Saturday, July 30, 2011

US Debt Mountain

The debt ceiling doesn't matter.  What matters is how much new Treasury debt is being issued each year.  The budget deficit since 2009 has gotten to such large levels that you are getting a huge increase in US Treasury supply.  Everything is determined by supply and demand.  With demand staying equal, an increase in supply can only do one thing: decrease the price.  The pace of Treasury supply increases has gone parabolic.  These are truly historic budget deficits that the US has never seen before in its history, even inflation adjusted. 

From 2009 to 2011, approximately 4 Trillion in new Treasuries will have/had to be issued due to the budget deficits.  Fed's QE through expanding its balance sheet by nearly 2 Trillion has taken out almost half of the supply either directly (direct Treasury purchases) or indirectly by displacing MBS holders (MBS purchases) pushing them into other debt/investments.  That is how long term Treasury rates have been kept artificially low.  Add to that, the fear of the average investor who has fled stocks for the "safer" waters of bonds has boosted demand along with the Fed purchases.  Bond inflows have been massive since 2008 and this strong fund inflow has helped to keep rates low.  But we all know that the average investor chases performance, and bonds have been performing strongly over the past 30 years.  What if that performance fades in the face of pressures of new Treasury supply?

I see 2 scenarios here.  First scenario with QE3 and the second scenario without QE3.  With QE3, more Treasuries will be purchased, sopping up much of the extra Treasury supply coming from the huge budget deficit.  This will help keep long term rates low but I guarantee you that investors will stampede out of the dollar.  There will be extreme dollar weakness, similar to what you saw in the first half of 2008.  Gold and silver will go through the roof.  Equities will also benefit somewhat from the extra money printing.  This is the most likely scenario which is why I am so bullish on precious metals.  It has nothing to do with the debt ceiling or the European sovereign debt crisis.

Under the other scenario without QE3 (very unlikely), the economy will have been relatively stable (otherwise there would be a QE3) leading to bond weakness, which with the big increase in the Treasury supply would lead to a bond market rout.  Long rates would shoot higher and bond fund outflows would only exacerbate the move.  The dollar would be weak, but stable.  Equities will struggle under this scenario because of the threat of higher interest rates and tighter money. 

There is no scenario where I see deflation or a significant reduction of the budget deficit.  The U.S.  has taken the road of Keynes and tried to spend their way out of their problems.  Europe has taken the road of austerity reducing spending.  That is why you are seeing such weakness in European equities compared to the U.S.  In the short run, austerity will hurt equities and spending helps equities.  In the long run, in currency adjusted terms, the opposite effect will occur, all things being equal. 

YearNominal DollarsInflation Adjusted
2002157.8 Billion Dollar Deficit186.204 Billion Deficit

2003374 Billion Dollar Deficit430.1 Billion Deficit

2004413 Billion Dollar Deficit462.56 Billion Deficit

2005319 Billion Dollar Deficit347.71 Billion Deficit

2006248 Billion Dollar Deficit260.4 Billion Deficit

2007162 Billion Dollar Deficit165.24 Billion Deficit

2008455 Billion Dollar Deficit455 Billion Deficit

20091416 Billion Dollar Deficit1416 Billion Deficit

20101294 Billion Dollar Deficit1294 Billion Deficit

20111650 Billion Dollar Deficit1650 Billion Deficit

Friday, July 29, 2011

Intraday Upside Seen

That seems like the upside for the day session.  I think we've seen the highs for the day.  There is that dirty word again:  hope.  Traders are hoping for a deal and hoping that there is end of month tape painting.  I am not expecting a giant short squeeze in the 2nd half of the day, because I just don't think many are short.  Also don't expect a collapse like yesterday after a strong first half of the day.  We should consolidate this move up off the morning bottom, and then have a weak close. 

A Day to Buy

We are reaching the apex of worry about the debt ceiling.  The process to raise the debt ceiling is taking longer than many expected.  The fear mongering is getting extreme even though there is no crisis.  There is no financial dislocation and comparing this to 2008 is asinine.   I don't know what time today we'll bottom, whether its the open, close, middle of the day.  If we do bottom today, will we call it the Raging Boehner bottom?  I am leaning towards a weak first couple of hours.  Afterward, I'll have to see the price action. 

Purchases of stock today will be rewarded in the coming weeks, downgrade or no downgrade.  But I don't think we'll V bottom like we did off of 1292 like last week.  Feels like we'll need to shake the tree a bit with a U bottom starting today  and lasting much of next week.

