  Based on the 1975 analog, we should trade down a bit more to around 960-970 and eventually rally very strongly in early 2010.

1975 Dow Chart from December 74 low

2009 ES Chart from March 09 low

Saturday, October 31, 2009

This Week's Lesson

“After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this:  It never was my thinking that made the big money for me.  It always was my sitting.  Got that?  My sitting tight!  It is no trick at all to be right on the market.  You always find lots of early bulls in bull markets and early bears in bear markets.

Men who can both be right and sit tight are uncommon.  I found it one of the hardest things to learn.  But it is only after a stock operator has firmly grasped this that he can make big money.  It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance.” 

                                      – Reminiscences of a Stock Operator

My favorite section of Reminiscences rings resoundingly true.  I had a target of ES at 1038.50 made on Tuesday afternoon and it reached there on Wednesday.   Yet I closed out my short trade at higher prices.  I called for a weak close on Friday, was bearish as all get out before the trading day started. I covered too early and didn’t make as much as I should have.  You’ve got to be a pig to make the big bucks.  I still have the problem of not letting my winners run.  If I could only solve this problem, which I’ve battled my entire trading career, trading would be much easier.  Even with this big flaw in my trading, I’ve still done OK.  The saying that you can’t get broke taking a profit is bunk.  If you keep cutting your winners short and ride your losers, you will go broke.

The new market

From March to middle of October, you could buy dips and be assured of being bailed out because the dips were brief and market kept going up.

Only problem is  that stocks have gone up so much and are overvalued.   The value investors, insiders, secondary offerings, IPOs, and private equity guys are all dumping size into the market at every opportunity.  Momentum cannot overcome that, especially in a fragile market like this one.

We are going to have a rough November because all the indicators are flashing red, and investors are still conditioned to buy dips and hope that things pop back up.  Market ain't that easy.  When everyone knows the drill, market mixes things back up to screw the majority.

Buying dips will be treacherous, and only extremely good buy set ups should be taken.  I will be aggressive on the short side going forward.

Friday, October 30, 2009

Time machine to 2008

Today felt like it was ripped out of the annals of 2008. After an up day, you would get oscillations early in the trading session and then dump down making new lows and trend down for most of the day, with meager short covering attempts between 2 - 4 PM EST.  We're in a downtrend, shorting rallies and hanging on to shorts till you see the whites of their eyes should be very profitable going forward.  I don't see us going above SPX 1070 for the rest of the year.  My previous projections were too optimistic.  I think we can test the 960-970 area in November and that should scare the bulls enough to set up for a nice rally in January 2010.

Probably a gap up

Based on the weak close, I expect a gap up on Monday as the dipsters come in to buy the open.  Also, it is the 1st trading day of the month, which is a much more reliable bullish seasonality indicator than the last day of the month. A gap up should set up a bull trap and we should sell off for first half of Monday, we may get a reversal midday, depending on the price action.  Those are the scenarios I see as most likely to happen.

Monday will be the day to buy

If we gap up on Monday, that will be a gap and crap.  If we close near the lows today, the chances of a gap up are higher.  If we rally into the close, chances of a gap up are lower.

In any case, I expect to be able to buy at lower prices on Monday regardless.  If we gap down hard on Monday, then we could rally all day on Monday.

So much for seasonality

Well, who would have thunk it?  A weak day at the end of the month.  Well, most pundits thought that the end of the month would lift stocks and there would be fund managers marking up stocks.  Today's carnage is proof.  Another myth busted.

Hesistation

I hesistate to get long unless we really selloff deeply because I saw how giddy traders got off the GDP numbers yesterday.  That kind of giddiness isn't usually dissolved in 1 day, although the Fast Money traders are bearish for the close, days like today usually don't reverse hard to the upside, so I will only wait for premium setups on the long side to buy, such a plunge down to 1025 on the ES.

I think weakness on Monday is a gimme buy setup so I am hoping for that.  For now I wait.

Everyone is bearish now

Haha.  now that we trade 25 points lower on the SPX, everyone is bearish.  Where were these fools yesterday?  Fast Money halftime is 3 to 0 bearish, so I've got to take the other side, even though I am a bear in the intermediate term.

I think we're going to squeeze higher near the close.  I may get long or not, not sure yet.

I am seeing some panic

I have gotten out of my short postion on this short term panic in the markets, I will reevaluate later in the day, I may get long if we go lower, but for now, I am on the sidelines.

