Monday, January 31, 2011

Egypt, Who Cares?

The market shrugged off Egypt today and everyone and their mom knows that we gap up on the 1st day of the month so we are closing strong.  But really, if we gap up tomorrow and keep going higher, we're right around 1296 again.  And it would really surprise me if we got back to that level after the beat down on Friday.  But playing the bear side doesn't pay unless you top tick the rallies.  Selling weakness is a fool's game in Bennie's ponzi scheme. 

Just 1% from 52 Week Highs

It doesn't feel like it though.  Another wall of worry that will be climbed.  Traders will grasp at anything to find an excuse for market action.  I think the ES would have sold off anyway even if they didn't show the Egypt riots on TV.  Oil and gold would have probably bottomed last week anyway without Egypt. 

Today is probably front running by funds who well know by now that every 1st day of the month is an up day (it is written in stone) starting with a monster gap up.  But the buyers have proven to be very eager again.

Panic is Gone

So did you expect a gap down after a beatdown Friday?  It is a pattern that is as old as the hills.  A panic Friday with a weak close followed by a big gap up on Monday.  It is too pat for the market to just ignore what happened on Friday and grind right back up to new highs by the end of the week.  The market will likely do some work at these lower levels before going back up.  But I am not going to bet against Bernank. 

Friday, January 28, 2011

Quite a Selloff

I am impressed by the bears for today.  This selloff came out of the blue.  I guess there are some riots in Egypt but that was going on when the ES was at 1298.  It seems more like the market hitting strong resistance around 1300 on SPX and the buyers are less eager than before.  It doesn't mean we'll crash down, because there are dip buyers underneath.  There are strong buyers around 1270, and strong sellers around 1300.  I don't expect much follow through selling next week.

Economy is Better

If you pump up someone with all kinds of steroids, human growth hormone, and drugs, you will get a bigger, stronger person.  Same with the economy.  Thus the better GDP numbers.  The patient is almost maxed out on drugs and artificial growth engines, it has built up a tolerance.  If you take away QE or fiscal stimulus, you will get an economy that goes back in the doldrums. 

The patient needs to go cold turkey but it won't be allowed.  Dr. Bernanke will be there to keep injecting drugs.  This market is hooked on easy money.  It does make the economy stronger, but with side effects.  $100+ oil will be one of those side effects.  The ES is basically untradeable these days so if you are not into long investing or trading small cap movers, I would recommend you take a break. 

Thursday, January 27, 2011

AAII Bears Rose

The short-term trading oriented AAII sentiment survey came out with many more bears than one would expect being at a 52 week high.  It goes hand in hand with the growing buzz among traders that we need a correction or a pullback, and that it would be healthy.  I doubt that the market will oblige.  This renewed bearishness doesn't mean we keep going higher, but we can probably eliminate that well awaited 5% correction from the menu for the next couple of weeks. 

ES 1296

Just from my paper napkin charting, it seems like 1296 is quite a formidable barrier for this market.  That equates to about 1300 SPX.  Equity mutual fund inflows are continuing, now 2 weeks in a row, after an extended period of net outflows.  It is amazing that this market has been able to rise so much without the equity inflows.  QE2 has had a dramatic effect in boosting stock prices.  We may not get back to a normal market till July, when the Fed isn't buying bonds everyday.  Until then, it will be hard to predict the market based on historical patterns.  There is no precedent for the amount of money pumping in non-crisis situations.

Wednesday, January 26, 2011

FOMC Prediction

This FOMC meeting will provide no major surprises, the Fed is not ready to change its language other than maybe giving a slight improvement in the economic outlook.  There should be nothing to derail the current rally, but we might get a sell the news reaction anyway because we are right near 1300 SPX resistance.  If we do selloff on the news, it probably won't last past Thursday. 

Tuesday, January 25, 2011


I've noticed a high index put call ratio over the past 2 days, after options expiration.  Looks like investors want to be hedged for a possible pullback.  When investors are hedged, they are less urgent to sell. 

Earnings Season

Most of the earnings season is past us and there were no big surprises.  Earnings aren't blowing out expectations like the past because consensus numbers are higher than before.  This market has been dull, so I haven't done much.  I still lean towards the bullish side in this tape.  Europe has been remarkably strong over the past couple of weeks so it is fair to say that the European worries are out of the picture for the time being.  It was a worn out story anyway, and those that wanted to sell Europe already have. 

