Cliff of Worry

It's not a wall.  It's a cliff.  The worrywarts got blasted for 50 handles in less than 4 days. It is shocking how quickly we've gone up but I underestimated the amount that fund managers were underinvested in this market.  The contents of the cliff include:  Greece.  Unemployment numbers.  Bad economic data.  etc.  That stuff is history.  All in the past.  It is always dangerous hoping for the crowd to panic when they are already fearful.  Sometimes the crowd panics, but usually they don't. 

Volume Heavier

The volume yesterday was the heaviest of the past 3 days, despite today going up the least of the 3.  Not what the bulls wanted to see.  Nasdaq volume hit 1752M and NYSE hit 909M.  Monday was 1676 and 834.  Tuesday was 1682 and 802.  Contrary to what the textbooks say, you want to see low volume on rallies and high volume on drops if you are bullish.  The past 2 years prove this very clearly.

Mad Scramble for Risk

The underinvested funds are scrambling here looking at a market going away without them.  This train has left the station without many passengers on board.  We are up almost 40 points in 3 days.  All dips will be voraciously bought by the underinvested longs who don't want to watch another runaway move go without them. 

We've got one of the biggest hurdles that was in the market's way out of the picture.  Greece is no longer a worry, at least for a couple of months.  The prices should naturally be higher after they get their bailout.  This move probably has at least a month to go, so you have to be careful shorting here.  Look to buy, not short.

Not Expecting Much Selling

The first half of the day should be weak because we've rallied 30 points nonstop over 2 days with a gap up today.  So we are short term overbought.  I expect a gap fill and some nervous trading, but I don't expect another big selloff on the news.  We have built up a wall of worry and the weak hands are mostly out.

U Bottom Completed

This market has shifted from a downtrend to an uptrend.  It took over 2 weeks, but we've finally put in a bottom.  Disagree?  I know many will.  But the strong support we've seen anytime the market gets around 1260 and the ease with which we get up to 1290 tells me we've bottomed.  Any 15 point pullback till early August is probably buyable.  Right now, I am eyeing 1275 as an area where lots of bulls will be looking to get back in.  Hoping for 1260 anytime soon should be erased.  We now have built the wall of worry on our way back to 1330.

By the way, my last post on Europe's decline hit some nerves.  I have strong opinions and hold nothing back.  There is nothing politically correct about this blog.  If you want to hear comforting views, find another blog.  

Europe in Long Term Decline

The Greece bailout is a glaring example of the inefficiencies in the European economy.  The socialist mentality has them looking to bailout the weak and cover up holes with duct tape.  Greece should be out of the EU and back to the drachma a year ago.  I think this is reflected in the Eurostoxx 50 index and its weakness relative to the S&P 500 since March 2009.

Structurally, the European Union has very low population growth, growing number of elderly, uncompetitively high wages, too big of a social safety net that puts a big strain on the  labor pool via high taxes.  There is no growth in Europe.  Anectodotally, I hear stories of the average European getting 8 weeks of vacation a year and working 35 hours a week.  The Chinese work 7 days a week and make peanuts by comparison.  Yes, some of that is due to it being manual labor/ lower productivity but that gap is shrinking fast. 

The Europeans are lazy.  Americans not so much.  At least the American economy has better demographics and more efficient workers than Europe.  Of course much of the gains from that ends in the hands of the quasi oligarchs at the big banks and corporate giants.  And HFT bots.

Sniffing Out the News

The market is speaking today about what will happen with the Greece austerity vote tomorrow.  Crude oil is higher, gold isn't rallying with the other commodities, and dollar is weaker across the board with higher stocks.  The market expects the Greece austerity vote to pass.  The Athens stock index is speaking loudly, rallying strongly today.  But there are two votes, the austerity vote, and the implementation vote.  So the 2nd vote might not pass, but it probably won't matter at that point (except for some short term market volatility) because the Europeans will say one vote passage is enough and will willingly give the money to avoid possible contagion. 