Market transformation

From March to earnings season this month, we've gone pretty much straight up with only slight dips.  But with the negative divergences of breadth and the weakening of the financials to overt dollar bearishness, we hit a top.  I see very little chance of us piercing those highs we made last week.  Yes, last week!  We were at a new 52 week high last week on the SPX and I don't think we'll be seeing those again till next year.

The key now will be to find ideal short entries and cover when the longs puke out their shares on sharp selloffs.

Those failing to make the adjustment to this new market will get crushed buying dips and chasing rallies as stocks trend lower.  I believe we'll stabililize on Monday, but I am sticking with the trend till at least 2:30 pm EST.  At that point, I'll reanalyze the situation.

Back to selling

We had the one day bounce and now we're back to our new mode, which is to oscillate in the first 30 minutes and then sell till the close.  I am looking for further weakness throughout the day as people "hope" to be bailed by fund managers marking up portfolios, but most of that seems to have been done yesterday.  Notable is weakness in crude oil.  I am looking for a repeat of Wednesday.

Chicago PMI and Consumer confidence

We've got a couple of reports today that might move the market a bit during the first 30 minutes of trading.  Actually, buyers seems to be brave again so I would not be surprised to see a pop on the news from the Chicago PMI and the Michigan consumer confidence number.  Even if we pop on the data, I don't think it will last into the close.

Yesterday's big rally stole a lot of thunder that could have been used for today so I think the market has got ahead of itself.  The anticipators were buying ahead of the so-called fund managers marking up portfolios for end of October.  I don't know how much marking up actually gets done but I am willing to bet that its a lot smaller than most people think.

I expect a weak close today and will be setting up for that.

Thursday, October 29, 2009

Sharp rally

This was the oversold bounce, and quite a vigorous bounce.  A classic bear market bounce which is sharp and swift.  Bulls are jumping the gun again on the long side, you have your end of month anticipatory buying today along with buyers of "good" news.  I am looking for selling tomorrow in the morning.  I don't have a strong opinion about it gapping up or down. I will stay short.

Wrong intraday

The oversold bounce occurred sooner than expected, the bulls are very eager to buy here.  Fast Money halftime bull bear on the close indicator is a tie, 2 - 2, so nothing to take away from there.  I am sticking with the short because I see very little upside from current prices, good risk reward on the short side.  I'm risking 3 or 4 points to make 20.

Not like end of September

The last time we had a string of down days was at the end of September.  During that downswing, there was fear of a bad nonfarm payrolls number which came, but we bottomed and rocketed higher for 2 weeks.  We had the same fear of a bad GDP number which didn't come as Goldman Sachs predicted and we've rocketed higher today.  But, the big difference is that last selloff was accompanied by more fear and more put buying than this past selloff.  Also, this selloff is similar in terms of S&P points (about 60) but worse in terms of breadth, a negative divergence.

Getting more bearish

We are watching a very slow motion crash in action.  Based on today's action so far, I feel like people still haven't learned from the markets of the last 2 years.  I feel even more bearish now after this GDP report and the investor reaction.  Its almost as if everything is fine now and we are free to go higher into month end and the beginning of next month.  I think we're going to sell off for most of the day and we'll maybe getting a little rally in the final hour.  But I'm bearish today.

Fading the gap

Well, well, everyone has turned bullish again based on these cooked GDP numbers. That leaves me but one choice, and that is to fade the enthusiasm off this GDP number that has formed.

Bulls actually should want a gap down to wash out the sellers, this will just delay the selloff by a few hours and prevent the needed negativity that forms hard bottoms. Optimism reigns again for the moment anyway.

I am dancing between the raindrops, cause I know the bulls will try one hard rally today, but I think it will be in the 2nd half of the day, not off the open.  I'm feeding the ducks here.

Wednesday, October 28, 2009

CNBC survey

Just saw the CNBC survey of money managers, all of them were looking for the S&P to be higher by the end of the year, with ranges from 1100 to 1200.  Wow!  They all agree that this is not the big bad correction and that the market will rally in November and December.

This would give me the chills being long.  It gives me a lot more confidence to go short for the intermediate term on any rally as I think we've got to go lower before we can shake out all the weak longs in this market.

Here is the article: http://www.cnbc.com/id/33508638

Gap and crap

I think odds are significantly higher that we gap up than we gap down.  If we gap up at the open, the market should sell off immediately and we could get a fear based bottom sometime during the middle of the day, only to close strongly.  If we gap down, then we'll likely rally right off the open.