The only real problem out there that could derail this market is China tightening.  But China doesn't have that high of a correlation to the S&P like Europe does.  So I'm not sure what will be the catalyst for the next correction.  It could be the Fed laying off the dovish tone in its March or April meeting.  The Fed will likely stay close to the party line of low inflation, high unemployment for this upcoming meeting. 

Monday, January 24, 2011

It's Not That Easy

Reading the news over the weekend, mostly about stocks.  And the general belief is that we've gone too high without a correction, and the market needs a breather.  A pullback would be "healthy".  That is another way of saying that the pundits have reduced positions and are hoping for a pullback to get longer! 

Most of the pundits say a 5-7% correction would be healthy, down to about 1220-1230 on the S&P.  The VIX shot up too much last week for such a meager selloff.  It tells me traders are more nervous than the surveys say.  I don't think the correction will come now or from these levels.

Friday, January 21, 2011

Bull Market Doldrums

There is a recency bias that occurs in the market, so some traders don't remember or forget what a bull market feels like.  It is a pain in the neck for index short sellers, and rewards dip buying.

There is a wall of worry despite what the sentiment numbers and the put call ratios say.  Traders are still worried about Europe, China, and to a lesser degree housing.  Tepper mentioned the first two, and he's basically thinking the same thing as the rest of Wall St. 

Only this month have retail started to cut back on bond fund allocations and got into equity funds.  This should continue for several months.  Retail is only now starting to jump back in on the equity bandwagon after getting burned in the flash crash and European woes last year.  Give this bull market some time, let the retail traders pile in again.  There will be plenty of time to short this market later.  No need to rush.  Have a good weekend. 

Tepper Says

I didn't even know who this guy was until he came on CNBC last fall, and called for the market to keep rallying.  Anyway, he's still bullish, but less than before.  So I can go ahead and buy now?  Yeah right.  In this business, you can never rely on tips, or other's advice.  You've got to make your own choices.  I think the market will keep going higher, confounding a lot of people, but it won't be because of people like David Tepper being bullish.  We're in a bull market and the economy is still improving with many job gains ahead. 

We still haven't got that blow out jobs report that makes everyone excited.  ADP has, but not nonfarm payrolls.  When we get a few of those, then I'll be more willing to look at the dark side. 

Thursday, January 20, 2011

Bottomed for Today

I expect a short squeeze and long buying into the close.  It should be furious dip buying.  Would not be surprised to see us get back to flat on the day in the ES.

Buying the Dip

I am buying this opening dip for a trade. I believe we will be at higher levels next week. 

Wednesday, January 19, 2011

Don't Expect Much Downside

Today's pullback is a buying opportunity.  No, I don't think we'll go back up to a constant uptrend, but we're probably mostly done on the downside.  The dip buyers will be ready to buy tomorrow and are probably readying their shopping lists.  We probably don't have much upside until we get past options expiration, then the call buying will refresh to another cycle and that will lift the markets. 

A Grind

I'm not seeing much in the way of trading opportunities in the ES.  I am still a believer that gold will outperform equities over the next 6 months.  I believe both will be higher in the summer, but I just think gold will go up more.  I am more focused on individual stocks these days so less posting on intraday movements which are minimal.  If we finish up again today, I would consider doing some shorting for a quick trade.  But I am in no rush.

Tuesday, January 18, 2011

Where is the Excitement?

You would think there would be more excitement for a stock market that goes up almost everyday month after month but it seems like we still have worries over little things like Steve Jobs taking leave or Citigroup missing earnings.  I believe those are little things in the big picture.  The big picture is a Fed manipulating the markets to make them go higher, a US economy pumped full of new fiscal stimulus (tax cuts), and a jobs situation getting better.

The US economy is in a sweet spot right now and the market senses it because it isn't being derailed by some random European bit of news or struggles in the Shanghai stock market.  Fighting the upswing just to catch a quick little pullback seems like a poor risk reward.  Who isn't waiting to buy a pullback (either shorts or underinvested longs)?  I'm sure there aren't many looking to sell on weakness!  That is why we keep going higher, bit by bit, until we reach saturation.  Not there yet.