Wednesday, July 27, 2011

Debt Ceiling

If everyone expects the US debt ceiling to be raised, and most people expect a rally on that news, how long can that rally last?  Especially when we rallied all of last week because of European bailout goodies and a debt ceiling deal. Will we even have a rally after the debt ceiling is raised with the possible S&P downgrade of US debt to AA looming?  I don't suggest that one should play the short side, but going long at current levels entails a risk of even lower prices after the news comes out.

Monday, July 25, 2011

Thinking Long Term

" There is the plain fool, who does the wrong things at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. "  -  Reminiscences of a Stock Operator

I started this blog in November of 2009, things were going very well.  Thereafter, I've had ups and downs, with most of 2010 being a bad year.  2011 hasn't been good either.  I can blame myself for being bearish when the market was rising, but there are other more general factors. 

For me, trading is a game that tests your psychology more than your analytical skills.  I have found analyzing the market data and reading the patterns to be the easy part.  What has been more difficult has been to overcome the psychological barriers to trading success.  I have a different mindset when I have been winning for several months than when I have been losing for several months.  When I am winning, I don't rush into trades, have a lot of patience, and wait for the easy trades.  When losing for a while, I become less patient and try to make back my losses quickly.  This has caused me to trade much more frequently and less than optimal setups.  I can't win at this game trading that way.  The last 2 years have taught me that.  But I continued down that road.  It is a psychological weakness which I need to overcome. 

The best way for me to regain my previous trading form is to forget about past losses.  To be more selective in my trades, and to think about more than the next few hours or days of stock movements.  Fortunately, I don't need to make money everyday like a worker on a salary. 

I have decided to focus on the big picture and the longer term.  The big money is made in the big swings.  I am not a daytrader and the best timeframe for my trading is a few weeks to a few months, not a few hours to a few days.  It is something that I have learned painstakingly over the past couple of years.  Numerous times over the past 2 years, I tried to catch the next ten points down and set myself up to reverse from short to long on the reaction.  But too many times the reaction was too shallow or it never came and I was left holding the short bag.  Even though I knew underneath that the market was strong and would eventually make back its losses.  I was trying to play a pullback perfectly, trying to pinpoint the exact bottom to cover and then go long.  I was able to do neither at prices that I desired.  You can't be Mr. Perfect.   I lost the forest for the trees.  Trying to capture the intraday movements left me badly positioned to capture the bigger moves. 

I will be making less but more substantiative posts.  There will be no regular schedule.  Maybe a few a month.  I am not sure yet, and it will depend on the market.  Future content will have less to do with the daily fluctuations.  When the daily fluctuations are such that it is worthwhile to daytrade, when there is lots of volatility, I will make more posts.  But mostly, I will be focusing on the bigger picture.

Thursday, July 21, 2011

Fewer Posts

I see a slow market for the next several weeks until September.  So I expect volatility to go down steadily over the summer.  In order to focus on the longer term view, I won't make as many posts because there just won't be as much intraday action to comment on.  It won't be worth it to daytrade.  If the volatility picks back up, I will post more.  But right now, it's looking like a sleepy summer coming up. 

Give the Market Its Due

The pullback is likely over and we're probably back to a narrow range grinding market that eventually bursts higher to get to new yearly highs.  1400 is probably coming up sometime in September. 

Market Feels Heavy

We are up over 1% but something feels heavy about this rally.  I expect a weak close.

More Can Kicking in Greece

Extending more credit lines, accepting selective default at the ECB who will now accept toxic Greek debt after restructuring.  Of course they were going to do it, they aren't going to shoot themselves in the face.  They are not getting ahead of the problem, they are putting band aids and the market will eventually sniff this out.  In the meantime, shorts are squeezed but they didn't do triage.  They are putting their resources towards saving the guy who will die anyway instead of those who still have a chance to live.  Expecting first half weakness today on this Greek Gap Up. 

Wednesday, July 20, 2011

Europe = Punching Bag

Again.  Shorting European stocks is like fighting a midget.  You can't lose.  Sure they can occasionally bite you in the knee caps and you can have some cuts here and there.  But in the end they get KO'ed.

During US hours:  US rallies, Europe grudgingly gains about 1/3 of the US gains.  US drops, Europe drops the same percentage.

During European hours:  Europe usually just drops, and when it doesn't, it barely goes up treading water.  Swimming upstream.  ES usually unaffected and squeezes in the 3 hours before the opening bell putting on their best Alfred E. Neuman mask.  ES has a scary moment during a European mini-panic, but that is the bottom, and it continues to squeeze into the US open and amazingly, gaps up while Europe is stuck in the mud.  That is the story of this market.