Odds Favor Bulls

We've gotten through the worst part of the storm.  The market held up well, never going below ES 1252.  And hardly trading below 1260 for any length of time.  The Greece austerity vote will be anticlimactic, whether they pass it or not, the EU will bail them out.  Of course, odds are high that they will pass it.  Bears are between a rock and a hard place.  With weaker oil, the bears had a chance to break the bulls today.  But they don't have much firepower left.  Rather, the bulls have too much firepower as the heat is building up in their empty pockets earning 0%.   It seems too many people are cautious here despite not going down for 2 weeks.

Monty Hall and the Stock Market

The Monty Hall problem, do you switch or not switch?   You pick one of 3 doors.  One has a prize, the other has goats.  They show you one of the 2 doors that has a goat, but it cannot be the one that you selected.  So do you switch to the other or keep your original choice?  Easy answer, but many people are clueless about the right answer.  You always switch because you increase your odds from 1/3 to 1/2.  It reminds me about stock market daily patterns.  Do they switch or not switch?  They switch more often than not.

From my experience, the current day has a negative correlation with the previous day.  Not only in price change, but in the daily path of price change.  Down early and up late, usually leads to a higher probability of the next day being up early down late.  See Thursday intraday  and Friday intraday as prime examples.  Look at Friday's overnight action and Monday's overnight action.  Mirror images.  Almost perfectly opposite daily paths.

Gold Being Sold

They always get to the strongest at the later innings of a selloff.  Gold has gone down hard the past 2 days, of course oil weakness doesn't help.  I expect us to bottom either Monday or Tuesday next week.  And then we will probably rally on Wednesday right before the austerity vote in Greece.  That should create enough of a cushion for a disappointment to not crush the market too far below the year's lows.  If they pass the austerity measure as is most likely, watch for a big squeeze higher. 

Waiting for Greece

It is pathetic how this market is all tied up on Greece.  The fate of trillions of dollars is in the hands of a bunch of Greek politicians.  I just cannot imagine us rallying strong into the austerity vote on Wednesday.  There is just too much uncertainty and the short squeeze yesterday on the Greek bailout news have people a bit complacent on Greece at the moment.  A lot of dominoes are still to fall in Europe.  Austerity vote not passing would bring a chaotic trading environment and would be trader's heaven.  Let's hope the Greeks say FU to the EU.

Looking Ahead

The Greece-EU news was a squeezer but it only sets up the importance of the Greece austerity vote.  It happens next Wednesday and it will be a classic event day.  So I am expecting a high probability of weakness next Monday and Tuesday.  But for Friday, it is a bit of a crap shoot.  That short squeeze at the close on Thursday takes away a lot of the bear fuel and makes the risk reward a 50/50 for today even though I think higher probability we go higher today.  You see, I give it about a 50% chance of going up ~10 points, 25% chance of it being near flat from the prev. day's close,  but a 25% chance of it going down ~20.   But if we do get that move higher to the 1290-92 area, it would be a good short opportunity to capitalize on the uneasiness ahead of the Greek vote.

Forming the U

So this is what a U bottom feels like.  It is much more gut wrenching than a V bottom.  Because the longs get tested over and over again.  The IEA crude oil news is a short term positive for the market, even if it drags down energy stocks temporarily.  And that Greece news coming right before the final hour couldn't have been scripted any better.  It was a shot to the shorts when they were least expecting it.  I am expecting further strength tomorrow intraday.  Not sure about the gap tomorrow however.

Crude Plunge

Counter to the past correlation of higher crude, higher equities, we are at a price point where a sharp drop in crude oil is a boost to the US consumer and a defacto tax cut.  I would not interpret the crude oil weakness as a bad thing for the market today.  It could work the other way around. 

Skittish Market

What a difference a day makes.  Yesterday morning, we were relieved that Greece got the confidence vote and were looking forward to more goodies from Banana Ben.  When he didn't promise QE3, and with the short term overbought reading, it leads to this: a short term disaster.  Especially for commodities and the euro.  I would be looking to buy stocks into the fear today, I still see the stock market as constructive in the near term.  I am NOT constructive on commodities, because there is still this brain dead notion that China will grow at 10% forever and the sentiment is more bearish on stocks than commodities.

Nothing There, Move On

Just like the Greek confidence vote, this Bernanke press conference is pretty much anticlimactic.   I expect some of the short dollar bets to unwind soon, if not right now.

