Out of My Short

It was a bad trade.  This market defies gravity and I will look to get back in short in January.

14 Year Winning Streak

If you bought at the close on the last trading day of the year and sold at the open on the first day of the year, you would have made money every year for the last 14 years.  I mentioned this last year, and we managed to gap up big on the first of 2010.   It tells you the power of fund money in driving the market.

Turn Out the Lights

Till 3 PM.  It is a ghost town out there.  Volume is extremely light.  I am sure there are a lot of year end rally players who are looking to sell either at the end of day today or on Monday.  I don't think there are too many looking to get long at the end of day or on Monday.  So we should see downside pressure for the rest of the day, and probably gap up on Monday as the fund money comes in for the first day of the year. 

Weakness

Looking for weakness throughout the day as fund managers lighten up on seasonality positions on the last day of the year.  Who will be more aggressive today, those that want to add long exposure or those that want to reduce it?  There are almost no shorts so they aren't a factor.  I believe all those who wanted to get long for the year end rally are long already.  I don't think there are too many out there who waited for the last day of the year to get long.  So when longs need to liquidate, that usually leads to lower prices.  Watch for big selling at the close today.

Is Everyone in?

The jobless claims came in gangbusters, at 388K, and so did the Chicago PMI which came in well above expectations, as did Pending Home Sales.  But why are we lower than the open?

The year end rally players surely must be all in already, which leaves only one thing:  closing out of positions.  Well they will want to close them out soon, and with the excess speculation that is built into this market, the pain trade is down.  Still short and in no hurry to cover.  

Market Manipulation

The Fed is buying Treasuries, but it might as well buy S&P 500 futures and take in the gains.   Instead, it is giving them to the banks and funds who are using the influx of cash to buy stocks.  It is a Ponzi scheme as this market doesn't trade with a natural flow.  These shenanigans will go on till June when QE2 is set to finish, but will they come up with a QE3?

That is very possible if the unemployment rate doesn't start coming down.  But what will be interesting to see is if the economy is doing better and there is a slight improvement in unemployment, will it be enough for Banana Ben to stop the endless QE?  Obviously the inflation numbers will be rigged to remain extremely low despite what is actually going on so I ignore that as a factor. 

Actually the worst thing that could happen for this market would be for the nonfarm payrolls to start printing strong numbers and for there to be a stronger economy.   That would make it tough for there to be QE3.  Once QE2 expires, we'll probably be at even higher levels than now making the market more vulnerable to the natural forces of the market.

Slow

Next year I should just take the last week of the year off.  There is very little action.  I have seen more index put activity over the past few days so it seems like traders are protecting gains by buying puts to put off sales till next year for tax purposes.  But overall, there is still a lot of speculation in the options market. 

Every market is different, but this does feel a bit like the end of 2004.  Charles Biderman of Trimtabs has only one explanation for how the market keeps going higher without new money coming into stocks.  QE2.  That seems like as good a reason as any to explain the endless bid. 

Bloomberg interview

CNBC interview

China Keeps Falling US Keeps Rising

China is being ignored here because it is the year end and it is a time when money managers hanging on to catch every last inch of the year end rally.  It is interesting to see the crowd bullish on commodities while Shanghai is getting whacked, performing as one of the weakest equity markets in the world this year.  All is quiet now, but we should get some stirrings next week.  The weak bears are mostly out.

Nuances in Sentiment

Those who remember the June 2003 to June 2007 period will recall that sentiment never got bearish, except for a very short period of time in mid 2006.  Yet the market kept going higher.  You cannot put down a bet based solely on playing contrarian towards sentiment.  It works well at extremes, but usually better during bearish extremes than bullish extremes. 

The sentiment numbers also don't reflect the give up that much of the public has over equities.  You don't have the same love for equities that you saw in 2000 or 2007.  And the sentiment numbers make it seem like the sentiment is just as bullish now as it was back then.  That is laughable. 

You've got to look beyond the numbers and read the newspaper, watch the TV news, and talk to your neighbors.  There is now a deeply ingrained apprehension towards long term stock investing.  If that apprehension slowly abates as the economy gets better and unemployment goes down (almost a given looking at the economic cycle), you will see higher prices despite the bullish sentiment. 

Rate Hike

China came in with a somewhat of a surprise this weekend raising interest rates.  I was surprised and it is pulling down Europe and the ES a bit.  But Europe is down much more than the S&P and the underperformance in Europe is getting out of hand.  Perhaps it is because of year end forces and portfolio window dressing.  The US market seems bulletproof.  Still targeting low 1240s.  The longs are already in, everyone playing the year end rally will likely want to sell by Friday or next Monday.

Shot in the Dark

I am going out on a little limb here.  No more death by a thousand cuts to the bears.   I think we've topped out for the year at ES 1255.  I don't think we'll go below the previous yearly highs from last week at 1241.  We should stay in this small range till year end, looking for weakness going into early next week, with a bounce back up to 1255 by next Friday.  Holdings shorts and in no rush to cover until we're in the low 1240s.  Merry Christmas. 

Market Has a Memory

SPX 1260 was where we topped out yesterday and in the overnight market.  It was also the point of the fear bottom in January 2008 and March 2008.  For those that remember the Martin Luther King holiday where we went limit down briefly on the ES, it was at 1255. 

Add to the past resistance at ES 1255 and the overbought overbullish tape, it favors the short side here.  Usually the dollar is weak at the end of the year but Europe is putting a wrench in that bit of seasonality.  Yet commodities keep going higher, something has to give here.  A strong dollar and strong commodities is not a long term sustainable trend.

Bull Feast

It is hard to make money shorting these days.  After all the good times that the bears had from October 2007 to March 2009, they are facing the exact opposite feeling since that bottom in March 2009.  Yes, we had the drops in May and June, and a quick one in August, but the market spent most of its time this year going up.  The down periods were sharp but brief. 

I still believe we are in a secular bear market but the market is trying its hardest to shake traders from that view.  I don't see good value in most stocks in this market.  Things don't look expensive if you consider pro-forma earnings, but one-time expenses that repeat habitually should not be considered non-operating losses.  If you just look at operating earnings and the historically high profit margins, this market is expensive.  Valuations only matter in the long term but if we have another up year in 2011, shorting will get more  attractive. 

New highs again today in a rush for end of year performance.

Adding Short

I am looking towards the first week of January for a pullback.  We probably will trade sideways for the next few days.  I am comfortable staying short here despite positive seasonality.  Expecting the volatility to pick up during the first week of January.

Another Gap Up

There we go again with the overnight market stealing the RTH move.  Sentiment has been useless for the last couple of weeks.  As I said in a previous post, we haven't seen the inflows necessary to form a lasting top.  We need to see retail excitement that is reflected in more equity inflows from new investors, not just more bullish positioning among the institutions and current retail crowd.  Any 20-30 drops that you see in early January should be used to cover shorts or go long.  Looking to add shorts intraday in the first half of the day.

Lunar Eclipse

When is that top coming?  Well, maybe we can rely on astrology.  We have a lunar eclipse tonight, I am looking for it to mark the top of the move. 

Europe Bouncing Back

Despite the weaker euro, Europe is bouncing back from losses on Friday.  New highs now on the ES and the sky is the limit.  Eventually things will come shooting down, but when it will happen, who knows.  The higher we go, the harder we'll fall.  In this thin trading environment, the market can creep higher without much buying.  Looking towards tomorrow for toppy action. 

Dull

Everyone has already bought and no one wants to sell.  That is how you get 5 point intraday ranges.  It is great for the stock investor however.  Leaning towards a gap down but not a strong feeling. 

No Inflows

You would expect to see the retail investor start to put money back into mutual funds after such a strong rally but that has not been the case.  Unlike the money coming in to funds in  January and March/April, we've had net outflows in equity mutual funds over the past month, and ever since the market started rallying from the bottom in July.  This makes me hesistant to call a lasting top at the moment despite some very lopsided bullish sentiment data.

You rarely see lasting tops without the retail investor putting in money into mutual funds.  
I've got to see inflows into mutual funds for at least a few months before you can say that the retail investor is getting excited again.  We haven't seen that, but I am betting that we will next year if the rally continues.  Then we can start looking for that big top to short into. Until then, every short trade has to have a tight leash and a short time frame. 

Getting Back Short

Not much energy after the good earnings from ORCL and RIMM.  Looks like all the good news has been priced in.  I am a seller today and have gotten back in on the short side.  I am looking for weakness today through Monday.

Gap Up Signal

Getting a gap up signal here.  It is surprising considering how high we are but that is what is firing up here.

First Dip Bought

The dip from 1242 to 1228 was bought.  From top to bottom, 14 points is all this market gave up after going up from 1170 in almost a straight line.  That was quite a small dip.   I know this is a seasonally strong time of the year but the market can fall in late December.  It happened in 2000, 2002, 2005, 2007. 