Tuesday, July 19, 2011

Closing In on a Sell

With the big ramp up today, I am getting a sell signal.  The debt ceiling relief is a joke.  We all know it is going to be raised, another ruse by the bulls to jump over midget hurdles and find an excuse to rally.  A gap up tomorrow based on an AAPL earnings beat will be a screaming sell.

Gap Ups Steal RTH Move

Another classic gap up and dare.  Dare you to buy up 10 points on the ES.  Dare you to sell here and tempt fate with a gap and go squeeze.  The bears got set up yesterday and are now trapped.  That is why you can never hold overnight shorts unless you are totally sure that we're gapping down.  Because you expose yourself to these random 10 point gap ups.  You rarely see random 10 point gap downs.  They only happen in a nexus of fear which is uncommon. 

With AAPL earnings coming up, no one will want to be short heading into those "blockbuster" earnings.  So we'll drift higher today with high probability.

Monday, July 18, 2011

Trend Down Day

Friday was the short squeeze to clean out the weak shorts, and suck in the overbullish longs before the market continued its mission lower.   Expecting a classic trend day lower with the lows right near the close.  The market is more complacent today compared to Thursday even though we're lower.  Amazing.  We broke down that cliff of worry with a hydrogen bomb. 

Market In Trouble

This is not selling because of Europe.  It is selling because the US hasn't priced in a slower growth economy while the other world stock markets have.  The strongest are always the last to fall.  The fund managers have already cleared out their European inventory.  Now it is time to clear out the American inventory.

Gold Bubble Is Simmering

It is hard to find a good investment now.  Stocks, bonds, and commodities are not cheap. So what is the best thing to do?  Buy the thing with the best chart and favorable supply and demand.  Gold and silver.  These markets cannot handle big investment flows like equities and bonds without going much higher.  The steady pressure to chase performance, lack of good investment ideas, and weak economy make gold and silver the perfect performance vehicles.  We are right in the middle of the bubble.  I can't imagine it ending without some huge up moves.  Traders will flock to the precious metals, whether the market is up or down.  I see this continuing for at least another year.

I expect weakness today, the market is grinding lower and there hasn't been a flush out yet.  It should come soon.

Friday, July 15, 2011

Always Fade Fast Money

What a short squeeze at the close.  Options expiration games with a bunch of shorts not wanting to be short over the weekend = huge squeeze.  Still believe we go lower next week to test 1290 on ES.

Very Weak Market

Not much more to say but all the bounces are sold and we'll probably need to probe lower levels to find value.  GOOG couldn't save the day, mergers can't save the day.  Europe with a laugher of a stress test isn't going to get the market excited.  We're going lower next week.

Fast Money Bearish

All of the Fast Money crew are calling for a weak close.  Usually they are a good fade so take that into account for the rest of the day. 

Ratings Agencies

Another overnight downgrade warning of US, this time S&P.  Who are the idiots dumping S&P futures on these ratings warnings?  S&P and Moody's are always late to the party, firefighters who arrive an hour late.  We keep making these ridiculous lows overnight and then ramping for the rest of the overnight session to greet eager open buyers with stock at pumped up prices.  Only to have these buyers turn seller near the day's lows in the 2nd half of the day. 

Why the pumped up opening prices?  Because everyone sells at the close for fear that Europe will fall of the face of this earth and then when it doesn't happen, they bid em up at the open.

This is a fear driven market, not a greed driven market.  Remember that.  They trade quite differently.

Thursday, July 14, 2011


JPM and GOOG have beat estimates and the early start for earnings is positive.  Positive micro, negative macro.  The European stress tests will be out of the way tomorrow, of course it will be like setting up mini hurdles for midgets.  These stress tests are a total scam to fool the public that everything is ok when the banks are leveraged to their eyeballs in suspect debt.  We'll probably get that relief rally, with the setup off this oversold day providing the springboard.  I don't expect it to last more than 2 days.

Looks Like a Bottom

We just might have seen the lows for the day.  The put/call ratios are elevated and we've got options expiration tomorrow.  The setup is there to squeeze the shorts into the close.  I would not short rallies for the rest of the day.

Overnight Volatility

The pattern the last 2 days has been to kill the ES during overnight hours and then reverse them hard at the beginning of European trading.  It happened again today.  And we went on to rally into the middle of the day and then close weak.  We've consolidated enough between 1310 to 1320.  The bears were tested yesterday with that QE3 rally but they passed.  Now it is time for the market to test the bulls during US hours.  So I am expecting intraday weakness with heavy selling in the first half of the day.  I have no idea how the 2nd half of the day will play out.  We may rally into the close or just flatten out weakly into the closing bell. 

