Too Sunny

The options market is showing a lot of complacency today, with very low put call ratios on a weak up day.  Usually you need at least up 1% or a strong uptrend to get these kind of low put call ratios.  It's almost as if a weaker dollar is all that's needed to get traders positive.  Along with the layers of resistance from 1332 to 1340, it is looking like a high reward low risk zone for shorts here.

Trend Down

We have a little gap up here but it feels like yesterday was a relief rally and the upside is limited from these levels.  I either see us being around flat today or having a trend down day.  So odds favor the short side.  If we are going to go down today, the bears have to act within the first 2 hours, after that, it is going to be too late.

Like Night and Day

You really have to separate the overnight market and the intraday market in the ES.  They have different characters but the problem now for the ES is that the overnight market is no longer the free money zone that it has been for such a long time.  It is behaving more like a natural market with sellers included among the buyers.  Maybe it has to do with the end of QE2, but more likely, we've reached a point where gap ups just aren't supported as well as before.  A more two way market.  Still, I shudder to go short overnight on ES on most days because it is tough for the short seller to fight the long term history of strength overnight.  But it's no longer a free fire zone on the shorts in overnight trade. 

Market looks like it wants to grind lower, no panic, just a steady drip lower to more reflect emerging markets and European pain.  Still bearish on this market until Friday. 

Something's Got to Give

How far can the divergence between Shanghai and the S&P 500 continue?  The Shanghai Composite keeps deteriorating and lagging behind the S&P 500.  I thought all the growth was in China and not the US!  It is looking more and more like the Chinese stock bubble in 2007 is playing out like the Nasdaq in 2000.  You have a Chinese real estate bubble now which follows its stock market bubble, like you had in the US.  The thing about real estate bubbles is that they go on longer than stock market bubbles and the peak can last longer.  Stock markets are quicker to act on fundamentals. 

As for the markets now, it seems like low volume trading, with a lack of interest by all parties.  I am a bit surprised that after such a big drop in commodities, the bulls are as steadfast as ever in that space.  I believe strongly that stocks will outperform commodities over the rest of this year. 

Conditioned to Buy Dips

Dip buying has been very rewarding since the dinosaurs roamed the world.  Or at least it seems that way.  We are getting discouraging signs of global growth again this May, like last May.  But there is a difference.  Back then, we still had a lot of pent up demand from the 2008-2009 recession but much of that has been used up.  Same goes for fiscal stimulus.  Also there were better valuations back then.

Going forward, I don't think dip buying will be so rewarding.  We have reached levels on stocks and commodities which make incremental gains that much tougher without further money printing.  And I doubt we see QE3 unless the S&P at least shows more weakness first.  Yes, the Bernanke put is still there but he's going to put it to work on big dips, not small ones.

The message that we are getting from the emerging markets stock indices paint a different picture than that of global growth that many are forecasting for the region.  China has been badly lagging the US.  Many still believe in the commodity bull market and it is a compelling story, but it hinges on emerging markets growth, especially China.  Their stock market is telling a different tale than portfolio managers. 

Pause that Refreshes?

On Fast Money today, there was a big flashing red light.  No one seemed too worried about today's selloff.  A pause that refreshes.  Month end rally.  FM Technician was positive despite growing weakness.  I was expecting more panic due to Greece but hardly anyone mentioned it.

Today we had low volume, which is a change from the usual high volume on down days, low volume on up days since March 2009.  And I have rarely seen a good stock market bottom happen on low volume.

Still expecting us to crack 1300 sometime later this week, probably by Wednesday.  We may make a panic low by Thursday or Friday when traders reduce risk ahead of the Memorial Day weekend.

Heading Towards 1300

We've got the market lined up for a mini panic.  We should not have gapped down today if we wanted to maintain a bullish resolution to the consolidation but the move has now entered into a terminal down phase where we'll drop and form the final bottom within days.  Market is set up for a panic attack but it will be quick.  But the rebound will take longer than past bounces, but should still be within a month from today. 

Gap Up Signal with Caveat

I am expecting a gap up but there is something hidden beneath this signal.  We're at a juncture where failed signals will result in fast moves in the other direction.  So I do think we will have a gap up with high probability, but there is a small probability of a gap down which would foreshadow bad things for next week.  Once again, the market is worried about Greece and that is the reason for the risk aversion today but its the boy that's cried wolf a hundred times.  And no dice.  Those selling because of Greece hoping for a gap down are betting on snake eyes.