The equity put call ratios are extremely low but I don't think the sentiment is quite as bullish as those lopsided ratios tell us.  I am not seeing that euphoria and excitement on CNBC, and the AAII survey that came out this week actually showed bullishness go down despite the market near the highs.  Yes, everyone is complacent, but not super bullish.  I will probably look to add short exposure again tomorrow. 

Out of Shorts

I expect us to grind higher for the rest of the day.

Bears Have to Hurry

I looked at the Hong Kong market today and it dropped off a cliff near the close.  China is much weaker than many people think.   A popping of the real estate bubble there would have huge negative ramifications for what the institutions are most bullish on, which are commodities.  

Today the time frame for a bear raid is probably just 2 hours after the opening bell.  I don't see another late day selloff the day ahead of options expiration.  I do expect early weakness after the weak closes the last 3 days.  But based on the benign action in pre-market, the dip will likely be bought.

Opex In Play

Options expiration forces are going to be at work for the next couple of days so we should see some good pin action.  A move down to ES 1220 would do the most to kill the call premium.   The dollar is strengthening with gold weakening.  The market is shrugging it off well so there is underlying strength in this market.  Sentiment indicators are not working well right now, I guess everyone is waiting for Santa to provide higher prices in everyone's stockings.  I am expecting early weakness tomorrow.

Spain Downgrade

Moody's put Spain on a downgrade watch and Spain 10 yr yields are approaching yearly highs.  I guess it doesn't matter because its December and Santa is coming to town.  We finally have a gap down which probably surprises the bulls who probably thought we could go up through the end of the year without any down days.  Market is vulnerable here to a sharp pullback.  Holding shorts.

Pin Drops

It is quiet out there.  I don't see anything notable except that there is a lot of hedging volume with puts on the CBOE, a change from the last few days.  The CBOE equity put/call is still low.  Traders don't have a worry in the world and are in cruise control.  I think they are too comfortable here and it won't take much for things to get shaken.  The current state is definitely not in equilibrium.  Waiting for the drop anytime now. 

Grind

This market is deadly for traders.  There just isn't much intraday movement to capture.  Bull markets suck the life out of futures traders.  I have my short position, now it is time to wait and see.  We might get a few points grind up before the FOMC announcement, but I am expecting a selloff after the announcement. 

No Bear Catalyst

With China not raising interest rates, there is no obvious bearish catalyst to take this market lower.  I can only think of European worries coming around again, but that story has been played so many times already.  I'm sure the media will come up with some reason for the market going down after we top out.  I don't want to try to time the top so I'll just stay short here and wait for the market to get back to sustainable activity.  This level of optimism rarely lasts for long.

Adding Short

Feels like we're getting the blowoff today.  The Chinese decided not to hike rates, and there is expectation of the tax cuts to pass the Senate.  It will be one big stock love fest.  I am adding another leg here short and will wait for the cows to come home later this week.  Fed day tomorrow by the way.

Blowing Off

We have entered the blowoff phase of this rally.  There is urgency among fund managers to get long ahead of the year end rally.  I want to see more volume to speed up the process but usually you don't get it in December.  I am sure China will not raise interest rates this weekend and that will probably be greeted with cheers among the Globex crowd.  If we get that last little run up in premarket Monday, I will put another leg into the short side. 

Friday Slowdown

This looks to be another sleepy Friday.  The bears usually only have about a 2 hour time window to operate on Fridays.  If they can't get any momentum to the downside in the first 2 hours, usually it is a flat or up day.  You don't often see Friday afternoon reversals to the downside.  So odds are the drop will have to wait at least another day.

Lined Up and Waiting

All the sentiment indicators are lined up for a fall in this market.  Just waiting for the trigger.  I am looking at Spain 10 yr yields and they are rising again despite a rising stock market.  That probably explains why the euro isn't rallying with the stock market here.  Also gold is failing to keep up with the stock market.  These are just little things that eventually add up and get noticed by the public.  Right now, every one has rose-colored glasses so they are being ignored.  A move to 1200 would probably cause max pain for options holders, as call activity has overwhelmed put activity.  We have 6 days till options expiration, I am looking for a down move to ES 1195 during that time window. 

Expecting selling at the open today.  If we don't selloff today, we will just be building more potential energy for a fall next week.

Gap Down Signal

I am getting a gap down signal.  The market feels invincible but it is finally chopping and showing more intraday weakness despite the high levels of optimism.  The data is overwhelmingly on the bear's side.  The price action is moving there.  I am giving the short trade a few more days to ripen.

Playing Countertrend

Going short this market is obviously a countertrend play.  It is very clear that the trend is up.  I am not a trend follower but I don't like to short markets that trade like this.  But the current market is unsustainable in its current form.  We dip probably next week around the FOMC meeting on Tuesday, or the day after on Wednesday.  With so many calls bought over the past week, I can't imagine much upside during opex week.

Unstoppable

"You know, it's a bull market!" - Partridge

This market made new highs overnight and we have another healthy gap up after a late day squeeze yesterday.  There is a reason that people are bullish on stocks.  It's because they keep going up.  Eventually we will reach a point where the market will go back to a downtrend.  It looks like that will be happening at much higher prices.  I am still short term bearish but the dip will likely be swift and snapped up quickly.  Today is rollover day so I will mention ES levels using the March contract.

Chop and then Drop

We are consolidating the gains from the past week , and we will likely continue for a few more days.  Friday or Monday, we should see some stronger drops on volume.   Let's not forget about Spain, it's 10 year yield is still well above 5% after dropping last week on the global risk rally.  I like to look at the gold and silver market to see the action of pure speculators.  It looks like they are saturated on the long side and key reversals occurred yesterday which should foreshadow the action in the ES. 

On Weak Closes

I've observed over the years that weak closes don't necessarily portend bad things for the next day as many would naturally assume.  Now this is what I've noticed in the stock market, the commodities and currency markets behave differently. 

In fact, more often than not, it is a better risk reward to get long on a weak close than a strong close.  Actually the weak close yesterday makes me a bit less bearish on the short term.  Fast Money remarked on the weak close and it made them hesitate a bit on their bullish views.  That makes me a bit nervous on the short side. 

The main piece of information gained from yesterday was that 1230-1235 is a sweet zone to get short at.  It helps define the risk on the short side. 

Insider Trading Investigation...Yeah Right

The market went down because of the insider trading investigation according to CNBC.  How about the simple reason that you had the buyers piling in on the good news and selling when they saw that we would be closing weak.  The market is saturated on the long side.  Dew point is at 1235.  I think it is a poor risk reward to jump in long except for very quick trades.  I expect some choppiness the next couple of days and then we should sell off to 1196 by the end of next week, just in time to kill the call premium for opex. 

Fast Money

Just wanted to point out that everyone on Fast Money was bullish for the remainder of the day, except for the contrarian, Steve Cortes, who happens to be the only guy I respect among the bunch.  Since we've been going higher in the past 2 hours, I expect a weak close.  Any points that the longs gain from these levels should be quickly given back so I am comfortable with my short. 

Adding to Short

I have added to my short position and expect that we have reached the apex of optimism for this move up with the Obama tax cut plan.  I am expecting some chop between 1216 and 1234 over the next few days and then a move down to 1196. 

Who Needs Taxes when you have Ben?

Some interesting news coming out of Washington.  Obama will be extending the Bush tax cuts for 2 more years, along with some other goodies.  Let's add up the effects.
1) Bush tax cut extension ~ $900 Billion - $1 Trillion over 2 years
2) Payroll tax cut ~ $120 Billion over 1 year
3) Unemployment Benefit extension ~ $75 Billion over 13 months
4) Estate tax rate reduction ~ ?
5) Equipment Purchase Deduction ~ $30 Billion
6) Various other tax breaks ~ ?

Of course there will be no spending cuts to pay for the tax cuts.   This Obama deal is a budget buster and guess who pays the deficit?  Banana Ben.  He is paying for this deficit with freshly minted dollars straight out of the Fed.  This is a classic money printing financed tax cut equivalent to a helicopter drop of money.  Milton Friedman would roll over in his grave.

This is pure dollar debasement.  Look for continued trend of dollar weakness.  In the long run, this is going to take commodity prices through the roof.  We are back on the course of 2007-2008.  

Topping

I am more encouraged about the short side as I see some things in the market that are quite rare.  The put call ratios are extremely low on both the CBOE and ISE.  This is not just a one day phenomena.  It has been like this since Wednesday.  Historically, it has been bad news for the bulls to see such lopsided low put call ratios for several days in a row.  

Eventually the bulls will be fully loaded and the only way to generate volume is for the price to come down.  We saw this repeatedly in the strong uptrend in the fall of 2009.  I don't think we will make it to 1235 on this run up, we need to pullback to at least 1198 before making a fresh run up.  More likely, we will chop between 1195 to 1225 for the next two weeks and then make marginal highs around December 31 and then go back lower to form a wider range. 