AAPL and C

The market is getting pressured by Steve Jobs and Citigroup's miss.  These are just more pieces of the wall of worry.  Bears can't get excited about a 1.5 point gap down after hitting a 52 week high on a Friday over a 3 day weekend.  Expecting more rallying in the coming weeks, but the pace should definitely slow down.

Friday, January 14, 2011

Long Weekend

Maybe when the pundits start putting out ridiculous S&P targets will I start to think about shorting.  The majority on TV all admit that we've gone too far too fast and need a correction.  But, they all agree that correction is a buying opportunity!  So we need to see bit more of a rally before performance anxiety really kicks in and waiting for a correction is abandoned.  Enjoy the 3 day weekend, I will be back on Tuesday. 

Dull Market

You know what they say about dull markets.  Don't short 'em.  Daytrading is out of the question with these small ranges, and we can microanalyze the indices a thousand different ways, but the big picture is we're going up with hardly any dips.  So take from it what you can.  It is not a market for traders.  If you are an investor, this is heaven.  Since we have the 3 day weekend ahead of us, we might see some early selling but I don't think it will last to the 2nd half of the day.  You can't short this market yet. 

Thursday, January 13, 2011

Dip Buying Pays Again

We dipped down to 1276.25 and now we're trading 1281 just 30 minutes later.  That's almost 5 points in less than 30 minutes.  The dipsters prevailed again.  The trend is so strong, with so few pullbacks, it reminds me of the late 2006-early 2007 rally. I am waiting patiently for the market to get so overextended that it begs to get shorted.  Probably at 1295 to 1300.  Until then, I just watch. 

Spain Auction

So there were no problems and everything went fine with the Spain bond auction.  And the rookie traders who sold stocks ahead of the auction have the luxury to buy back higher after.  The euro is making some dizzying moves here, up 1.8% after being up huge yesterday.  There are still a lot of dollar believers out there, despite the Fed's endless QE. 

Everyday we have the same low vol creep higher with the occasional 4 point dips which are buying opportunies.  I bet the dip buyers are lined up right now just waiting to snap up ES on sale at a dip to 1279!  What a market!

Dollar Back to Punching Bag

For those that were tricked into getting bullish the dollar based on positive US economic data, they are paying the price today.  Euro is storming back higher, stringing together 2 big up days.  It is going to a be long year for those bullish the dollar.  The ECB and Japan can't compete when it comes to putting out money supply.  And the US GDP growth is just not great enough to overcome the supply. 

The scary part is that commodities hardly went down after the dollar strengthened.  I can't imagine the bubbles that will appear when the dollar tanks.  It will be a sight to see.  It might put the first half of 2008 to shame.

Wednesday, January 12, 2011

Drop Will Come Suddenly

I don't think there will be any clues before we get a week's drop of 5-7% in the market.  The thing about bull trends is that you can't rely so much on sentiment, so it is hard to time tops.  The patterns are harder to discern because the emotions are dulled, greed being a much less powerful emotion than fear. 

But the decent pullback in late November tells me that usually a strong trend after such a pullback lasts for at least 2.5 to 3 months.  So making a rough guess, I would put the time range for a top at around mid February to early March.  The price is harder to guess, but we should probably be at 1300-1310 by that time. 


Nothing happened with Portugal's bond auction.  It was a non-event.  Some were concerned about this, so that's why we're getting the reflexive gap up in the futures based on getting over another wall of worry.  We're at 1278 in the futures, another fresh 52 week high.  There is money that desperately wants to get into equities on any dips, but the market is not complying.  The dips have only happened intraday, and the market bounced back immediately.  We've got to get to higher prices to bring out supply, before then, we'll just keep grinding away. 

It isn't a great market to trade for faders except those that buy dips intraday.  I am mostly on the sidelines watching this action, the volatility is too low for my liking.  We may get some stirrings on INTC's earnings after Thursday's close or premarket with JP Morgan but it will probably be a snoozer.  When fear is contained, so is the volatility. 

Tuesday, January 11, 2011

Selling Ahead of Portugal

There is some risk being taken off the table, probably due to some nervousness ahead of the Portugal bond auction.  Like almost all bond auctions, it will likely be a non-event and the rookie traders will likely buy back the same position at higher prices then they sold a couple of days prior. 

There is still a lot of pent-up buying potential for equities.  Ever since the flash crash, there has been no inflows and until I see sustained retail buying to match the bullish sentiment, we're still a long ways from a top. 