QE3 Based on S&P

Bernanke is a stock jockey.  He won't admit it, but he looks at the S&P, Russell, and the Dow like a hawk.  He will provide support at 1228.  Rumors of QE3 should emerge around 1228 and if we do somehow break 1200, watch for the Bernanke led PPT to hold the fort.  We will not see S&P under 1000 in our lifetimes with Banana Ben at the helm.

Surprised at the Weak Reaction

I didn't expect the market to gap down after this successful Greek confidence vote.  I am probably not the only one surprised.  Ahead of the Fed, I don't expect much movement so it will be trying to game the market's reaction to Bazooka Ben.  I am leaning towards a small rally after the decision but I think it will be quickly sold.  Perhaps we get a weak close and a gap down on Thursday.  Judging by the weak reaction to this Greece vote, we don't have much upside in the short term. 

Buy the Greek Rumor

Traders will be waiting for that confidence vote in Greece.  It seems like almost a certainty, so we are steadily rising here.  So after we get that confidence vote tonight, that could bring in the Johnny come lately bulls on board awaiting Fed goodies and more weak dollar action.   We could be set up for a fall on Wednesday after the Fed meeting concludes.  I am constructive on this market until the Fed rate announcement.  Then I expect us to have the sellers come back.  Today should be a slow grind higher.

Euro Up Despite Greece Uncertainty

The EU decided to delay the Greece bailout and we had overnight weakness but the market is back to flat now.  The euro is actually up.  How can this happen with all that Greece uncertainty?  Market players are not idiots.  They know Greece will be bailed out.  It is just a matter of when, not if.  It is about the most telegraphed bailout that I have ever seen.  Not that anything can be allowed to fail after 2008.  The default option for central bankers is to bailout first, ask questions later. 

What is more insidious is the continuous deterioration in Shanghai.  Something bad is going on over there that many investors are overlooking. 

The Current Choppiness

Over the past week, the ES has gone nowhere, closing last week at 1264 (Sept Futures) and closing this week at 1266.  We've had 2 rally attempts and they both failed. 

The market has a habit of following a certain pattern for a long time and then changing the pattern once everyone gets used to it.  Since March 2009 till this month, almost every dip has been a V bottom.

We would get the mini panic of capitulation, form the bottom usually within the first hour of the trading day, and head higher into the close and go up for days and days.  Once we headed off to the races, underinvested longs and fearful traders had no opportunity to buy dips until we got to much higher prices. 

A lot of traders are looking for a panic capitulation to mark the bottom, and then ride stocks higher into the sunset.  They are looking for a V!  But what's happened is that we're churning here and forming the first half of the U, but since people are so conditioned to look for the V, they are waiting for the bottom to fall out of this market to make the U turn into a V.   Many are looking at 1250.  Too many.  If we get to 1250 and bounce hard to make a V bottom, it would fit in with a lot of trader's plans.  Probably the most likely course from here is that we churn higher in fits and starts to 1300, form a higher trading range between 1275 and 1300, before we make a sharper move higher to 1340. 

Equity Put/Call Ratios Above 1 Again

There is a big disconnect with the mood of the market and these equity put call ratios.  You have more equity puts traded than calls today and that is rare, usually only happening during panics.  Today is far from that and yet the equity put call ratio remains sticky above 1.  It is at an obscene 1.20 right now.  The past two days closed out with ratios above 1.

It seems traders are hopeful about a Greek bailout package but it doesn't reflect at all in the equity put call ratios. Something seems broken here and I can't explain it.  Sentiment is not nearly as bearish as these options are telling us.

Best Advertised Crash Ever

If we are going to crash under a heap of PIIGS debt and Eurozone contagion, a lot of people will look like soothsayers.  I don't think the market is that easy.  Why is Europe up so much when we have a crisis on our hands?  Why aren't we going down more?  I have my own theory:  it is priced in.  This is the most advertised problem in the world.  We've gone through this in January, May, and November 2010.  This feels like act 4.  The story is old and tired and everyone knows about it.  Greece bonds are priced for a 75% chance of default.  The EU and IMF will bailout Greece, they say they will do it and when they get it done, we will be at much higher prices.  We are gapping up big here and it feels like the real deal this time. 