Nothing Much

Looking for another narrow range day without much volatility.  We probably have one more last gasp move higher before we go back down so I will be keeping my powder dry for that.  Still leaning short overall. 

Likely Gap Up

Based on the flat trading after 2 strong up days, I am expecting a gap up for Monday.  We'll likely make marginal new highs for the year next week and then chop around and selloff after a few days. 

Gap Fill then Sell

We've got the disappointment in the jobs number.  I expect this gap down to be met with eager buyers in the first hour or so and then expect selling to come in around the gap fill area at 1221.  I don't think we are ready to selloff hard just yet.  It will likely come in next week.  In the meantime, it should be choppy around the top here. 

New Highs

Looks like we will be making new highs.  Probably will reach levels between 1235-1240 but that should be a top that lasts for the rest of the year. 

Euphoria

CNBC Fast Money are all believers now in the rally.  The equity put call ratios are at extremely low levels, something you don't see often.  We are near the highs of early November, so we are on our way to forming a double top.  I will wait for the nonfarm payrolls report to come out and will add short exposure on Friday if we get the good number that I expect. 

Bad News from ECB

The ECB has not extended the bond purchase program.  This almost surely means the market will test the bulls to see what they are made of.  We will likely get further euro selling and sovereign debt selling.  Eventually Trichet will give in and extend the bond purchase program but only after we get closer to a crisis.  Need to see more pain in Spain before we get going on the bailout. 

High Expectations

The jobless claims just barely missed estimates and we are selling hard in the ES.  The expectations have gotten high enough that if we don't meet them, the market will not like it.  The jobs number tomorrow will likely be good, but most expect that.  I just don't see a good risk reward bet on the long side now.  It doesn't mean we can't work our way higher, the odds are just worse for an up move.  

I am a bit surprised we are gapping up here.  The market was down right euphoric yesterday and viewed Europe as being contained with the Trichet rumors of more ECB bond buying.   Let's see how the market views the choppy action over the next couple of days.  If it is greeted with optimism, odds are high that we are topping out. 

Awaiting Economic Data

The tone has changed dramatically in regards to economic data.  Now most expect stronger jobs, manufacturing, and other economic data.  Is it a coincidence that we are near the year's highs?  I am sure the shorts don't want to get steamrolled by an above consensus number for nonfarm payrolls.  So we have shorts covering ahead of Friday.  And of course, jobless claims numbers are coming in strong as well.  Can't be short ahead of that.  Or better yet, better get long ahead of it.  Without the thorn of European PIIGS, traders are super confident.  I see limited upside in this type of environment.

Back in Short

Today's action is actually worse in the long run for this market.  There needed to be a razing of the European sovereign debt and equities through panic selling and that wasn't achieved.  Now you have thrown a lifeline into a endless money pit.  It only extends the pain and will come back to haunt this market later.  It also puts to question the probability of a year end rally.  If we rally now, we won't have as much firepower later. 

I am short again.  The first day of month auto buy orders have flooded this market along with the trend followers jumping all over risk assets.  This buying power could last the rest of the week but by next week, we should be vulnerable again to a sharp pullback.  

Will Restart Shorts

This is a selling opportunity, you gotta sell the rumor of Trichet bringing out the nuclear option for the ECB buying all kinds of crappy PIIGS debt.  They have no choice, it is that or economic armageddon.  This is no time to chase strength, we have a change in the winds, we have the doors to fear opening, it will pay to sell rallies for at least another week or two.  I am going to look to reinstate my short positions this morning. 

Europe Stabilizing

Trichet is rumored to be considering continuing bond purchases at the ECB, and that is exciting the market.  Also, we have the first day of month which usually means a gap up.  I don't recommend buying this gap up, we are close to the gap fill area at 1196 and near the top of the range.  Expecting the market to trade between 1190 and 1199 today.  I don't expect any fireworks.  The deed has already been done, in overnight hours of course. 

Gap Up Signal

Despite the constant Europe weakness, I am expecting a gap up based on it being 1st day of the month, slightly oversold conditions, and the intraday trade for today.  I have closed out my shorts and will put them back on tomorrow or later in the week. 

Europe Falling Apart

Europe seems like it sells off every day.  The euro also.  Yet there is no panic.  It is a controlled selloff and weakness just doesn't last.  Traders are quick to buy the dip which is a recurring theme.  I am still bearish on this market.  The path to the bottom will be longer and slower than expected.  Not much of an edge either way so I will mostly watch.

Not Going Down Much

We have a couple of things favoring the bulls, which is positive seasonality on the 1st of the month and into the nonfarm payrolls report, and also we've got a bit of fear from Europe which means there isn't much more to go on the downside.  The best bet is to expect continued range trading for the rest of the week (slightly higher bias), and then we should have selling next week which will mark a short term bottom. 

Range Trading

We are staying within a range of 1175 to 1200 for the past couple of weeks.  This should last till the nonfarm payrolls report if there is nothing crazy coming out of Europe.  Europe will determine whether we break down ahead of nonfarm payrolls or after.  It looks inevitable that we go lower within the next 2 weeks.  If we get close to 1200, I will look to add to shorts. 

Heat in the FX Market

The non-dollar currencies continue to bleed.  The Australian dollar was a very crowded long and that is getting hurt the most.    It is surprising to the see the market hold up so well despite the strong dollar.  The crowded positions seems to be all short dollar.  Maybe the recent weakness in China is a warning sign that we're close to the upper limits on the risk trade.  Europe is certaintly not doing its part to keep the global market afloat.  This market remains vulnerable to a deep correction.  Maintaining my positions into the weekend and for the foreseeable future.

European Pressure

Spain 10 year bond yields continue to rise, we are making new highs.  The heat is coming, the bond vigilantes are putting Spain to the test.  This is giving us a healthy gap down on the futures.  Until the mess is cleared up in Spain, a cloud will be hanging over this market.  No strong feeling about the intraday action today, I will likely just watch.  I am leaning towards further weakness after the open.

Be Back Friday

Happy Thanksgiving.  I will be looking to reshort to a full position soon.

Whistling Past the Graveyard

The bond vigilantes are going hard after Portugal and Spain.  Spain is the biggie.  Thanksgiving Day gives the turkeys an opportunity to put their heads in the sand.  Ignore the current realities in Europe and stuff themselves and go shopping.  I wouldn't be so concerned about Europe if the market wasn't so complacent.  We are whistling past the graveyard.  Spain 10 yr bond yields are above the highs in May when we had widespread Euro panic. 

Wash Rinse Repeat

Are we repeating the weaken on Monday, selloff on Tuesday, stabilize on Wednesday, gap up and go higher on Thursday, and stabilize and edge higher on Friday pattern?  It is pushing forward the bullish Mutual Fund Monday phenomena that we had for so long to bullish Thursday and Friday.  The market continues to chop in this little range, 1172 on the bottom, 1199 on the top. 

Just out:  Better than consensus consumer sentiment.  I hope the positive economic data gets the traders bullish, I want to reload to a full short position at good prices. 

Weaker Open than Expected

Although we are gapping up, it is quite small and well off the overnight highs set during the Asian hours.  There is underlying weakness in Europe and it is weighing down this market.  The market badly needs a flush out to clean out the weak hands.  Everyone points to positive seasonality, one wonders if that is breeding more complacency.  What everyone knows in the market isn't really worth knowing.  Still believe we will see lower prices next week. 

Partially Covered

I still have a short position, but just lightening my position, as I expect there to be about 7 to 3 odds of a gap up tomorrow.  But I do expect lower lows intraday tomorrow.  We are not done with the downside yet. 

Looking for a Weak Close

Are we gonna get another stick save in the final hour to give holiday cheer to the bulls?  Will Bernanke push the buy button?  I am leaning towards a weak close near the day's lows.  Worries over Korea and Europe will have traders leaning on any bids towards the close.   Given the amount of optimism that was built up over QE2, I hesitate to go long.  I want to wait for the correction to mature some more before switching to the long side.  

Real Problem is in Europe

North Korea is a smoke screen today for the real problem which is Europe.  The euro is gettting crushed today.  I am looking at traders flocking to gold as a safe haven and that seems like mindless trading to me.  To some extent, the geopolitical tensions have kept oil from falling apart.  But when things in Korea simmer down and Europe continues to get worse, you should see capitulation. 

Of course, these are bad case scenarios.  The market is about calculating probabilities.  The probability of a sustained rise in the market is much lower than the probability of a sustained pullback. 

Reasons to Sell

Suddenly the market has found a lot of reasons to sell after ignoring potential bad news for so long.  North Korean attack on South Korea, European debt concerns, and the insider trading probe provide convenient excuses to sell.  I would have preferred us to gap down on no news rather than all these things to worry about, but I still expect lower prices after the open.  Last week's gap at 1177 and the lows around 1172 are natural areas of support. 