Beyond the Next Dip

Sometimes I get caught up in the day to day movements and forget to see the forest while staring at a tree.  Livermore always said the big money was in the long term moves, not the short term fluctuations.  Whatever short term fluctuations we have in risk assets: stocks and commodities should be used to grab the long term position.  So we must do whatever we can to get a long term position in line with the long term trend.  I believe the long term trend is up. I will follow that theme and look to get long, not short.  I will still short, but only when the set up is very ripe. Otherwise, I'll be more focused on long setups.

I can't put all my belief in sentiment.  Especially when its so fashionable in the media to mention the sentiment surveys as a contrarian indicator.  It is counter to what other things are telling me.  The Fed's QE, the improving jobs picture, and the lack of retail enthusiasm and equity fund inflows.  

Monday, January 10, 2011

Europe Rehash

The script has all been laid out beforehand and I'm sure everyone knows the plot.  It is Greece then Ireland then Portugal then Spain.  It's Portugal's turn. I doubt this will be much of a market mover because everyone knows.  Still we get the gap down but I wouldn't bet on much of a drop, it has been a fool's game to call tops. 

Friday, January 7, 2011

Lots of Index Hedging

The equity put call ratios are low and the index put call ratios are high.  This usually isn't a good short term sign.  Based on the intraday action, the market wants to take a rest but not pullback much.  I still doubt that we'll pull back below 1250-1255 level this month.  However, I think the upside for the month is limited because sentiment is so bullish.  I'm going to play this market as if it in a tight range, with an upward bias.  So not really much to do.  Just waiting for a fatter pitch to swing at. 

Market Should Be Down More

When the market doesn't go down as much you expect on a consensus miss for an economic report, it speaks to underlying strength and demand for stocks.  This was a woeful miss, especially with high expectations coming from the ADP number.  I think we're going higher today because we're still not at levels where you have willing sellers. 

I am sitting on the sidelines waiting for an easier trade, trading right now seems to be exchanging fire in the front lines.  I'd rather be a sniper waiting for a sure shot from safe range. 

Thursday, January 6, 2011

Nonfarm Payrolls

Taking the over on the consensus numbers of 150K jobs growth.  It will be a low hurdle to jump over, but the crowd isn't dumb.  They saw the blowout ADP numbers and I'm sure the whisper numbers are much higher.  Expecting a gap up after the nonfarm payrolls numbers  beat. 

Out of Short

I am taking this little dip in the market to get out of my short position near break even.  I will look to recharge on the short side if we get closer to 1280.  Even then, I doubt we'll go down more than 25 points so 1255 should hold.  Playing short is a mug's game in a bull market.  The put call ratios are low and have been for a long time.

Welcome to the bull!  We have to get away from the bear market sideways market playbook.  This is a very strong market, and we need to adjust to the new action.  I will play short much more carefully and I will be a buyer of all dips.

Fundamentals of the Dollar

The euro has been the punching bag of traders for a year now.  But the long term fundamentals for dollar weakness is still intact.  Contrary to what the pundits on TV say about the importance of growth rates on currencies, other factors are much more important.  The most important factor is supply.  If there is too much money supply, the value of that money will go down.  It is that simple.  The United States is a much more aggressive printer of money than the European Union or Japan.  Despite the large budget deficits in Japan, their money supply growth is very conservative.  Same with Switzerland, to a lesser extent.  

The United States is a liberal printer of money.  It can get away with it because it is a reserve currency and used extensively for international trade.  The U.S. government has abused this priviledge to run up huge budget deficits through big tax cuts, rebate checks, and all sorts of stimulus.  The Fed is more than happy to buy up this debt to keep rates lower than they should be. 

From a long term fundamental view, the euro and the yen should be valued higher than the dollar.  The Eurozone and Japan both run trade surpluses with the U.S.  They are not printing money like the U.S.  Europe is trying to fix its long term fiscal problems by taking their medicine and reducing budget deficits.  This hurts the currency in the short term, but is a benefit in the long term.  The U.S. is just kicking the can down the road with more stimulus, bloated budgets with big tax cuts, and more QE.  The trend is secular and will not change until the policies of the U.S. government and the Fed change.   I don't think the Fed will give up on QE until we get runaway inflation, which is still a long ways away (due to a lack of wage pressure).   