We didn't have a classic capitulation, but we got a slow motion version with enough fear shown in the put call ratios and finally a spike in the VIX yesterday.  If you are going to short, you have to pick your spots carefully.  For the next month,  it will be much tougher now on the short side, and easier on the long side. 

Gap Up Signal

Triple witching opex forces and the intraday action point towards a gap up tomorrow.  We've basically gone nowhere for the past 5 days of trading but have built up a base of bears during this churning period.  You gotta buy at 1255-1260 and sell at 1285.  That is the new range for this fear based market.  Greece can will be kicked down the road, I expect nothing less from the ECB and the IMF.  The bankers will win again, holding the systemic risk card as a threat for receiving bailouts on their PIIGS bonds.  The losers will be the peons who hold no stock, no wealth, and have no skin in the rigged game.

Quiet Out There

The trading action is surprisingly placid.  This market seems to be pricing in a Greek rescue but if there are any delays or problems, we'll get to SPX 1250 in a hurry.  And the economic data coming out of the US is horrid.  Philly Fed came in negative -7.7 versus expectations of +7.  At some point, the weakening economy will funnel down to earnings.  And valuations are not so good this time, compared to summer of 2010.  There is a LOT less margin for error.

Slow Capitulation

This market is not scaring out the bulls, it is wearing out the bulls.  A lot of traders are looking at 1250 as the line in the sand.  If Greece doesn't get anything done, you will probably see a short term panic and we would blast through 1250 easily.  I am looking for an entry into this market but want to buy intraday dips to minimize price risk.  The big drop in crude oil yesterday was another sign that traders are slowly getting rid of their trusted favorites.  Looking for early weakness followed by afternoon strength.

If Greece Is Such a Problem

Why is the Eurostoxx 50 index outperforming the S&P 500 over the past 3 months?  The European stocks have priced in these Greece worries a long time ago.  You would expect the European indices to underperform like it did in 2010 when we had the first act of the Eurozone crisis.  But this time, it's the opposite.  European indices are outperforming the US indices.  The fear is palpable today with the Greece riots and the surging dollar and de-risking.  I am looking at long entries soon.  Very soon.

Riots on CNBC

Everytime CNBC shows some kind of riot on TV either in Greece, Egypt, or wherever, its usually the day of the bottom or we're within a couple of days of a bottom.  They just showed some riots in Greece but since we rallied hard yesterday, I don't think you can buy this gap down.  You've got to wait for the white of their eyes to buy safely in this market. 

Don't Ask Don't Tell Gaps

Once again, we are getting a big gap, this time down, on no news.  Don't tell me the CPI and Empire Manufacturing numbers are the reason, we were way down before those numbers came out.  This is a weak market but a market that is underinvested.  So you get short squeezes but no follow through.  It looks like another weak day and the downtrend continues.  Yesterday is looking like a repeat of last Thursday, a less than one day wonder, with a late fade in the day.

Gap Ups Out of the Blue

The most dangerous time to be short in an oversold market is during the overnight hours.  Just treacherous if you are a bear and they gap up the market 10 points on ether.  You're going to tell me that the market is gapping up because of below expectations Chinese CPI?  Then how about the Chinese raising reserve requirement rates?  Shouldn't that negate the positive data?

The disgust in the bear's stomach for not covering the previous day is overwhelming.  To a lesser extent the disgust for underinvested fund managers who try to be cute trading the market. 

You take your shots shorting intraday but to be short overnight is asking for trouble with the market this stretched to the downside.  It feels like a strong gap up that will go higher intraday because I see no reason for us to be this high overnight, which makes it that much more likely to squeeze the shorts.

Tolerance for S&P Downgrades

S&P can't take this market down for long anymore.  Another downgrade of Greece by S&P and the market and the euro dipped and shrugged it off to go higher.  The market is no longer vulnerable to these downgrades, they are pretty much priced in.  Greece is such an old story that it doesn't pack much of a punch.  We are at levels where it is dangerous to be short.  I will be looking mostly for longs in the near term. 