Gap Down Signal

I have gotten a gap down signal and expect lower prices tomorrow.  Positive for the bulls is the outperformance of small caps and the Nasdaq risk names. 

Ireland then Portugal then...

Be careful for what you wish for.  Ireland bailout was awaited by the Street to eliminate the uncertainty.  But I don't know anybody who thought the bailout wouldn't happen.  So it was an uncertainty that had a certain outcome.  Sometimes logic doesn't work on Wall Street.  All the Ireland bailout did was turn the focus to Portugal which will make traders nervous because Spain is next after that.  And none of the countries really matter until you get to Spain.  Of course Spain is less vulnerable because it isn't in as bad a shape as P I G.  But the market can make it more vulnerable. 

One thing I am noticing today is the strength in the precious metals despite the weaker euro.  The group looks sold out to me and will likely be the first to rocket higher once stocks stabilize.  We might get one last flush out as I do believe stocks and commodities are going lower for the next few days.  I would not be surprised to see gold go up almost every single day in December and close out the year well above the current YTD high. 

Full Moon Special

The full moon is out, and the wolves are howling.  I looked at some interesting data over the weekend.  The CBOE put call volume data for Friday was extreme.  It stood out because it was one of the 10 lowest put call ratios for index options over the past 7 years.   Looking back at those dates, the market had trouble going higher, and usually pullbacked within days.  It is also surprising because we traded mostly flat on Friday.

Investors have forgotten about hedging downside risk and are just letting it ride.  Combine that with the Investor's Intelligence bullish sentiment, anecdotal complacency, and the weak futures despite the Ireland bailout news.  I've continued to believe that you have to sell the Ireland bailout news, as it is very anticipated, and buy when we have further fears of contagion towards Portugal.  I am reshort the ES in the premarket.

Got Out

I covered at the close.  I'm looking for a gap up so I will reshort on Monday morning.

Weak Close

I am still looking for that weak close, we continue to trade below yesterday's close, churning below 1200.   Friday afternoon trading on a flat day is not something that excites me.  Just watching and waiting.

Weaker 2nd Half of Day

We should consolidate yesterday's gain by chopping back and forth in the first 90 minutes, but after that, I expect the downtrend to resume.  China tightening is going to make traders a bit nervous holding longs over the weekend.

China Tightening

China raises reserve ratio requirment, not the ordinary interest rate.  This shouldn't have a big effect on the market but we are up in thin air and after yesterday's rally, we can selloff on any sort of bad news.  Yesterday's highs looks like a good spot to add short.  Yesterday was a dead cat bounce.  Sell rallies.

Running Up the Score

On big up days, after the first hour, strong markets tend to keep going higher and higher finishing with an uptrend into the close.  I am a bit surprised we are not trading above 1198 after the strong first hour.  It looks like the bots front run the day's rally immediately snapping up shares when they recognize a gap up and run higher day.  Then they unload later on in the day.  The bots are probably the ones selling here in the past hour.  Tomorrow should be flat to down.  We may gap up, but it should be filled quickly after the open.

Targeting Next Week

I will look to add some more short tomorrow morning.  I will also not be doing much covering until next week.  I still see this market as being very vulnerable to a sharp selloff.   I don't see a big selloff today, but I also don't see us going that much higher. 

Revisiting May

Maybe it is just too obvious, but this feels like the beginning of May to me.  There is bullish sentiment, the market is off the highs after a monster rally, and European problems are in the news.  It feels like a terrible spot to be long, so that is why I am short.  I hope I have the balls to ride this one down for a bit, unlike the last time. 

Ireland Bailout Coming?

There is a big gap up this morning, in part because there seems to be rumors of an imminent bailout of Irish banks.  Who knows when that news comes out, but I don't think it will be good for the market.  I have added to my short and will be holding till next week in all likelihood.  I am expecting the big drop after options expiration. 

Been Waiting For

This is about the best setup on the short side I have seen since early May.  The price action is everything the bears could want.  Commodities are selling off hard, sentiment is bullish, lots of complacency, European wildcard, and a double top formation.   The market probably will not accomodate traders with a bounce to short.  Too many dip buyers are looking to sell that bounce for it to happen before the flush out. 

Starter Short

Got started on the short side.  I will be looking to add more short exposure if we go towards 1190, but right now, I will be content with a small position.

Playing it Short

I will be playing the short side again, there should be some chop for options expiration which hopefully can provide a good entry point on the short side.  I still think we've got plenty of room to the downside.  1130 is a bit too ambitious, but 1145-1150 is very much possible by next week. 

Commodities Liquidation

There is a commodities blowout going on.  To get an idea of which commodities are mostly lopsided on the spec long side, check out the COT charts.  Crude oil, copper, corn, soybeans have very high speculator longs open compared to past history.  Surprisingly, cotton and silver are not near the spec long highs. 

It makes sense that commodities are getting crushed to a much greater degree than stocks.  The hot money has been piling into commodities, not stocks.  They are the first ones to pull the ripcord when things get hairy.  The key to the game is to determine where the hot money comes back to when the coast is clear.  I believe it will be in the precious metals, and not the industrial/ag commodities. 

Dip Buyers Galore

The market has been completely conditioned to buy any selloff.  There hasn't been a selloff like this in so long that traders are jumping at the chance to buy here.  We are not done with the selling yet.

Sweet Spot

This is the sweet spot of the selloff, about halfway done.  If you have been bearish, and suddenly find yourself bullish on this dip, the market has accomplished what it has intended.  You can only get a 100 point drop from top to bottom, like in January and April if you have the masses complacent.  QE2 did its job in getting the market complacent.  Even after a 50 point drop, you have reflexive dip buying.  I am not ruling out a bounce, especially since this is options expiration week.  But that bounce should be contained under 1190, today's intraday top.  After consolidating today's down move, we should be ripe for the final leg of the selloff down to 1130. 

Ireland is an Excuse

The Ireland sovereign debt problems were with us when the market was at 1220, it didn't just suddenly come out of the blue.  As the market starts selling down, traders grasp at anything to explain the sudden selling.  What really has engineered this selloff is the excessive bullishness and lopsided positioning of the Street.  Those that wanted to get long already have.  So the selloff should be commensurate to the excessive bullishness of traders.  Thus this selloff should last more than just a few days.  I am expecting lower prices from here, and 1130 sounds like a reasonable target, which is the 50% retracement from the August low to the highs last week.

Stubborn Dip Buyers

The dip buyers have been so well rewarded over the past 2 1/2 months, they must be chomping at the bit to buy this "dip".  This doesn't feel like those past dips because 1) we are much higher in price 2) sentiment has had time to get overly bullish and complacent 3) this dip has lasted longer than all the others. 

I believe options expiration will help to control the downside this week, so we shouldn't close out the week under 1175-1180, but next week could see us have the flush out after the moderating effects of options expiration is removed.  Expecting lower prices later this week.

Just a Correction?

The vast majority view this pullback as just a small correction before we get the year end rally.  There is little fear of a plunge like we saw in May despite sovereign debt concerns in Europe and the recently stronger dollar.  I think there is something more lurking in the waters for the rest of November. 

If we do get down to 1160, I don't think it will just stop there.  From 1160, I think a flush all the way down to 1130 will happen.  That flush will evoke fears of the flash crash and that will probably be close to the bottom.

Fading into the Close

We've had strong finishes for the past 3 trading days, we are due for a weak finish and today is a good setup for it.  Traders continue to be oblivious to potential downside as shown by the low put call ratios and the dip buying phenomena and the quickness with which bears take profits.  I predict more downside this week and expect at least a trip down to 1175.

Hot Potato

Buying stocks and commodities now is like playing hot potato.  Everyone is looking to rent, not buy.  Most traders are looking to dump on the greater fool.  With the complacency that we've built up over the past 2 months, we are vulnerable to deep pullbacks.  Today, I am looking for weakness off this gap up in the first hour and then we should stabilize.  But I won't be betting on any substantial bounces from here.  We've got a ways to go to get this market back on a more sustainable path. 

Riding Bubbles

When I look at my quote screen these days, my eyes naturally move over towards gold.  Then silver.  And then to the other commodities.  The energy in the precious metals is building.  It has been building in the commodities, but the precious metals have had the longest uptrend and the most staying power.  It has the best story.  It is the theme of this market.  Currency devaluation and money printing.  The open interest in the COMEX Gold futures is the highest in history.  The genie is now out of the bottle.  The animal spirits are alive.  I cannot fathom it ending with a whimper.  The volatility coming out of silver is something special.  Are the Hunt Brothers pulling the strings again? 

I really haven't felt this way about something since crude oil in 2008.  This feels like a calmer, more stretched out version of the crude oil bubble.  I regret not being flexible enough to look beyond my specific niche.  This prevented me from being able to ride bubbles.