You Can't Beat the Races

" You can beat a horse race, but you can't beat the races."  - How to Trade in Stocks, Jesse Livermore

I've tried to beat the races, and it is very hard to do.  But I can beat individual races among many if I selectively pick and choose.   I have given up trying to make money every day.  I am not a salaryman.  I shouldn't act like one.   I've realized that the biggest mistakes I've made in the past have been trying to catch every little move up and down, leading me to miss the big one.

For most people, daytrading is a sucker's game.  Especially with HFT ruling the markets.

The ES looks untradeable.  It just might be the most bullish market in the world or the most manipulated.  Either way, I don't want to play that game.  The horse races have been rigged by BB & Co.  I am not alone in feeling this way so you have a lot of traders that aren't participating in the stock market rally.  That's one of the reasons we hardly go down and stay down.  You need a large supply of weak hands to sustain a bear trend.  We don't have that yet in stocks.  It is getting there in commodities.

Economy Slowing

The Philly Fed and the existing home sales came in horrible.  I don't focus much on the jobs numbers because they aren't leading indicators.  Looks like QE2 did nothing but delay the inevitable.  This economy needs a recession to clear out the junk in the system.  The longer we delay it, the more feeble the future recoveries will be. 

My feeling on the market short term is neutral and there is nothing much to add.  Sentiment seems about neutral as well.  In these situations, I prefer to do nothing.  Commodities look like they have further downside, just from a technical viewpoint and their relative weakness to equities.

Losing the Forest

"Losing the forest for the trees" - current long traders

Looking at the big picture, it is not a good time to get long.  Sure, the market has likely not made a top because the odds of having topped are low when the market is so close to its 52 week high.  But what about risk reward?  The higher we go, the more risk there is for a set amount of reward.  At 1325, the market is not cheap, no matter how many cheerleaders say 13 times forward pro-forma S&P 500 earnings is cheap.  That is not cheap.  Maybe if pro-forma earnings included repeated one-time losses it would be more factual.  But that is not the case.  And maybe if profit margins weren't so high, it would be cheap.  But unless we have repealed the laws of competition in the new capitalism, these are unsustainable profit margins. 

Having said all that, I think we will grind higher into the fall, after this dip, but hell no, I am not buying to catch a few percent when I know a cliff dive awaits at the other end, probably in 2012.  But it could happen sooner, and that's why I am not buying these little dips.

Bearish Chart

The chart looks bearish to this paper napkin chartist.  We made a false break out from the inverse head and shoulders to 1365 and are now digging into 1330 SPX support.  The short term traders will turn bearish when we break this support level and we could shoot down in an air pocket down to SPX 1310, where layers of resistance lie. 

Commodities continue to underperform equities, especially energy.  The longs are crowded into energy and positioned wrongly in a downtrending market.  Crude oil looks like it will test even lower levels.  Perhaps by Wednesday or Thursday we can have a mini capitulation. 

More Downside to Come

We have completed an 8 day consolidation between 1355 and 1325.  All signs point toward a resolution towards the downside.  The commodity bulls are sticking steadfast to their positions.  Looking at the speculative length in energy, grains, S&P and Nasdaq futures, and non dollar FX, this liquidation will take longer to play out.  The fast money went a few steps too far and are scrambling to get their risk under control.   Perhaps another week or two should finish the job.  I don't expect a rocket ride higher either.  It should be a lengthier consolidation for commodities than previous ones.  Equities should bounce back quicker because I see much less fast money in that space. 

Greece Dark Cloud

There is a potential catalyst for the euro next week when there is a EU meeting where Greece bond restructuring is likely to be discussed.  The commodity funds are on edge, they are hanging on here hoping that we bounce back quickly.  If the market doesn't cooperate, we could see further liquidation next week.  That would probably induce equity weakness.  Below 1330 support, there is likely to be a bit of panic selling down to 1310.  Perhaps that will be a place for the market to bottom.  The ES is quite resilient, so I don't see it breaking 1300. 

Selling in May

A lot of mini-me funds are reducing their long exposure as we see the short dollar long commodities trade unwind.  This looks like more than just a quick dip.  You can't call a $15 drop in crude oil a quick dip.  That causes serious technical damage and worst of all for the commodities bulls, it was really on no news.  This commodities unwind is about 2/3rd finished.  The last 1/3rd will feel awful for anyone long.  Stocks are trading in a totally different world and it cries of overflowing liquidity in that space.  Remember, fast money is in commodities, the slow money is in stocks and the safe money is in bonds. 