Contrarian at Extremes

You cannot just buy because sentiment is bearish and expect to make money.  It works more often than not but when it doesn't work, it can be painful.  You would have likely bought at SPX 1310-1320 in May.   That is a 40 - 50 point hit.  Sentiment has been bearish for over 3 weeks now.  This is based on the AAII sentiment survey and various put call ratios.  Yet we keep going lower. 

In the stock market, it is natural for the sentiment to get more bearish as the market goes lower.  It would be strange otherwise and actually have more meaning if it was not the case.  Only at extremes does being contrarian help in making high probability trades.  We are getting closer to those extremes right now.  So it becomes more dangerous to short the market.  Ironically, the best short daytrading set ups (like Friday) occur in this type of environment of worry.  Along with the worst longer term short set ups. 

Very Weak

The price is still not low enough to bring in eager buyers.  We just get fleeting short squeezes with no underlying demand for stock.  It feels like there won't be a V bottom this time.  We're going to have to trade at these lower levels for a while to wring out all the weak hands.  The lack of volume means the bottom will take longer.

Short Squeeze

The bulls have the bears right where they want em going into the final 2 hours of trade.  We have too many bears leaning the wrong way right now, I would not be surprised if we finish in the green today.  The classic Friday afternoon short squeeze out of the blue.  No one would see it coming.

Covered

I am out of the short here, I don't want to push my luck, there is a possible squeeze into the final hour with all this negativity.  The equity put call ratio is out of this orbit, so we can squeeze hard anytime now. 

Covered Half

I will look to cover the other half in the final hour of trade.  It looks like a trend down day with a Friday risk off theme. 

Likely Adding

The bounce was pathetic.  Yes, I am using past tense because it lasted less than one day from beginning to end.  It is hard to be bearish after we've gone down so much with so few bulls but the price action says we need to go down some more.  I don't know if we will get to 1250 as many expect, but I don't think we stop at 1275.  I'll probably add to my short if we can open around 1280 +/- 2 points (Sep futures)

Small Short

I believe the first bounce in 6 days gets sold hard.  I am short and looking to cover on the gap fill down to 1277. 

Intraday Bottom

We should fill the gap early in the trading session, make a whoosh lower to the 1275 support zone midday, and then close strong to finish either unchanged or slightly higher.  That is the highest probability scenario.  The next most likely scenario is a drip lower to finish near the lows, around 1270-1275.  Either way, I see good risk reward in buying the dip intraday today and selling out around 1290-1295.

Psychology of the Stock Market

I have added a Favorite Books section on the right which include some free books available over the internet.  One that I have enjoyed reading is Psychology of the Stock Market, a little known gem written in 1912.  It is interesting that some of the best books on trading were written in the early 1900s.  Speculation is as old as the hills.  Human nature never changes. 

I missed today's earlier bounce, but as I am writing, it is already fading badly.  I admit that many are bearish, but there is very little short interest out there and longs seem to be waiting for a bounce to get out.  They still haven't gotten one yet in June.

Doing Nothing

I am waiting to see the white of their eyes.  Sure I could miss a 15 point bounce, but I don't think I'll miss a 25 point bounce by waiting.  This market has favored dip buyers who acted quickly and bought the first dip and held on for the V bottom ride back higher.  I am putting my bet down for a U bottom. 

No Vs This Time

I am not expecting a V bottom this time.  I do think the bottom is coming soon but we'll probably trade at that bottom range for at least a week or two.   I am basing this on the lack of volume and fear, along with the uncertaintly about the effects of the end of QE2.  So there is no rush to get long, because I don't see this market making a V bottom and running away higher like last time.

P.S.  Next layer of support is between 1275-1278 on the ES, which is the Egypt bottom.  I do expect the bulls to make a stand there.  It might be good for 15 to 20 points.

No One's Selling

The volume is pathetic.  We are making new lows on this down move and I don't see fear.  I see apathy.  There is buying of put protection, but I see very little liquidation.  Without liquidation, you don't have much fuel for a bounce back higher.  The selloff feels like one of those from the summer of 08 where no one cared that we were dripping lower everyday.

This is very much out of character from previous selloffs over the past 2 years.  Those selloffs were always quick and on high volume with fear and liquidation. 