Riding bubbles doesn't come naturally.  We are naturally inclined to shy away from buying sharp uptrends and moves that are based more on momentum than fundamentals.  Bubbles do not come around often, but they are immensely profitable for those that can ignore the fundamentals, high prices, and can spot their end.  I realized this after piking around in the crude oil futures for a couple of dollars here and there.  I was missing the big picture.  Riding the big wave.  Crude oil had been in a long uptrend since 2002 and by 2008 was the highlight of financial news.  Fundamentally, crude oil over $100 seemed expensive so I was very careful when playing the long side.  I had to ignore the fundamentals but I didn't. 

Crude oil at $110 is similar to gold at $1400.  It is late in the game.  But it is well worth it to pay a higher price for the higher probability of a bubble forming.  There is a lot of upside left.  It will just come swiftly and that will be it.  The most likely time frame for the peak of the bubble is late January to early March.  Much like crude oil at $110 was entering the terminal stage of the bubble, gold is about to enter the same stage.

Pretty soon, after we get this little stock market correction out of the way, all lights will be flashing green for gold.  There will be nothing stopping it.   It will go up almost every day like the Nasdaq did from 4000 to 5000.  Like crude oil from 110 to 140.  It helps that the dollar is seasonally weak in December. 

I will know we are very close to the end of the bubble when the energy is manic, the buzz is deafening, and talks about a new paradigm emerge.  And when peripheral commodities start faltering and all the money only gets funneled to gold.  We are not there yet.

Covered

I don't want to be short over the weekend.  I think we go lower next week but I'm hoping there is a little bounce on Monday to short.  I was too optimistic about this market, I think 1175 won't be the floor and 1160 looks to be in play.  The commodity bubble has popped, and we'll probably have some more commodity weakness next week but gold is probably going to bounce again and make new highs in December. 

Have a moderate gap up signal for Monday, but I won't be playing it. 

Breaking Through

We have busted support at 1202 from yesterday and the overnight support at 1194, and with it being Friday with risk managers lightening up on risk, I expect weakness into the close.  Still short.

Shorting

I have gone in for a short here.  The market is getting nervous and I expect there to be closing out of risk positions ahead of the weekend and possible Chinese rate hike news.  I'm also taking a cue from gold and oil, which are very weak despite a stronger euro. 

Looking to Sell

We need to sell any strength in the first hour as I see a bloody second half of the day today.  No one will want to take home overnight weekend risk and that will be reflected in the selling after the first 90 minutes.  We could have a slight rally in the first hour and I will use that opportunity to get short.  The markets are getting nervous, and dips aren't going to bought as aggressively as the past 2 days. 

Intraday Dip Buying

It is two days in a row that buying the dip intraday worked out and you made good gains intraday.  Usually when you get these dips intraday and a bounce to close strong, its not necessarily a sign of strength.  I do believe we will have a positive Friday and a small gap up for Monday so I want to wait till then to get short.  I still don't want to chase the short side when we've had such a strong uptrend, even though I do feel like we have topped out for the month.

Did I Miss It?

Was that the top that just went by?  I wanted to get a short position and ride it down to 1170 but I don't think the market will accomodate me with an easy entry.  We aren't rallying and if we don't bounce by Friday, it could get ugly next week.  Everything is set up for a pullback, but usually you get more choppiness at the top.  It looks like we're just going straight down.

Rumblings from CSCO

This market is very vulnerable.  The CSCO news was enough to dump the futures and now we have the 1-2 punch from CSCO and of course Europe, the perpetual punching bag for traders.  Meanwhile, gold is strong and oil has made a new high despite the stronger dollar.

It would be a gift to get a rally to 1220 today, I don't know if we'll make it up that high.  The G20 is a nonevent so I am not even paying attention to that.  I am just hoping for another chance to short at higher prices.

Anectodotally, it seems like the bears are in hiding, and the bulls seem emboldened by this strong uptrend.  Sentiment is set up such that we should get a whack down sometime in November.  I am forecasting a 60 point whack down to 1164  before Thanksgiving.  When you see gold giving up and tanking hard, that will probably be a sign that the pullback is near its end.  They always get to the strongest markets last. 

One More Up Day

I am looking for a continuation of the strength into tomorrow, which is Veteran's Day.  It should be low volume trading, probably taking us to 1220.  I will look to reload short there. 

Out of the Short

I am expecting a bounce later today and tomorrow.  The choppiness should continue, I don't expect a plunge from here.  I will reshort later this week.

Commodity Volatility

We are getting the volatility that signals the potential turn of a trend, although I don't view this as the ultimate top.  We will likely chop around between the low 1200s and 1224 for the next few days before finding traction to the downside towards 1175.  I would not get caught up in the hype that is being fed by the media about inflation and commodities.  The buzz is getting too loud for it to sustain much longer. 

Making a Top

Today's action has confirmed the top of 1224 and we should now see more two way trading for the next few days.  After that, I expect a move to the downside, probably to at least 1175, but more likely to around 1162-1165.  We are probably getting close to a bounce, but it will likely be contained at 1220. 

Very Complacent

I have not seen the market this complacent since April.  Traders are not buying put protection and are going all in on the commodities trade.  Parabolic moves in gold, silver, cotton, and about every other commodity.  We are set up for a significant pullback.  The trigger is anybody's guess.

Bubble Ben

We are at the mercy of Bubble Ben and his endless flowing liquidity gun.  You'd think deflation was everywhere with the way he's printing money.  Inflation without food and energy and with hedonistic price adjustments is probably close to zero.  But then again, when oil was at $140/barrel, the inflation number was also quite moderate.  As long as government entitlements, TIPs, and quantitative easing are determined by the CPI, the CPI will always vastly understate inflation. 

I expect us to trade weaker off the open, with late day strength.  It should set up a decent down day for Wednesday. 

Topping Process

Tops last longer than bottoms in the stock market.  Just when it feels like the market will never go down, that is when it becomes vulnerable to a pullback.  Right now, we have released all the positive catalysts that the markets wanted: Republican victory in the House, QE2 beating expectations of $500B with $600B, and an above consensus employment number.  Plus Obama agreeing to negotiate on tax cut extensions.  The market needs time to digest this good news and the process isn't done in 3 days.  But what is important is that the market has more two way trading, not up days and flat days with no down days.  When there is more two way trading, you are building a top which often leads to a sizeable pullback. 

I believe we will get more choppy this week and have more two way trading.  

Final Blastoff

Gold.  It is the most logical choice among speculators to target as the best risk asset.  It is the next bubble.  The greatest benefit of gold is that it cannot be denied by fundamentals.

If oil prices get too high, OPEC will be tempted to bring out more supply thus dampening the price.  There is also demand destruction there.  Same goes for other commodities.  But gold trades on pure speculative fervor.  It has very little intrinsic or industrial value, a small portion is used for jewelry, which is based on perception.  There are many other elements rarer than gold which aren't used for jewelry.  The fact that gold has been used and sought after as money doesn't mean anything in this fiat world where money is not backed by gold.

The story sounds good.  Banana Ben is hell bent on continuing to print money to finance the Treasury budget deficit and to goose the economy.  Since printing money is a very inefficient way of lowering the unemployment rate, the Fed will have plenty of fodder to print more money as the unemployment rate stays high despite lots of QE2.  So they will print more, because if 600 billion is not enough, maybe 6 trillion will be.  If 6 trillion isn't enough, maybe its 60 trillion.  As long as the banks and the financial markets want it, they will get it.  We know Bernanke is the sugar daddy and he will deliver.  All this money printing of course encourages the search for other currencies, and of course, gold, which will be considered the best currency as other nations competitively devalue. 

The chart is beautiful.  It is a perfect example of a chart that is about to go parabolic.  A very long uptrend built over several years with momentum rising every year.  It reminds me of the Nasdaq in late 1999.  Crude oil in early 2008.

From looking at past bubbles, from the liftoff point where the market was basing usually was a move of 50%-60% to the top.  The Nasdaq took off on a relentless uptrend from 3000, going from 3000 to 5000 in 3 months.  Gold has been basing between 1100 and 1250 for the past year before starting its liftoff on the QE2 announcement taking it up to 1397.  Based on past analogs, we can expect a 50% move up at the minimum from that base, so a range of 1650 to 1875, on the conservative side.  If we get a 60% move, it would be a range of 1760 to 2000. 

The best way to take advantage of this is to buy gold, silver, platinum, or palladium.

 Nasdaq bubble

Crude Oil bubble

Gold bubble

Ceiling at 1224

The overbought thrust to 1224 this morning looks to be the ceiling for now and I expect weakness on Monday with a likely gap down.  Still need to see how the last 2 hours trade, but if we finish around these prices, I expect a gap down and then a run lower to eventually fill the gap at 1196.  European debt spreads are widening for Ireland and Portugal, it is ignored for now but that is probably why the euro can't find a bid on a day like today.  Something to look for next week.  Also the European markets have been lagging badly so there is obviously meat behind the story. 