Wednesday, July 13, 2011

Watch 1296

That will be the first real strong level of support.  We are getting crushed here in the after hours on the US credit rating news.  1296 and then 1290 are the levels to watch.

What a Reversal!

This is something you do not see often, especially 2 days in a row.  We've got back to back nasty reversals, with hopes being pumped both times by Banana Ben and the QE3 bazooka.  The market refuses to give a lasting rally here, and traders have been quick to sell any pumps.  The volume analysis I've been doing confirms that this is no ordinary selloff, you are getting more volume on pops than drops.  Contrary to paper napkin volume analysis, that is bearish, not bullish. 

QE3 Reflexive Buying

Anytime QE3 is mentioned the market rips higher.  It is a shot of adrenaline for this market but like yesterday, the rally eventually faded.  As I am writing we are fading already and we're less than 1% higher on the day.  Like yesterday, traders are using the strength to lighten their load.  Like those quick rallies that died in the afternoon in June, this looks like another one of those.  Usually we had a lot of selling the next day.


This is not your normal pullback.  The reason I say this is because we should be getting a lot more volume on down days than up days.  But we're not.  Can you say yesterday was a down day?  It was mostly flat.  We got more volume yesterday on the upside try than on Monday when we got whacked.  That is not healthy.  It tells you a lot of overhead supply is waiting to sell on a rally.  Today in the premarket you can feel the sellers coming down on the gap up as the US open nears.  Just 3 hours ago, with ES at 1321, you would have thought, ok, we have a gap up and go scenario coming up.  Now, we're at 1316 and it looks like a fade open off a mediocre gap up.  Big difference. 

This pullback still has a ways to go, we either need to get traders more bearish by going lower.  Still see yesterday's overnight lows as targets on the downside.

Tuesday, July 12, 2011

Rally Sold

We had another down day, making it 3 days in a row, with 2 unfilled gaps above.  The situation in Europe is reaching a boiling point, and the ECB is intervening to try to contain the contagion.  Remember ES 1296.  That is a price which will likely be revisited soon.  Below that, I see ES 1290 as strong support.  They correspond to SPX 1300 and 1294.  1290-1296 should provide a strong bounce if we get there this week. 

Europe Panicked

You saw ES test 1296 overnight and it passed with flying colors.  That will be a huge support zone going forward.  I do believe we will see a bit of follow through strength off the V bottom in Euroland but it should only last for the first half of the day.  We should fade back down in the 2nd half of the day.  It will be volatile out there.  I would not chase any rallies today.  Getting above 1318 will be difficult

Monday, July 11, 2011

Those Last 15 Minutes

From 3:53 to 4:06, the market surged 7 points.  Those looking to buy the weakness with on close orders just flooded the market.  And it is spilling over into extended session.  This has to be totally demoralizing for the bears to grind the market lower and lower and then have the bulls give a big FU by putting on this squeeze out of nowhere.  I don't think we'll get to SPX 1300, we might get to ES 1306 if we have some panic in Europe.  It sure won't come with the US panicking. 

No Heroes

A strong market will give you one chance to buy a gap down and win, but not so often a 2nd chance right away.  I think this is the real deal, and there is real selling here.  I would not fade the down move today.  I am watching on the sidelines here, may want to buy the dip tomorrow.  But I am not very bearish so no shorting either.

Friday, July 8, 2011

Not Totally Sanguine

If you've noticed, I've been advocating BTFD and being bullish on small pullbacks even after the huge run up over the past 2 weeks.  But today is kind of a game changer.  Not in the sense that we go right back down or have a deep pullback next week.  In the sense that a market that will immediately blast to new yearly highs doesn't drop 20 points on a nonfarm payroll miss.  I still believe we rally early next week to test ES 1355-1360 because of such strong momentum.  But today's drop makes a 1355 - 1360 short a much stronger play. 

By the way, this is not because I think this number dooms us to a big slowdown.  I could care less if it was +18,000 or -118,000.  Nonfarm payrolls is probably THE most overrated economic data point.  It was the market's reaction that caught my eye.

Hedgies View

After the underperformance in the first half of the year, what do you do if you are a hedge fund manager?  How do you explain getting 2 and 20 when you get clobbered by the S&P?  The buying you saw last week was desperation.  You only get those kinds of moves in a couple of situations.  When you are coming off a panic bottom or when you have underinvested fund managers who need to chase and add beta, and add it fast.  I would have to say that it is the 2nd case.