We are extremely oversold being down 4 days in a row, but we are nearing another area of strong support around 1030 on the SPX.

Getting out of shorts

Covering shorts before the close.  I think we may be higher and the market is close to my price objective so I'm closing out.

Still think we go even lower on Friday.  But tomorrow, I think we'll get a reprieve from the selling or an intraday reversal midday closing strong.

Small cap annihilation

Dow is hardly down and very little mention of the under the surface weakness on CNBC.  The Russell 2000 is getting crushed for 2.5% at the moment.  We are still only down about 1.2% on the SPX so there is still a lot of downside available for today despite the horrible breadth readings.  Bulls are not liking what they see at the moment and will probably push the eject button if we start trading lower into the close.

Bulls used up all their ammo yesterday

The heavy volume yesterday were bulls making a stand at SPX 1060, they were too eager to defend that line and buy the dip.  Today is the flood after the dam at 1060 burst.  The selling force is powerful, and we'll likely selloff further, there is solid support down around 1040, which is another 10 points from here. Cascade selling is where one can accumulate a bunch of points on the short side quickly.

Recent pattern of early strength

Over the past few days, in the first 30 minutes of the day, we've been having strength but its faded after the first hour and have continued weakness throughout the day.

This tells me that the longs don't want to miss a rally and shorts don't want to be caught in a squeeze higher, but there is no back up firepower behind the buying.

We need to go lower to relieve the building selling pressure, otherwise, it just gets pent up and explodes to the downside at a later date.

Goldman lowered their GDP forecast from 3% to 2.7%.  I guess they are looking to buy today or cover their shorts.

EIA Crude Oil Inventory numbers

The past 2 weeks, the EIA crude oil inventory numbers have boosted crude oil to higher highs.  Tuesday afternoon, we received the API numbers, which usually gives  a good preview of the EIA numbers.  Crude jumped higher on the data, but then has been steadily going downhill in line with the weaker equity futures. It feels like oil speculators are waiting for the EIA data to sell the news expecting a spike higher.  I believe we'll sell off today in crude oil which should drag down the energy equities, one of the stalwarts during this selloff.

Santa Claus Rally?

Despite being down 3 days in a row, the bulls remain stubborn and view this pullback as being temporary.  Yesterday's equity put call ratios were still  relatively low despite the weakness.  Almost all believe in a year end rally based on a chase for performance.  Even Jeremy Grantham who is bearish now is allowing for the possibility that we'll rally to year end in his newsletter.  But let's look at it from the viewpoint of the buyer.  If the majority are looking for a year end rally, won't the majority just buy ahead of it?
This stubborn belief may just delay the true killer selloff into the middle of November after nonfarm payrolls report is out and everyone thinks the waters are safe.

Tuesday, October 27, 2009

ES Target 1038.50

There is a gap still open at 1038.50 from October 5.  I am looking for that to fill as we free fall lower.  A sell the news reaction to the GDP numbers/energy inventory numbers could be the catalyst.

Cascade sell off coming

We hardly bounced off of very oversold breath indicators and market is churning here.  The volume is heavy for going nowhere on the S&P which tells me bulls are making a stand here at 1060.  Bulls have used up most of their bullets.  They have very few bullets left to defend lower levels.  If we break 1057 on ES, we're gonna free fall down to low 1040s in one day. That could happen tomorrow or Thursday.

I don't want to miss it.  I am gonna get short again by the close with a gap down likely for tomorrow.

Weaker than I thought

This market is very oversold on the McClellan oscillator and it should have bounced today but the bounce faded away in a couple of hours.  The buyers are absent, and the sellers are getting a bit nervous.  I am hoping for higher prices to reshort but I don't think I'll get it today.  Tech stocks are lagging, and pharma is outperforming.  This tells me longs are liquidating their winners and going defensive to protect their leads.

Seasonality

As we all know, seasonality is based a lot on money inflows and automatic investments into stocks at the beginning of the month.  The only problem is, when investors are no longer putting money into equity funds, which is the case since 2008, does seasonality go away?  It should, which is part of the reason why I think we saw such severe weakness on the first 2 days of September and October. 

I don't think you can bank on seasonality as much as when equities were a favored asset class.  It probably applies more to bonds now than to equities.