Force Fed Rally

The Fed has put the fund managers into a corner and baited them into getting long risk assets at overvalued levels.  It is now a game of musical chairs and traders are going all in on the risk trade. The put call ratios are at very very low levels, something you see perhaps once every six months, last time I recall seeing such lopsided levels was in the middle of April when we were around 1210.  That was pretty much the top of the move.  Staying short here and will keep this one for a while.

Almost at the Apex

There should be one last push, probably in premarket on Monday as the pre-weekend sellers put a lid on further upside today and the Monday buyers push up prices for the Monday open.  I am staying short, but don't think we'll have much downside today.  I'm looking for the selling to start Monday at the opening bell. 

Nonfarm payrolls almost seem like an afterthought, economic data is now viewed through a double good lens, if its bad data, Fed will buy more assets, if its good data, the economy is recovering and earnings will be higher.  A doubled head coin with Bernanke calling "heads" on every flip.  What a market.  Rigged beyond belief and a complete Ponzi scheme.  Karl Marx has taught Ben well.   Comrade Bernanke will always look out for us! 

Hyperinflation Talk

You know the commodities trade is getting long in the tooth when you hear traders talk about hyperinflation and the dollar going lower.  The euro has topped out after running up to almost 1.43.  We have gold looking like it formed a double top pattern around 1384.  The ES has formed a double top pattern from April around 1215.    The majority believes the Fed will achieve its inflation levels and stocks will go higher.  The sentiment is euphoric.  Yes, not just bullish anymore. 

If you don't get short here, I don't know when you will.  Once in a blue moon? 

Adding to the Fire

I have added to my short position, but with room to add more.  We are in the vicinity of the April highs and that should provide a good risk reward backstop for the short position.  We have a lot of euphoria this morning.  A lot.  I wouldn't be surprised if we are making the highs for this up move today or tomorrow.

Short Ahead of FOMC

I have put on a short position expecting immediate weakness off the announcement.  I have heard about there being too many looking for a pullback, or a sell the news reaction.  That is being contrarian just for contrarian's sake, and isn't supported by actual psychological drivers of market price action.  I still want to point out how the market has been conditioned to be bullish when the Fed pumps money, and that Pavlovian response is the linchpin for why we've rallied so much after 2 months. 

Once the anticipation is over, what is the next catalyst?  And at ES 1187, we are not going higher just because there aren't enough bulls.  The market fundamentals is not conducive to having a lot of bulls, because the stock market has a secular problem, not a cyclical one. 

Due for a Selloff

We are long overdue for a selloff, and today can provide a convenient excuse for it.  I am not going into any of the technicals or the price action, but just into trader psychology.  The past two months have completed transformed the positioning in the Street from bearish to bullish.  This is especially the case for commodities and non-dollar currencies.  While I do see traders positioned for a selloff in stocks, they are not many positioned for a selloff in commodities or a dollar rally. 

Aside from a totally ridiculous sum like $1.5 T or $2 T promised asset purchases, I don't see much surprising this market to the upside.  If we get below consensus or near consensus program, disappointment will ensue.  At least until Friday's job report.  So there is a window of 36 hours where we are very likely to selloff.  That is the window I want to be short for.  I plan on shorting right before the FOMC announcement. 

D-1

One more day till liftoff.  Get your space suits ready.  There is so much anticipation for tomorrow's report and bulls are the majority now.  It is going to take something spectacular from the FOMC to get this market to buy the news.  Can it be buy the rumor and buy the news?  That would surprise me, most fund managers have gotten short dollars, long commodities, and to a lesser degree, long equities.  I believe commodities will have the biggest selloff on the news. 

Another Gap Up

Who are the idiots that sell at the close and buy back at the open 10 handles higher?  We have been getting a lot of these gap ups out of the blue after the previous session had intraday weakness.  The pre-sellers have done their work and now it will be light trading ahead of the midterm elections and the Fed.  There is a very good chance that the Fed will meet market expectations and that should cause a selloff for at least 1 day.  So I will likely look to add short exposure before the meeting looking for immediate weakness after the announcement.  But I don't think that weakness will last long, probably not even past this week. 

Could we rise on the news announcement?  It is possible, but I would only have believed that if we had traded stronger the past 2 weeks.  We've only gone sideways, so I believe it goes lower on the good news.

Pre-Selling Good News

What is widely perceived as good news, QE2, and the midterm elections, a guaranteed Republican takeover of the House, we have selling.  Yes, it is pre-selling the good news, making it that much harder to game the actual news announcement.  They don't make it easy anymore.  The fools who like to buy good news and sell bad news are fewer and fewer.

I don't see a sustained sell catalyst because I am not in the camp that believes the economy of the developed world goes back into a recession.  We are already in one, and its probably gonna be much of the same over the next several months.   And if they can't rehash the same old Euro crisis story, than the bears have very little ammo to make this market go much lower other than overextension of the upside and overexuberance.  I see no such signs at the moment.

Stuck on 1180

For almost everyday for the past 2 weeks, we have been closing between 1178 and 1182 at the cash close 4:00 PM.  This is despite intraday trading as low as 1168 and as high as 1192.  This is a lot of back and forth action going on ahead of a perceived "good news" event.  Usually if you are a bull, you'd like to see strength ahead of perceived good news, not choppy trading.  Anyway, I think we're headed lower off this back and forth trading but it probably will be a spike low that doesn't last very long.  That is how I am playing it.  So I'd like to get short, unfortunately, I think I missed my chance this morning waiting for higher prices in the afternoon.

Eager Beaver Buyers Remorse

Well, it is the first day of the month and a Monday, what did you expect?   A gap down and rush lower?   Of course we got the typical gap up and thrust higher in the first hour.  But that's all this market has got.  This market looks dead tired, it doesn't have energy on the upside, all the up moves seem forced and they don't last.  The euro has also lost steam and that probably was a sign that hedgies were selling into the rally this morning.  It is probably a good time to position oneself short for the potential downside later this week after FOMC.  It seems destined to happen looking at the price action and complacency.

Churning

We've been trading from 1168 to 1186 for most of the past 2 weeks, aside from a couple of false break outs.   I don't know if it is churning or basing for a move higher.  It feels like we should selloff next week but its not going to be as easy as I first expected.  I will still be leaning more towards the short side next week, but it would be nice to short a market that is rallying into next week.

Expecting weakness in the 2nd half of the day today as funds lock up their profits.

Unusual Weakness

The market is acting unusually weak despite the weak dollar today and strong jobless claims number.  This is just a guess, but it seems like funds want to pare down the risk on their books for the end of the month and ahead of QE2.  It would not surprise me to see us keep going lower for most of the day, but I'm not putting any money on it. 

Also, I've been rethinking what happens after the FOMC meeting, and I am less bearish about the post FOMC trade than before.  It seems like the uncertainty and the fear of a sell the news reaction is in the current prices.  That doesn't make me bullish for the post FOMC trade, but it just makes it harder to guess what's going to happen.  Nothing easy in this market with much of the dumb money gone. 

Dips are Fleeting

You can tell the strength of the market by the amount of time it gives you to buy dips.  This market just doesn't stay down for long before bouncing back towards the highs.  Yesterday was a classic example of this.  So was last week.  A strong market gets up right away after pulling back.  This is what this market is doing.  That makes me hesistate to short except for absolutely perfect highly overbought situations. 

Not much read into today, the action feels random but with a strong bid underneath. 

Lowering Expectations

The Fed apparently leaked news to the Wall Street Journal yesterday to lower expectations for the size of QE2.  It is going to make things trickier to trade on the FOMC announcement next week.  The consensus is moving towards a smaller program.  This could actually make the immediate selloff on the news more buyable.  It also would make shorting ahead of the news riskier because expectations are lower. 

What I noticed yesterday was the lack of sustained selling in the market despite the obviously stronger dollar.  This has been a continuing theme for the past week.  It looks like the short dollar trade is much more crowded than the long equities trade. 

Weak Into Thursday

We've got a gap down and run lower.  Due to the complacency, I don't expect us to bounce back right away, I expect us to get down to 1163 by Thursday, where the dip buyers will get aggressive again.  I don't expect any miracles from the bulls today, it is the bear's day. 

Waiting for the Waves

The volatility has died out, I don't have much conviction long or short.  But I think we have one more move up before the end of month.  Just watching and waiting. 

Front Running QE2

It is a possibility that we could top out this week as sellers front run the expected good news of QE2 and the midterm elections and sell before the news comes out.  If that happens, it will make the action next week trickier.  I don't see that much enthusiasm for stocks, but I do see enthusiasm for weak dollar trades and commodities.  The sell the news phenomena should hit the currencies and commodities much harder than stocks. 

Today I expect us to grind higher from the open.