Bad Signs

First, we've got a gap down after the vicious selloff in the final 2 hours on Friday down to the day's lows.  That is definitely a change of character from the Friday selloff, Monday gap up that we've gotten used to.

Second, the market is still going down even with the dollar going down.  A weak dollar doesn't hold up the market anymore. 

Third, China is killing the US.  Not by keeping their currency lower.  It is because they are jacking up the price of commodities with their insane 5 year projects replete with bridges to nowhere, roads to nowhere, ghost towns, and high speed rail that no one can afford.  They are rationing coal to keep the price down, they don't want to bid against themselves!   We have Brent oil at $115/barrel with no employment growth.  Imagine if there is a halfway decent economy in the US.  Oil goes to $150/barrel in a straight shot even with Libya back online. That kills any recovery. 

On the positive side, we have sentiment getting bearish but with fundamentals like this, you need to see big oversold readings to get good entries.

Echos of 2007-2008

The weak dollar isn't helping stocks anymore.  The same thing happened from the fall of 2007 to the summer of 2008.  Commodities would go higher but stocks would not.  But this time, commodities have front run the weak dollar theme of QE2.  That game has been played out. 

We are starting to decouple from the weak dollar higher stocks relationship.  The market is giving up its intraday gains.  We need to see a lot of volume to confirm the panic.  Still not there yet.

Bad Jobs #

Looks like the ADP was right this time, but we're still gapping down big.  I am a bit surprised that we are gapping down so hard even with an expectation of a bad number by most.  It emphasizes the weakness of the current market.  We are now at that 1295 area where I believe there is a fair amount of support as it is the lows of April from where we bounced 70 points.  So the first half of the day should make back some of these losses at the lower open.  But I would sell that rally off the open quickly.  By the end of the day, we'll probably give most of it back. 

Bad News: Low Volume

Contrary to what many are taught, low volume on a big selloff is bad news.  As is high volume on a small rally, like we had on May 31.  Many don't interpret volume correctly.  You want to have a lot of volume on a big down day because it means there is panic and weak hands getting flushed out.  When you don't have high volume on a big down day, it just means the weak hands are just hanging on waiting to sell later.  

Yesterday, we had low volume for such a big down day.  We went down over 2% on lighter volume than the previous day when we went up 1%.   It is almost unprecedented in this rally from 2 years ago when all the big down days were on big volume and big rallies were on light volume.

It is a bad sign for the bulls for the short term.  It means the weak hands didn't capitulate despite the big down day.  I am looking for more weakness ahead and despite all the bad news bears out there, are they acting on it?  The volume yesterday says most of them weren't.
Nasdaq Volume data 2011

Looks Like a Downtrend

Don't want to put too much weight on one day but it was a whopper of a day.  We haven't had this kind of all out selling in a very long time.  It looks as if this is day one of the continuation of the selloff.  The final part of the down move is always the sharpest.  So this downtrend looks quite mature.  I'm expecting a few more days of weakness and a likely break of 1300, down to 1295, the low in April.  That area should stem the bleeding and should be a good buying zone. 

First Day of Month Effect

This seasonality is too well known.  It vastly outperformed its historical strength over the last 2 years and that got many jumping on the bandwagon and front running the strength.  I think that explained a lot of the buying in the last hour in the ES.  The volume was quite high.  The market is never this easy.  When traders on Fast Money know about this seasonality and game it, you have to watch out for the opposite to happen. 

Something that is sticking out is dollar weakness on a strong down day.  Usually the market doesn't go down this much when the dollar is weak on the day.  Not a good sign for any kind of reversal today.

Get Short Soon

We're getting a gap down on the bad ADP jobs numbers but this market has ignored bad economic data and kept going higher.  The Greece backstop is what this market wanted and it got it.  Everyone knows the US economy is weak, so the data doesn't have any surprise factor. 

That being said, we've got a strong bounce in this pathetic little downtrend, or you can just call it chop.  It is hard to distinguish for most.  Today's fund flows should be used to establish short positions.  At around 1340, it looks like a good risk reward on the short side.  The coming weeks in June will have many worried about the end of QE2 with all this bad economic data.