S&P 1060

I think we've flushed out the weak longs on this down move this morning, and bulls came out in droves to defend 1060 on the SPX.   I am out of my shorts and will reshort later in the day if we rally.

Who doesn't expect us to go up again?

I have been reading financial articles, watching Bubblevision, and getting a feel for traders' views and the majority seem to agree that we will go right back up after this little pullback.  And I think most people are expecting only a little pullback.

I see a lot of hardcore economic bears but not too many hardcore stock market bears.  Its almost as if most bears feel like liquidity from Banana Ben will hose them down so they don't bother shorting.  The bears that I see seem like pansies, only willing to stay short for a couple of days and then bailing out looking to reshort higher.  Sometime in November, I expect there to be a 8-10% correction, and very little bounce.  That will surprise the bulls and only the hardcore bears will be left to reap the rewards.

In premarket, we got the typical chicken little shorts and eager beaver longs buying here afraid that we'll shoot straight higher off the open.

I'm calling for a sell off at the open, but I don't see it being sustained.  Then a countertrend midday rally with a slight selloff near the close.  We still need to generate more fear and that's going to take time.

Monday, October 26, 2009

Overnight action should be weak

Past couple of trading days we've had stronger markets overnight, I think a gap down is coming as investors fear the market being up too much despite horrible fundamentals.  Technical damage has been done by breaking 1072 on the ES and now we're churning below those levels right above support at 1062.  Once 1062 goes, look for the 50 day MA at around 1050 SPX, or ES at 1054 to provide support.

Support broken

We are skating on thinner ice, below 1060 on the ES is a lot of air down to low 1050s.  Below that and bulls can fall flat on their face down to 1025.

Gap down play

I believe this market is setting up for a gap down on Tuesday morning.  I don't see the market bouncing up much from here, the support at S&P 1075 was broken and the market has been churning under that level for the past few hours.  Beyond Tuesday, it's a toss up, we could rebound or drop further.  But I think we need to do some more work on the downside this week before we can rebound.

From my studies of historical charts, a reversal like we saw today shows you the increased level of volatility at these prices.  The higher volatility is showing that the market is rejecting these higher price levels for the current time.  This market needs to consolidate more before making its next move.

Looking for blood

I believe we will see bloodshed this afternoon and have repositioned accordingly.  This reversal is for real, and a sign that the market is in for some pain for at least a couple more days.  This market wants to test 1060 on the S&P.

An unforgiving market for shorts

That sudden push was short sellers and weak longs that dumped on Friday suddenly deciding that the market wasn't going down so they all bought at the same time.  The Monday morning fund buyers just had to get in.  I expect weakness near the close, but they can keep this up midday with the lack of volume out there.

Short squeeze

Very unusual action today shooting straight up off the trend sell day on Friday.  This isn't a common occurence, especially right from the opening bell.   I cut down my position size because I had a time stop but I'm going to watch and see what happens over the next hour.  Financials are lagging thanks to BAC, and energy is leading here.  This rally smells suscipicious to me and I'm thinking we'll revisit lower prices before the close.

ES buyers at 1082+. Why?

I know its mostly computer black boxes that are just using FESX and DAX movements to automatically buy or sell the ES, but after a trend down day on Friday and running up into 1083 resistance, its a poor risk reward buy in the wee hours EST.
It is difficult to get the ES futures gapping up more than 5 points in this low volatility environment, so what kind of risk reward is ther for buying those contracts at those prices ahead of the US market?
I still think we go lower in the first hour of US trade.

Sunday, October 25, 2009

The Next 3 months

Right now, most traders are in agreement that the market will be unsettled and a bit weak for the next few trading days, but once we get past the next couple weeks, with the Fed and nonfarm payrolls report 2 weeks from now, people are projecting a rally to the year end based on a chase for performance and the Santa Claus Rally.
I have other things in mind. I believe we will sell off next week and then rally at the beginning of November and then selloff again more sharply surprising those expecting the year end rally as the economic realities and overoptimism about the market takes the market lower. Then I expect a sharp rally at the beginning of January which will test the 52 week highs.

This is all still far away into the future so I don't want to get too far ahead of myself. Anything can happen, but its better to have a general projection and make adjustments based on market action than to fly blind on the seat of my pants.