Nothing Wrong

I don't want to read too much into one day, but the two most likely things are 1) The market has another up day tomorrow and tops out by Wednesday or 2) We keep going up slowly into Friday.  A big pullback usually doesn't come right away after days like Friday and Monday.  The bulls are doing nothing wrong. 

Bullish Market

I underestimated the strength of this market when I stated that we'd be in chop mode from 1156 to 1182.  With higher highs and higher lows after hitting 1156, it is not a top formation but a continuation of the uptrend.  The dollar has resumed its downtrend and last week was just another mini-scare before going to higher ground.  Today, I don't expect a big up day but I do expect us to be trading close to 1200 later this week.  Still no rush to short.

Gap Up Monday

Mutual Fund Mondays got moved over to POMO Fridays during this 2 month rally.  But we still tend to have bullish Mondays so I expect more of the same as we are eerily quiet just a few points from the highs of this week.  After the volatility earlier this week, it is odd and a sign that we need another push higher.   Expecting a gap up on Monday and a run to surpass 1186.

Note on Currencies

From the action this week, I've noticed that the speculators are crowded into 2 main currencies.  The AUD and the CHF.  They have been underperforming against the euro the and it is probably speculators bailing out ahead of event risk of the G20.  It tells me that the AUD and CHF are extremely crowded longs, and if you are going to play for a sell the news reaction to QE2, shorting those 2 currencies probably gives you the most bang for your buck.

Ahead of the G20

The G20 meeting is this weekend, and that can be viewed as event risk for those holding substantial currency positions.  Most of those speculators would be short the dollar so they have probably been paring back their short dollar positions.  I'm sure nothing will come out of the G20 like always and it will be back to more dollar selling.  That is why I can't be too bearish here because I think the dollar will continue the downtrend next week.

Out of the Short

I've gotten out of my short position.  Should have covered on the weakness yesterday but I was looking for a gap down that never came.  I don't see much of an edge today, but we're likely to go higher in the 2nd half of the day.

Failed Signal

We got a failed signal and that usually means there is strong underlying demand.  Another gap up pretty much seals the deal for a trip to new highs beyond 1186.  1200 looks to be in the picture for next week.  I'm still short but with plans to exit soon.

Gap Down Signal

I am getting a  strong gap down signal based on the rally in the final 2 hours back to 1176.  I'm also expecting the dollar to strengthen tomorrow and the commodity players in gold and oil to throw in the towel tomorrow morning. 

Range Bound

I don't see this as confirmation of anything but continued choppiness.  Since we are still above the low end of the range, I remain short with a view for covering if we get close to 1156.  We may accomplish that tomorrow morning.  In any case, I don't want to stay short past Friday lunch time.  If we close around 1170, I expect a gap down tomorrow. 

Incredi-bull

This bull is on steroids.  I remain short.  Perhaps this is the breakout that takes us to 1200, but I am playing this as a false breakout of the range that can be viewed as a stop run.  We took out the stops and weak holders who bailed out on the break out of 1182.

Of note is the new high in the ES but the lack of a new high in crude oil, gold, and the euro, the mighty trio that has taken us up since the FOMC meeting.   Looking for weakness tomorrow, today is a crap shoot. 

Going Short

I have gotten short in the premarket, the choppiness over the past few days has defined a range between 1156 and 1182.  The risk reward looks favorable with a short at current levels.  I will hold on to the short till tomorrow morning or 1156. 

That Was It

We touched 1180 and that looks to be the top of this move up from 1156 yesterday.  We are set up for a down day tomorrow and I would be leaning short.  The downside should be contained to 1156, at the worst.  Choppy trading continues.

Story is Getting Old

Dip buying is working again and the bold bears are getting gored by the bulls.  I will only try to top tick this market, I will not chase weakness.  I will be a seller at 1180-1182.  Below that and I am just watching. 

Changed Market

Yesterday we saw hints of panic among traders and we've opened the door to future selling.   I expect early weakness and late day strength.  So I would look to buy dips early in the day. 

Watch 1156

We should not break more than a couple of points below 1156.  If we do, and stay under 1156 for more than an hour during US trading hours, we are likely to go down further to 1142.  I believe 1156 should hold and we should pop back towards 1173-1175 by Thursday.  

Chop Until FOMC Meeting

Today's low and yesterday's high will define the approximate top and bottom of the chop range that I see till November 3.  Yesterday's high was around 1082, and today's low is yet to be determined.  This chop will be very tradeable for the next 2 weeks, so that will be how will approach it. 

After the chop is over, I expect us to break down to the downside, although I don't think it will be a new downtrend.  It should just be a pull back, but a big one that will scare people.  We could go down to around 1100-1110 on that pullback.  But that is just something I am guessing way out there in the future.  For right now, we should take advantage of this chop to pick up a few dimes before the bulldozer rolls in. 

Dollar Bottoming

With the dollar forming a short term bottom, the market will have problems exploding higher.  It can still edge up, but I don't see the same explosive up moves off bottoms.  At the same time, the market has hardly had a down day and the trend has been firmly higher.  Until we get more two way trading, it is hard to be a bear.  But I think we're starting the two way trading this week, on the way to forming a top.  So I'm forecasting choppy up and down moves for this week, with swifter selloffs than in the past 6 weeks. 

Letting Out Air

Weaker futures after AAPL's earnings is better for the bulls as it gets rid of some froth.  Market apparently was leaning very long ahead of earnings today, as can be seen by the panic selling in the AH right now.  This is something we haven't seen in a very long time, the market going lower after earnings.  It is still a bull's market, so I wouldn't chase shorts, and dip buys will probably still work for 2 more weeks.

AAPL and IBM

Earnings are coming up for the big boys and odds favor the market reacting favorably to AAPL, because that has been its history.  With AAPL always lowballing estimates, they will come up with another big beat and the pom poms will be out in full force.  That should lift the futures in the after hours.  Whether it can maintain that strength is yet to be seen, but this market seems hell bent on going to 1200. 

Yes, the crowd is getting more complacent but we're not at January or April levels in terms of bullishness.  And coming after such a big washout in May-August, stocks are in stronger hands now. 

Going to 1180

We've got a big turnaround in the overnight futures and resting near the highs of the overnight session, yet still below the futures close.  In general, this means we keep going higher for the rest of the day, plus we've got the Mutual Fund Monday working for the bulls and the rush to get long tech ahead of AAPL, so we're going to 1180 later today.  Strap on your bull horns.  We are going up today.

Mapping the Apex

The calendar is set up such that we should have some interesting markets in the beginning of November.  The midterm elections are on November 2, and the much awaited QE2 announcement at the FOMC meeting on November 3.  Don't forget the always reliable Mutual Fund Monday combination with the first day of the month could set up an explosive final "all-in" rally on November 1 that should mark a short term top.

Here is how things are setting up.  First, with high expectations for a Republican victory in the midterm elections and the belief that will be a positive for the stock market, optimism will be at an apex.  The problem is that the Republicans will be in favor of less government spending and less stimulus, which is a negative for the stock market.  And winning the midterm elections is no guarantee of extending the Bush tax cuts.

No one will want to be short ahead of the midterm elections and the FOMC meeting where Banana Ben could light fireworks to the market with a QE2 announcement for $1 trillion.  I never like to bet the under with BB's liquidity gun.  Odds are we're more likely to get a $1 trillion asset purchase than $500 billion, which is what many are expecting.  However, going into the FOMC meeting, there will be almost no short base.  That doesn't mean we enter a bear market but the pullback after the meeting can be very sharp and quick.

We should see the ES top and the dollar bottom at the apex.  The cascade of selling not seen since May is very much a possibility.  This rally is at a mature stage and is ripe for a healthy down move.  Seasonality is usually positive for November, but that always takes a back seat to the charts, fundamentals, and sentiment. 

In the meantime, the market has something to look forward to and we shouldn't have more than a 2% pullback till the time comes for all this good news to arrive in November. 

Another Comeback

Another day with intraday weakness, another strong close, especially between 4:00 and 4:15. The futures traders seem to like to ramp it up after the stock market close.  Despite the weak financials, the techs have taken over to keep this market afloat.  AAPL reports after the close on Monday.  I'm sure they blow out the numbers again and ramp up the futures right after the release like it always does.  The pattern is so old and repetitive but it doesn't change. Looking for strength on Monday whether we gap up or down.

Bears Need Dentures

We have the dollar selling off significantly today and we haven't had much traction to the downside.  We are selling off again now but we're only down 4 points from yesterday's close.  It looks like this trend will last longer than I expected.  I thought we could ramp into the Fed meeting and then selloff and form a huge top.   But the lack of overt bullishness despite going up nearly every day for over 6 weeks has me second guessing that outlook. 

As I write, crude oil is dumping huge on the dollar suddenly finding buyers.  The dollar is the lynch pin for everything.  A dollar rallying for more than a couple of days will have huge negative ramifications for this market. 