Wednesday, January 5, 2011

Bull and Bear Markets

The same strategies don't work in bull markets like they do in bear markets.  I believe we are in a bull market.  That means the odds of shorts working are noticeably reduced.  Imagine if you tried to short during the 2004 to 2007 period.  Sure, you had the market correct but they were infrequent and most of the time, shorts lost money. 

In equity bull markets, trends are slower and last longer.  Sentiment is less effective.  Just look at the sentiment numbers from 2004 to 2007.  They lingered in mostly bullish territory with the market going higher most of the time.  I have a leg short, but I'm not very enthusiastic about it despite just a minor loss.  I need to see more signs of retail investors putting money where their mouth is.  I want to wait for steady fund inflows before trying to pick a top.  Every short before then is just a short term trade. 

Blog Trolls

Lately there have been quite a few comments that provide no useful content but are aimed at taking shots at Market Owl.    I made bad trades last year and I will make bad trades again this year.  No one bats a 1.000 in this game.

If you don't agree with my commentary, then fine.  If you want to use me as a contrary indicator, go right ahead.  I don't mind the criticism.   But if all you are going to do is post nasty comments and take potshots, then please visit another blog.  If the trolling gets out of hand, I'll just remove the comments feature. 

Blowout Jobs

Well, we got a huge ADP jobs number, 297K.  That is going to get the juices flowing for the bull crowd.  The market always moves ahead of the economy, and the last thing to move is jobs.  Once companies start hiring, most of the good news will already be reflected in higher stock prices.  Yet, we still have a gap down because of weakness in Europe. 

Gold is selling off here and I am putting a leg in here on the long side.  This will be a long term trade.  I want to ride the bubble.    I believe we will see huge upside in gold for the next 6 months. 

Tuesday, January 4, 2011

Shallow Pullbacks

This is a totally different market than the one we are used to from the past 2 years.  The volatility will be reduced and it will be frustrating for those relying on sentiment to time the market.  The main reason for this is the lack of retail participation in the market.  You just don't see the fund flows into the market which mark a long lasting top.  We saw that in January and April of 2010. 

The improvement that we'll likely see in the jobs picture will drive continued equity strength.  The lack of jobs was the main thing holding back the bulls from becoming euphoric.  When we get improvement in jobs, you will have the necessary ingredient for a last gasp blowoff rally, probably to 1400. 

It is mindboggling how we keep going higher despite the lack of fund inflows and the insider selling and secondary issuances.  I can only come up with POMO.  Anyway, we should not expect much of a pullback this month, in fact I would be a buyer of dips rather than a seller of rallies for the next month or so.  I am short now due to the excessive speculation but will likely change my tune on a pullback down to 1247.  I think we see 1300 before 1230. 

Never Going Down

It feels like we have an endless uptrend.  The money flows in the beginning of January are always tough to fade on the short side.  I assume an avalanche of pension fund money came into the market yesterday, and probably some leftover for today and tomorrow.  It is notable that bonds were weak yesterday, which probably means pension funds were selling bonds to raise cash to buy stocks. 

I still believe we top this week, but I don't want to go all in here, waiting to get short in stages. 

Monday, January 3, 2011

Shorting Here

I have put on a bit of a position on the short side.  I will look to add more perhaps later today or later in the week. 

2011: Last Gasp

Sentiment will not be as reliable as it was for the last 3 years when fear was more palpable.  In complacent bull markets, sentiment is less reliable because greed is not as strong an emotion as fear.  So here is one vote for traders who rely heavily on sentiment to be left behind by this stubborn bull. 

For the next several months, you have to be bullish.  I am not recommending buying stocks right now, as I see a shallow pullback in the next two weeks.  But if you had to place a trade now and couldn't get out for 6 months, I am a much better buyer than seller. 

Why am I saying this in the face of such bullish sentiment?  Because the one thing that has made traders reluctant to embrace stocks is jobs.  And jobs will be more plentiful in 2011 than in any of the past 3 years.  The lower unemployment rate will drive expectations for earning growth which will lift stock prices.  The Fed is a nonfactor for the next couple of meetings until we get closer to June, at which point we may see some weakness come in due to expectations of the end of QE2. 

As for the first trading day of the year, I am looking to enter short in the first half of the day looking for weakness in the second half of the day.