Most Investors' Projection:



My Projection:

Saturday, October 24, 2009

Chess game

There are mad men that think about the markets all day long. I guess I am one of those mad men. This blog is a release of that pent up thought that I want to get out of my system. I don't try to monetize my blog, sell subscriptions to a service, or have some grand plan to make money off this. I may write a book in the future, but it won't be for the money. It will be for the same reason that I write this blog. A release for my pent up thoughts.

What I write here is what I am thinking about the market. I am not thinking about charts or systems. I am thinking about the other "thinkers", or traders out there. I view the market as a game, a game in which a minority win and the majority lose. People are trying to beat each other's brains out with any edge that they can get. The key to the game is to realize how to get that edge and to push it when you really feel it. Most weeks, I don't have a strong feel for the market and I don't push it. This past week, my reads felt stronger so I traded more aggressively.

Like chess, traders need to think a few moves ahead and anticipate reactions to the news as well as trader's positioning ahead of the news. The recent case is earnings, and last week I was a bit early, and I realized this, so I stepped back off the pedal and focused on hitting the bulls in the mouth this week. I was going to sell the news, it was just a matter of when. Timing it.

In this game, you've always got to think a step ahead, but not 2 steps ahead. My problems in the past have been when I have thought 2 steps ahead and have sold too early or bought too soon. I still have this problem, but measuring foot steps and timing are tricky things that one gets better at with experience. But I will say this. I have rarely had problems thinking 1 step behind.

Friday, October 23, 2009

Earnings season

In April and July, earnings season was a catalyst to catapult the market to new highs. Expectations were low, and they were soundly beat. Stocks went higher on the news. Well, the expectations were low this time as well, and most bellwethers beat the numbers. But stocks have not gone up on the news. Since INTC earnings, the market has gone nowhere. The bulls were ready for a good earnings season and had already bought ahead of it. Only the fools were left to buy on the news. The cat is out of the bag. Sure, overall market sentiment is still skeptical about this 7 month rally, but actions speak louder than words. People are still complacent as seen by the put call ratios over the past couple weeks. And I don't know too many diehard bears left standing after a 60% up move in 7 months. Those that are left standing are reluctant to short. The bears still need to be nimble here because the trend is still clearly up in the intermediate term. But now its more of a two sided game, no longer is it going to be straight up moves.

Fear Factor

Traders are now getting a tad bit scared about the market. Still a lot of complacency with the put call ratios not very high despite being deep in the red. The action today was very bearish, especially on top of the churning that we saw on Wednesday and Thursday.
I am looking for a gap down on Monday as traders digest the action over the past week. The bulls threw everything they could at the bears, INTC, AAPL, JPM, MSFT, AMZN and the market has basically gone nowhere.
Fear is now a factor.

A little squeeze at the close

Fast Money half time report was a dud, 3 sellers and 1 buyer. Looks to me to that we'll probably get a little squeeze near the close. I have covered most of my position and may take a trading long to dump into a strong close.
I am banking on a gap down on Monday morning so I will be fully short at the close barring a complete collapse in the market.

Adjusting to the volatility

The volatility has gone straight down from March basically in a straight line, but things have woken up the past few days. However, we are still trading in 12-15 point ranges on most days, and it is unusual for us to have greater than 20 point ranges in a day. We've got to adjust to the new volatility which means less daytrading and more swing trading. Also targets should be adjusted to be less ambitious. All this means that profitability will be lower than in the past, but that is the game that is played. 2008 was a boom for daytraders, and now its like pulling teeth to capture big moves. This makes the entry and exits all the more important because of the reduced volatility.

MSFT blowout numbers

We now have a catalyst for the gap up in the futures, an excuse to buy up. That is the scenario I was looking for to sell the news. Still looking for them to sell the news as I do think this market is churning at these levels before going lower. If we don't have a selloff today or Monday, then I am wrong, and will cover. But I am betting on the short side now.

Thursday, October 22, 2009

Gap and Crap

I don't want to be short overnight, I think earnings news and relief after today's rebound will cause a gap up, so I will wait for tomorrow morning to feed the ducks. I think we will sell off hard from the open on a gap up tomorrow.
This market is clearly showing topping action, the volume today was above average, as was yesterday, and we've basically gone nowhere. Volume was the missing ingredient that I was waiting for, as well as intraday volatility to tell me that a turn was near. We are getting that these past 2 days.