GOOG and Bazooka Ben

The bears are getting whacked with a one two combo of GOOG and Bazooka Ben.  CPI came in less than expected and that will have everyone believing the Fed will have a giant QE2 program.  There is a lot of mileage coming from this QE2 theme, I don't know when it will end, but it is reaching extremes.  Notable is gold is actually lower today and the dollar is around flat.  Looking for some early selling today. 

One More Down Day

Options expiration is having a negative effect on the market and I expect one more weak day and then we'll be back off to the races towards 1180 starting on Monday.  In this type of power up trend, selling anything but tops is dangerous.  I don't dare chase a short entry in this type of market.  Any downside tomorrow should be contained at ES 1161 or in the worst case, 1157.  This market is not ready for a big down day just yet. 

Out of the Short

I want to wait for a bit of a better setup before getting short.  Or at the very least, some more two way trading.  I expect the 2nd half of the day to be strong ahead of Banana Ben's jawboning due on Friday.  The weak dollar is going to help this market stay afloat today.  The only way I see this market having a big down day is if the dollar is trading strong.  It is not today, thus my lack of conviction on the short side.

INTC and the Market

Well, what I thought would have happened to the market today happened to INTC.  We had the gap up on ok earnings and then a drip lower all day.  That was what I expected for the market but we managed to pull a levitation act again.  It feels toppy, but the market was so de-risked over the summer that it is taking longer than I expected for everyone to get on board the risk train.  Bernanke has a speech on Friday, I'm sure he'll greet the market with more QE goodies to look forward to.  All but the oceans' worth of liquidity is priced in right now.

Put/Call Very Low

There are alarm bells going off in the options pits.   The put/call ratios are extremely low this morning.  I would consider this just a one off were it not for the complacent sentiment that I have seen on CNBC and the relief that came after the Fed minutes with QE 2 on schedule as planned.

I have repeatedly noted the strength of this market but today feels like a fulcrum day.  A day where the hesistant just say get me in and the shorts just throw in the towel.  We may touch 1175 a couple more times in the coming days, but I see little upside near term.  The risk reward on the short side is very compelling here. 

Watch the Dollar

The dollar is not selling off against the majors despite a healthy gap up in the futures.  This is a sign of exhaustion for the dollar down move, I am getting more negative on the market here and have put in a short position.  Yesterday on Fast Money, the complacency was quite thick after INTC came out with ok earnings and everyone was afraid to fight the trend.  A pullback is right around the corner.

P.S. - There was a Barton Biggs sighting on CNBC yesterday.  He was very bullish.

INTC Coming Up

Although I believe INTC will disappoint and earnings overall will disappoint, the market has had very few pullbacks and if there is a pullback on the INTC news, it probably won't last long.  A tough market to short sell in.  It will get easier, but right now, it's still a buyer's market.

Fed Minutes

The trade before 2:00 PM ET and after will be dramatic.  I don't expect any big moves but we should see some volatility when the Fed minutes come out.  The market is showing subtle signs of weakness, the dollar is trying to find a short term bottom.  With INTC coming after the bell today, I will be looking to be on the sell side today.  The question is timing it.  We can see weakness after the Fed minutes when the details are more vague than what the market wants. 

Columbus Day is this Slow?

The volume is very light and it feels like the week after Christmas.  I wouldn't put much meaning into a day like today, its is almost a nothing day.  Tomorrow should give us a better picture, but the market looks strong. 

Earnings Coming

This week earnings are going to distract from the QE2 talk, and that should bring some strength to the dollar and weakness to stocks and commodities.  I think INTC will drop a bomb on Tuesday afternoon and then from Wednesday we'll have some profit taking.  We may squeeze a bit higher today, 1170 should put a cap on any upmoves. 

Headlines Repeating

The Yahoo Finance headline: Stocks Edge Up on Expectations of Fed Move; Dow Hits 11,000 for First Time Since May- AP 

It is the same explanation for the past week on an up day.  The market is going up in anticipation of QE 2.  Well, the FOMC meeting is 4 weeks away.  Can they repeat this headline everyday for the next 4 weeks?  We have earnings coming up next week, and it won't help the market.  INTC is lagging the market ahead of its earnings.  The banks are all laggards. 

The market only cares about the techs and financials during earnings season.  INTC earning come out Tuesday afternoon, that will likely provide us with a gap down on Wednesday.  Until then, we can edge higher. 

March/April 2010

I am getting flashbacks to that time period.  But this time, we have less optimism.  The Fed is more willing to pump money into the system now.  The only difference is that we have proof that the recovery has slowed down.  In March/April, there was no proof of a slow down. 

I don't think we'll make new recovery highs in the ES.  1200 is a possibility by early November, but that would set up another good short opportunity which could be ridden down to 1100.  Those talking 1300, 1400, are not aware of the new normal.   In order to reach those levels, we need to reach escape velocity for GDP growth and I don't see that as likely unless Banana Ben goes crazy and prints an extra $3 trillion+. 

Weak Dollar Theme

Since the FOMC meeting on September 21, a clear trade has taken place.  Long commodities, short dollar.  Stocks are being swept up higher following this theme.  We need to delineate all stock market action as pre 9/21 and post 9/21.  Pre 9/21, stocks went up because they were oversold, pessimism was high, and funds were re-risking.  All gains since 9/21 are due to stocks following a weaker dollar and stronger commodities.  I want to emphasize that stocks going higher are not making the dollar weaker and the commodities stronger.  It is the other way around.

If you can grasp this concept, you can see why we had intraday weakness in the market on Thursday.  The euro made a short term top above 1.40, along with the ES making a top at 1163, and reversed hard but was able to stabilize above 1.39.  For a moment, the market was worried that the weak dollar trade had reached a top and stocks sold off in sympathy.  But the euro stabilizing helped the market to rally into the futures close.

Every 1-1.5% rally in the dollar till the next FOMC meeting should be shorted. 

Stocks are at the mercy of the weak dollar theme.  This will play out till November 3, the next FOMC meeting.  Everything else is a sideshow.

Leaders, Followers, and Laggards.

List of what is strongest in order:

1. Leaders:  Precious Metals, Agriculture, Softs, Emerging market equities, Non-dollar currencies, Treasuries
2. Secondary Leaders:  US equities, Energy
3. Followers and Laggards: European equities, Japanese equities

 When the European and Japanese equities start playing catch up, that is when we are very late in the rally.  The strongest sector, commodities and emerging market equities and non-dollar currencies will likely outlast the S&P in its uptrend like 2008.

Ahead of NFP

Expecting a quiet trading day ahead of the nonfarm payrolls with a slight upward bias in the 2nd half of the day.  Dollar continues to get dumped and it is setting up for a mini dollar selling climax either today or tomorrow.  If we rally on a stronger than expected nonfarm payrolls report, I will likely get short. 

Unusual Treasury Strength

We have an unusual scenario in which stocks and commodities have been rising strong, and so have Treasuries.  Usually Treasuries aren't near 52 week highs after stocks and commodities have gone up so much. 

I've looked back at past scenarios in which stocks and Treasuries rise at the same time, it is usually very bullish for stocks.  When Treasuries begin to selloff and investors take more risk, that should be the start of the topping process for stocks.  We are far from that now.

Covered

I don't like the price action and I've been looking at some things that suggest that we should rally for longer than many people expect (with corrections along the way). 

Looking to Cover Soon

I don't think we have much downside, but I think the market will have a hard time bouncing today.  So I will probably cover in the final hour.

Rigged Dice

So if the economy goes into a double dip, the Fed will rescuse the markets with QE2 and the markets will go up.  If the economy recovers, earnings will rise and the markets will go up.  This argument started with David Tepper and is almost considered fact now.  Whenever investors think it is that easy to make money in stocks, I take caution.

Dip Buyers Heaven

A very strong rally with hardly any dips.  The train left the station a long time ago and it hasn't slowed down enough to pick up many passengers along the way.  What few dips we have quickly disappear to give way to further rallies.  I will probably have to try to eek out of my short position with minimal losses, I don't think we'll have any dips greater than 1% unless we get some more euphoria.  This rally still hasn't been fully embraced by the investor community.

The incredible levitation has the full support of the Fed who wants to goose stock prices to stimulate spending.  This will be another play that ends badly but we can enjoy the party while it lasts.  The party in the gold section seems to have the most alcohol. 

Money Printing

The market is zoned in on the Fed and its plans to print its way out of high unemployment and "too low" inflation.  The dollar is getting trashed everyday and equities have an endless bid.  The FOMC meeting is on November 3.  Mark your calendar.  That will be the mother of all pivots.  The hedgies are going all in on the short dollar, long financial assets trade.  We still have 4 weeks to build up steam.  The higher she goes, the harder the fall.  Just make sure you've got parachutes ready in early November.