Moreover, this underperformance is revealing a two-tiered environment.  A small group of hedge funds that really add value and consistently outperform and the majority of funds that lack talent  and have gotten by on sheer luck/ rising markets.

Over the long weekend, the underperforming funds decided to throw caution to the wind and buy up commodities in a hail mary bet that they can come back from a bad year with aggressive beta plays.   I think that explains the sudden strength on Tuesday in precious metals, oil, and grains with a flat S&P.  And the recent outperformance in high flyers like NFLX, LULU, etc.   For the remainder of the year, the chase is on for performance and it will lead to ridiculous overshoots on the upside.  Followed by panic selling on the downside.  We are right in the middle of the overshoot to the upside.

Thursday, July 7, 2011

Rising Consensus

The nonfarm payrolls number will be tricky to play.  The strong ADP number has raised expectations to the point where I believe it will be a coin flip situation.  The best approach is to short on an overextension, perhaps to the 1355 to 1360 zone.  I don't want to buy the dip until next week. 

Still Not Shorting

The move looks excessive but I'm still not interested in shorting this beast.  There are a lot of traders getting short now on this up move and I am betting that they want to get flat ahead of nonfarm payrolls.  So I still don't see a good risk reward on the short side.

Europe NOT the U.S. is Japan

I've read too many articles talking about the disintegration of the eurozone, various euro crisis scenarios, etc.  And the main investment theme is to short the euro.  This mainly based on recent history.  2010's euro trip to the abyss and back still leaves a lasting impression.  It is the wrong play.  Japan tells you everything you need to know about shorting a country's currency because its economy is weak.  How did those yen shorts play out over the years?  There is a much greater probability of deflation in Europe than the U.S.   No matter how much Trichet warns about inflation and Banana Ben tells you there is no inflation.  The demographics of Europe are much closer to that of Japan than the U.S. 

How can you go short a currency of a place (EUR) that has a better trade balance, is tighter monetarily, and less willing to print to solve all their problems than the currency of the country that you are going long (USD)?

If you are negative on Europe, short non-export based European stocks.  Not the euro.  They will probably mostly be small caps.  I know it takes more homework and you need to use your brain a little.  If there is a crisis in Europe, those European stocks will go down much more than the euro.

Wednesday, July 6, 2011

Ahead of Jobs Reports

The ADP employment numbers will be out tomorrow.  With last month's bad numbers lowering expectations, the odds favor the bulls despite running up here into the close.  If the numbers beat consensus for nonfarm payrolls, that could be the capitulation of the shorts who have been fighting this rally.  It would probably set up a good short term short play.  But I want to emphasize that the short side is the hard side for the next couple of weeks.

The Pullback

Well here is the pullback that everyone was waiting for.  It probably wasn't as deep as most expected but it will be hard to expect much more than this with the news already out.  The contents of the wall of worry include China rate hike, Portugal, and general disbelief over last week's rally.   Healthy amount of put activity in the index options.  Looks like many traders want to hedge or just bet against this market. 

Tuesday, July 5, 2011

Shallow Dips

This market just won't dip.  The most you can ask for is a 0.5% dip these days.  And that dip lasts for about 5 minutes.  I was waiting a couple of points below the intraday low to buy the ES and it never came to me.  Volatility is dead.  And now we're off to the races to finish strong.  You either put in aggressive buy limits or you will be left holding air.  Even if the market does go down below your entry, buys are always forgiving in this market because it  always comes back to higher ground.  The same can't be said for sells that go against you.  Then you have a high probability of being squeezed in a slow death grind.  

Get Ready for Low Volatility

It will be boring trading for the next few weeks as the market grinds higher along the cliff of worry.  I am not going to short much, if at all, and will be looking to buy dips.  It is a strategy that has worked for over 2 years and will continue to work until the stock indices get too high and the public embraces the stock market. 

Friday, July 1, 2011

Gap Down Signal

I am getting a pretty strong gap down signal for Tuesday.  This also coincides with stiff resistance at 1340, the first intermediate top off the March low.  I would be looking to short overnight on Monday if not already short.   See you Tuesday.

Incredible Hulk

The market has transformed into a hulk.  There is no stopping this market.  Up 60 points in 5 days in a straight line.  No dips.  We are fast approaching signficant resistance in the SPX 1330-1340 area.  I think we'll spend some time in that zone before heading to test the year's highs at SPX 1370.  Those looking for a pullback are everywhere.  I don't think the market gives it easily because of the number of underinvested fund managers totally caught off guard by this sudden strength.  I am just watching in amazement and reminded once again that the market doesn't always repeat but often rhymes.