Lack of Conviction

The bulls and the bears don't have a strong opinion about this market.  There are very few people that are extremely bullish or extremely bearish.  If all you had to go by was sentiment, and you didn't know what the chart looked like, you would probably think we were lower than where we are now. 

But looking at the chart, there has been so much ground covered over the past 7 months that it will be hard for longs to tack on more gains anytime soon.  We may just digest these gains over the next few months with shallow pullbacks interspersed which will frustrate those looking for a correction.  The lagging emerging markets and large number of dollar bears may be the best sign that the pessimists can point to.

Risk On Mondays

The counterpoint to the risk off Friday.  You can't add much risk unless you have already taken off risk.  When traders are usually worried about something over the weekend on a Friday, they will take off risk.  And when the weekend passes without anything news worthy (about 99% probability), they put risk back on. 

Greeced

It was another fake by Greece.  Nothing happened over the weekend.  So we get higher prices overnight.  A thing about commodities.  Why does everyone call it a bubble after it goes down?  Why don't so many call it a bubble before it drops?  If commodities are in a bubble, are stocks as well?  Or are stocks always cheap because of pro forma designer earnings which never disappoint the Street?

Things to ponder on a Sell in May day.   

Precious Metals and Internet Stocks

Lately, I have been having flashbacks to a time when Yahoo and Amazon were the idols of the stock market. The daytrader favorites that went to heights that no one could imagine. There are many stages in a bubble. The first stage is recognition of fundamentals. When the time is right and the cultural buzz is atune with that group, there will be pin action. The internet bubble started in 1998, with Yahoo and Amazon leading the group. It was something new to investors with fundamental underpinnings. These companies were growing wildly, and it was hard to project the limits these companies could achieve. Imagination. These stocks had it. You could imagine tremendous growth and unlimited possibilities. Precious metals have it. Imagination. You have a stagnant economy but with fears of inflation due to money printing. What is a more fitting asset class for that environment than gold and silver? The imagination runs wild with QEx and Bernank printing more money than Zimbabwe.  Precious metals represent the current zeitgeist of investors worried about rampant money printing in the face of a weak economy. 

The second stage is parabolic price movements. You saw that in early 1999 and then again in early 2000 in internet stocks. There was a mini parabolic stage in summer of 1998 but that was just as precursor to what was coming up. You saw the summer of 1998 portion of the precious metals rally in the fall of 2010 with QE2. The past month has been the early 1999 portion of the precious metals rally. Recognition and howls of a bubble. If you look at a chart of YHOO in 1999, you see a kind of road map for gold and silver in 2011. The parabolic rise in early 2009 followed by a resting period and then the final blowoff top in 2000 when everyone was in the game and the noise was loudest about anything internet.

One of the important things to remember is that as a bubble matures, periphery plays come in favor. For example, B2B was not even on the radar in early 1999 but by early 2000, stocks like ICGE and ARBA were the flavor du jour and favored over the old internet stocks like YHOO and AMZN. We have yet to see that stage in the precious metals bubble. All the attention is focused on gold and silver. When you get platinum and palladium in the spotlight, you know that the bubble is near the final stages.  You also get the mining stocks in play, especially penny stocks and we are no where near that activity.  Just look at PAAS and SLW over the past 3 months, it has not moved up with silver.   We have not arrived at that stage.

The Fed can't stop this bubble unless it raises Fed Funds to at least 3% and gets tough with action not words.  Aggressive rate hikes.  Do you think that will happen with Bernank at the helm?  There is no opportunity cost to holding precious metals and no effort to tighten by the Fed. 

We haven't got enough excitement and fever in the precious metals market to call a top.  This is the early 1999 stage.  In the chart it looks like a small rise, but YHOO went from under 200 to 450 in about 3 weeks in December 98-January 99 before splits.  We still have about a year left in this bubble.  And yes, it is a bubble.  Gold and silver values are mostly perception, and they have no intrinsic value other than their industrial uses.  When you get gold acting wildly along with silver and platinum and palladium joining the action, we are close to the early 2000 stage of the IT bubble and the top is imminent.  For now, let this bubble simmer for a while longer, I believe we are just in the thick of things and more upside is yet to come.