Everyone is a trader

The new paradigm for stocks is not to invest, but to trade the moves. This is the new mentality for those that buy and sell stocks. It used to be buy and hold, but not anymore. Everyone is on to the game and know that they were sold a load of bull by the mutual fund industry with the buy and hold mantra over the years. From what I see, the longs don't believe in this rally, meaning that upon signs of weakness, they will bail out of their positions quickly. They are trading the market, not investing in it. They are what one would call a weak long. There are a lot of weak longs in this market. The shorts are mostly absent. They are either buried 6 feet under or have been conditioned to cover quickly on any weakness or cut their losses immediately for fear of getting their face ripped off. Most people are deathly afraid to short this thing after having been burned shorting repeatedly for 7 months.

Weak longs + Absense of shorts = Free fall waiting to happen.

Controlled selloff

I don't look for anything crazy today as I believe weak long traders likely bailed yesterday afternoon and that leaves the hardier longs hanging on. I expect slight weakness early on in the day due to yesterday's reversal, and then we'll probably just chop for most of the day and rally into the close.
Either Friday or Monday I am expecting a continuation of this selloff, if we don't get it, then I am wrong about this market having topped. But I believe odds are that we will. Bears are finally hitting back against the bulls, should make for some more exciting trade in the coming weeks.

Wednesday, October 21, 2009

TIMBERRRRR!

The market emphatically rejected the 1100 level on the SPX and we saw a brutal reversal, blamed on Dick Bove's downgrade of WFC. It was coming anyway, the market was diverging and weakening regardless of the news, good or bad.
Looks to me like we will be in a period of consolidation for a few weeks, today was a statement day made by the equity bears, despite the weak dollar and roaring commodities. The easy trade now is the short side.

Commodities fever

Oil broke through $80 and is trading above $81 as I write. Short squeezes in the grains market and further dollar weakness has added to the commodities fever. So far, commodities strength has been a positive for the stock market, but at a certain point, it becomes self destructive and hurts the consumer. We're probably at that point now.

Fast Money contrarian indicator

This market is in trouble. The Fast Money crew all had buys into the close for the halftime report, that in addition to my reads on the market and I feel like we'll have a sell into the close scenario, I would not want to be long here and today feels like a top to me.

False break of 1100

Looking for a false break of 1100 to get S&P traders excited and I believe that will be the top for this move. A very good short opportunity is setting up for later today, I am trying to remain patient but it is very tempting to push the sell button.

Looking for early strength

Based on the pre market weakness, there is a good risk reward daytrade on the buyside, buying before the open and selling midday. The market will not collapse immediately, it is weakening, but I still believe there is one last gasp for this run up before it goes down for the count.
Looking for early strength which will provide a possible good midday entry on the short side.

Tuesday, October 20, 2009

When the bell tolls

They don't ring a bell at the top, but they sure do give all kinds of hints. The market action today is reinforcing my belief that we will have a final intraday rally with a selloff in the final hour either today or tomorrow. The crude oil inventory numbers will be a sell the news event for crude and for stocks.
Get ready to sell.

Small caps continue to lag

Russell 2000 is down 1.5%, while the S&P 500 is down 0.65%. This continues a pattern of narrowing leadership in the market and small cap underperformance. The crowd is now rushing into tech and energy stocks and selling off other stocks to raise cash for those purchases. The market is teetering here, I believe there will be a top this week, either tomorrow or Thursday. I am still looking for heavy intraday volume and an intraday reversal to signal the top.

Put Call ratio divergences

On the CBOE and the ISE, there is a noticeable divergence occurring today between the index and ETF options traders and the equity options traders. The equity put call ratios are on the low side, the index / ETF put call ratio is extremely high. The pros are beginning to fade this move and retail remains stubbornly long.

TD Sell setup

I don't think TA is the end all of trading, but it helps. One of things I like to look at are Tom Demark (ego, huh?) indicators. With a new closing high yesterday on bar 9 of the TD sell setup, the sell setup has been perfected. A sell countdown begins today, meaning we are likely to sell off soon within 4 trading days. Another arrow in the bear's quiver.

Monday, October 19, 2009

AAPL of my eye

AAPL blows out low ball estimates. What a surprise. This is setting up a possible blow off top catalyst, but I expect the gap up to be muted, if it gaps up at all. Perhaps an intraday meltup will get enough bulls on board with enough volume to finally set the top of this rally. What has continually been missing is volume on the upmove. Perhaps this will be the catalyst to do so.
Timing tops is difficult, but I can smell the fever and I want to bet on the other side.

