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.