Risk Off Fridays

Usually when you have a gap up on good news on a Friday and then we start selling off mid day, usually there isn't a reversal because of the risk off nature of fund managers who don't want to be long over the weekend as the market heads lower. This is especially true because of the commodity liquidation which is putting pressure on funds.

Tough Call

I am out of longs and staying neutral here. It is a tricky spot here, the market is strong despite the commodity selloff which is a positive, but at these levels, I am not willing to trade for more than a bounce. Intraday looking for an initial selloff.

Commodity Liquidation

You saw the funds just eject a load of Crude oil, gold, silver, and any other liquid commodity just a while ago. This looks like your garden variety scary pullback in a bull market uptrend. Pullbacks are supposed to be SCARY, otherwise they wouldn't happen. Stocks and commodities go on sale when there is fear, not when everything is fine and everyone is just saying its a correction. The ECB triggered this selloff, but what they said was actually a positive for commodities because they are more dovish. But with everything linked to the dollar carry trade, you saw unwinding. It was liquidation, nothing fundamental here. I believe we will rocket higher next week after all this dust settles.

Got Long

The market is selling off on a less vigilant ECB, which is giving the dollar a rally. This looks like a buying opportunity for stocks, so I have added a long here looking for higher prices going into tomorrow. It looks like indiscriminate selling fueled by the dollar carry trade unwinding.

Mini Commodity Panic

I am seeing mini give ups in crude oil, gold, silver and the AUD. It looks like a safe buy point at the open and I will be looking to add some long exposure here. In front of the nonfarm payrolls, I expect shorts to flatten positions and the longs already seem to be shaken out by this small dip here given the rather high put call ratio for a mild down day yesterday. Conviction is low among the bulls. As I mentioned last week, bullishiness is a mile wide and an inch deep. I expect the market to rally into the close today, the lows at 1336, which is strong resistance, should hold.

Liquidation

You are seeing liquidation in the commodities, especially silver and gold. That is igniting selling in crude oil and the rest of the commodity crew. Look at the AUDUSD, it is getting pounded today. The euro is not the risk currency in favor, it is the Australian dollar. I think the liquidation ends either today or tomorrow morning. The nonfarm payrolls has lower expectations after the weaker ADP numbers. I wouldn't be short here.

Consolidation

This first dip after a strong rally is usually just that, a dip. I am looking at a range of 1345-1370 for the next several days. I see limited downside from current levels until we see the trend flatten out. I don't really see much of an edge yet either long or short. Maybe if this market struggles to go much higher over the next few weeks, that could set up a selloff.

Next Worry: US Debt/Deficit?

The falling dollar is concentrating the attention towards the budget deficit and US debt. The S&P downgrade was just the first shot, there will be many more to come. Rising commodity prices is grabbing the attention of the public to the downside of a weaker dollar and building populist anger towards QE2 and the endless stimulus, both fiscal and monetary. Instead of just a high unemployment, there is also the added kicker of growing inflation, which has been admitted by everybody but the US government. What does this mean for the market? Well, stocks like the falling dollar but at some point, you will get a divergence like 2008 when the dollar kept falling but so did the stock market. The rise in oil prices was a big factor.

Usually when you get a pullback in stocks, the dollar strengthens but with all that supply of dollars adding up from the QEs, the supply demand fundamentals keep getting worse. The market will keep focusing on that US debt and deficit until something is done about it in Washington.

Sell In May

Sell in May and go away will not work as well as last year. It will take about a week of consolidating in a range without further up moves before the stage will be set for a 60-80 point pullback. That could happen between 1350-1370. So I don't see us dropping right away without exhausting the momentum first. Remember in April 2010, we traded 2 weeks between 1180 and 1215 before the bottom fell out to 1040. In March, we traded between 1295-1325 for about 2 weeks before the bottom fell out to 1242.

Sell in the middle of May and buy back at the end of June sounds like a plan.

Bin Laden Rally

Oil and gold go down and the S&P futures go up on killing Bin Laden? Who bought on this news? Just wondering. Those still worried about Al Qaeda and Bin Laden are those that permanently wear tin foil hats and constantly worry about the end of the world. Maybe some dumb money will come here hoping for a move up but we've already gone up 70 points in 2 weeks after that S&P downgrade. It just makes it that much more attractive to look for a short side entry soon. I believe we top out in the middle of May, the risk reward is getting more favorable for selling here.