Deteriorating Breadth

When the market reached a new closing high for the year on Thursday, one would have expected the Advance Decline line to be healthy, but it has been lagging. The small caps are lagging, and the rally is narrowing. Even with a modest decline on Friday, down volume overwhelmed up volume. These are small signs to watch closely this week for a top. Risk reward on the long side is poor at these price levels for the next month or so.

Expecting a strong close

Gut tells me that ahead of the AAPL earnings, we will have a strong close today, so I will be very careful to avoid getting caught short in a steady drift higher on the 2nd half of the day.

The top is near, point wise we are very close, the timing is the tricky part. Market seems hell bent on squeezing as many bears as possible for as long as possible.
There will be that sweet pot of honey at the end of the rainbow, but only for the most persistent and tenacious bears willing to overcome all the arrows thrown their way for the next 4 months.

Friday, October 16, 2009

Sell the close

All the traders on Fast Money Halftime Report had buy calls for the close, as with my tendency to fade the Fast Money traders, I would sell expecting lower prices at the close. But I don't think the top will be a point, I expect strength in the market again, the dip buyers will not go away easily.

Lots of complacency

Maybe its just because its options expiration Friday, but there is a ton of complacency out there today with all the call buying and the put call ratios are once again very low.
This in a down market that is trending down intraday. Looks like we're probably not gonna be able to have that strong close that people are conditioned to.

Everyone knows the pattern, buy the dip at 10:30 AM and sell at the close for a quick profit. But who's gonna be the idiot buying the close today when they could have bought it earlier in the day??
Everyone is looking for a strong close on opex Friday, I don't think its gonna quite work out that way...not with this kind of rampant call buying in a down market. Market is not that easy.

S&P 1100

The market closed at 1096.5 for the S&P 500. That is awfully close to 1100, an intermediate target for a lot of bulls. Plus we are at options expiration and the call buying has been fast and furious. The risk reward for buying here is extremely poor, we are overbought and today is options expiration. We are right around what will be strong resistance at 1100, and most of the positive catalysts are already spent (good earnings).
Expectations are high. Looking at the reaction to GE and BAC, missing analyst expectations is not easily forgiven in this environment.

Asia underperfomance

There are canaries in the coal mine. They are the Asian markets, in particular, Japan and Korea. They are not on an artificial US dollar confetti standard/peg like Hong Kong or China, their currencies have been appreciating recently, and those equity markets don't seem to like it.
China, Japan, and Korea have all topped out, and aren't making new highs as the U.S. and European markets keep going higher. Remember at the bottom, the Asian equities moved first off the bottom, now that they are overvalued, they are the first to move off the top.

Looking for the pullback

I just viewed some CNBC and people are still looking for that pullback. That is not something I wanted to hear. There is still not much enthusiasm for this rally. Despite the low put call ratios.
What seems to be happening is that we're grinding higher due to a lack of sellers, not a bunch of buyers. Thus the low volume up move.
We need to see that high volume high energy trade intraday to mark a turn. Until that happens, a slow grind higher is the most likely scenario, with perhaps 1 or 2 day dips, even with the ridiculously low put call ratios.

Thursday, October 15, 2009

Fast Money traders

Although most of what you see on CNBC is useless, I do like to watch it to measure investment sentiment, especially short term sentiment. The Fast Money halftime show is one such segment where the traders make a buy or sell call into the close. Well today, even with the market basically, flat, 3 out of 4 traders said sell and Joe Terranova said buy just to be contrarian.
From what I've noticed over the past couple of months, these traders are usually a fade at the close and a good indication of intraday market sentiment.
That tells me that we're not likely to sell off today.
Also, there is a S&P 500 adjustment being made at the close due to the Pfizer Wyeth deal closing which should result in some index buying at the end of the day.

Bulls get frightened quickly

So the bulls have a quick trigger finger these days, as noted by the quick sell reaction to the C and GS earnings reports. However, as advertised, the bulls were all over the 6 point gap down on the open and rallied them near flat on the day.
Today seems like a nothing day where bulls will probably have the upper hand most of the day. These days, if the bears can't scare the bulls within the first hour of trading, its almost as if they have no shot at a down day.
Although I am bearish, I am not suicidal. Being a bear in a steady uptrend is grueling and not the easiest way to make a dime. But tops are processes that take time, while bottoms are usually brief and quick.
However, options expiration hangover on Monday looms large and its dicey to try to pick up a few extra points on the upside in an overbought environment.

Wednesday, October 14, 2009

New Market High, But...

The bigger they are, the harder they fall. With extreme call buying in both equity and index options, as well as a new all time high with bullish news everywhere and near 1100 on the S&P, one has to wonder: who's going to flinch? Bears have been mauled here, and the market hardly has a dip even intraday. It can only mean one thing: we will have to have a blowoff top on heavy volume. The thing missing right now is the big volume up move. It's required to signal that bears have capitulated and bulls have panicked by buying recklessly. I think there is a greater than 50% chance that the blowoff top happens tomorrow.

CBOE equity put call ratio at 0.35

Over on the CBOE, as of 10:00 am, the put call ratio is at 0.35!
The speculators are out in full force today in the options arena and they are leaning long.

ISEE equity sentiment index hits 327

As of 9:50, the ISE equity sentiment index has ringed up a 327 number, a huge imbalance of call buying over put buying. How long can this madness last? Surprisingly, the index options number is also over 100, which is not common after such a big gap up.
Seems almost everyone is bullish, retail and the pros.

JP Morgan beats by .30, beat expected revenues

Another beat by another company. Another squeeze higher of a few S&P points, but we are trading back to where we were before the JP Morgan earnings announcement.
What is funny is that JP Morgan calls its balance sheet a "fortress balance sheet". They are levered extremely high, not through the eyeballs like some of the other banks, but their Tier 1 capital ratio is low, considering how dependent their balance sheet is on asset prices rather than cash flow. But all that stuff doesn't matter when you can mark to model/myth.

S&P futures are trading at 1083.50, all kind of great earnings news is out, much of it expected, and we have a gap up well over 1%. We have rallied from 1015 a week and a half ago and have gone relentlessly higher. If that doesn't scream sell, I don't know what will.

It's a classic.

Classic buying panic after hours on the INTC earnings announcement. The price action told the story, and in general, when the markets are strong ahead of an awaited announcement, the tendency is to overshoot to the upside and then reverse.
INTC will be the excuse for those on the sidelines to buy, the sheep will no longer wait for the pullback and will rush head on.....over the cliff.
A false breakout to mark the top of this move up, based on INTC blowout earnings, you can not script it any better. Classic Wall Street.

Tuesday, October 13, 2009

INTC could be the catalyst

Everyone knows to be long ahead of earnings. Its the tried and tested method of making money, right? The crowd has now been conditioned to buy ahead of earnings reports that beat ridiculously low expectations. Will it happen again that we squeeze higher during earnings season to new highs? By the call option volume relative to puts, it would seem most are thinking that way. Its a dangerous time to be a long investor.
INTC could just be the catalyst for the blowoff top which marks the top for this rally.

Monday, October 12, 2009

Put Call ratios flash warning signs

The CBOE equity put call ratio over the past 2 trading sessions have been lingering between 0.50 to 0.53, while over on the ISE, the ISE option sentiment index is putting up very large numbers, going over 350 at the beginning of the session,and currently at 234 as of 3:50 pm, showing call buying overwhelming put buying on equities.
This is showing the complacency among stock investors which will set this market up for a big downdraft soon. I believe earnings this quarter will be the catalyst for that selloff.

Market Top is forming this week

The market is ripe to drop huge over the next few weeks as a gigantic top is being formed at the moment.
The pillars of the top are 1. Complacency among bulls 2. Lack of improvements in top line earnings 3. A trend change in the dollar 4. Reintroduction of fear due to nonexistent job growth, swine flu, and a double dip recession 5. An abundance of weak longs buying based on performance chasing, not a belief that economy is better or stocks are cheap
By November, I expect the S&P to be trading under 1000 as the bulls remain complacent. Also commodities should sell off on a dollar rally and equity selloff. There are too many bulls in commodities in contrast to the bearish fundamentals.

Bulls are complacent , Bears are scared

I think an important intermediate top will be put in this week. The market strongly rejected the 1070-1080 level from 2 weeks ago, and now we have more bulls and fewer bears than we did back then when we were at these same levels.
Shorts are definitely getting scared, CNBC’s Guy Adami who has been bearish since August finally threw in the towel and said you can’t fight it. Today on the CNBC Fast Money Halftime show, all 4 guests called for buying into the close. Bulls are complacent. Bears are scared to short. The top is coming soon.