Rally Skeptics

The majority seem to be skeptical of this rally.  I don't blame them, I am one of those rally skeptics.  But we keep making new highs each day this week despite the skepticism.  So  we need to build up some optimism before we can get a sustainable drop.  A better than expected ISM number and nonfarm payrolls number would do that in a hurry. 

Topping Phase

We are entering the top zone.  We will be building up hope during this phase as traders expect 1250 and higher as we trade along.  I don't expect this to last more than 10 days.  But with the way this market moves, it might last just 2 or 3 days.  In any case, this is a selling opportunity and upside from here is at most 20 points, with downside to 1100, or 100 points. 

Buy 1130 Sell 1180

The market carved out what I believe to be the trading range over the next week between 1130 to 1180.  Right now, we are closer to the upper end of the range and you have to be cautious going long, or want to start shorting.  This morning, the market bounced strongly from 1133, the lower end of the range.  You cannot expect outsized moves and get greedy.  The market will go back and forth for the next 2 weeks before eventually going lower to crack 1100. 

Gaming Ben

Bazooka Ben is the main event today.  The market is obviously nervous ahead of this event as we are selling off before it.  But with expectations low, I don't see much room for a sell the news reaction.  And if Bazooka talks dovish like he often does, it would be a huge boost for this market.  I would not overstay the long side, but after this event, the market should get a relief rally. 

Sell This

The problems with this market run much deeper than BAC.  You are getting a monster short squeeze on the financials right now, but the market is overreacting to this news.  Gold is getting crushed and is now so far down from its highs that the risk reward is now very compelling.  Very bullish on gold here.  And in an intraday time frame, not bullish on stocks.

Gold is Most Bullish Market

There is a big selloff in gold right now and it is getting closer to strong support at 1725-1740.  I would be a voracious buyer into that price area if it gets there.  Perhaps a COMEX margin raise would be the catalyst to do it.  We are in the early to mid bubble phase of gold, which means lots more upside.  Those people with 5000 targets are being ridiculous, but 2500 is very much in play by next year.  Talks of bubbles are popping are way too premature.  The current environment is perfect for gold, which is a weak economy with firm inflationary pressures and an easy Fed.

Lower Highs, Higher Lows

The trading should become more compressed as is the pattern after a market crash.  Yes, it was a crash that we observed the past few weeks.  I don't expect the market to go above 1200 based on the price action over the past 3 days.  I also don't expect us to break below 1120 either.  The tighter trading range should be around 1130 to 1180.  So even though we are up 20 handles, we are still in the lower end of the trading range. 

We are in a recession, and the market hasn't completely priced it in, based purely on the denials by so many Wall Street analysts still clinging to 1% growth estimates.  This confirms my belief that we will retest and likely break 1100 sometime in mid to late September.  Before that, we should have playable rallies.  But don't get greedy.  This is not your super strong market of the past 2 years.  It is a new ballgame.

Buy Zone

ES under 1150 is a buy area, ES around 1200 is the sell area.  Let's not get emotional about the market, the market is pricing in a recession and those in denial about the recession are Pollyannas.  This is no soft patch, this is a full blown recession coming.  It can be argued that we never got out of the recession with the cooked CPI numbers overstating GDP growth. 

Even though I think the economy is in a recession, from a stock market perspective, there is a high probability that this is just a dip in the bounce off crash scenario that I see playing out.  Bounces off crashes usually last 6-8 weeks before retesting or cracking through previous support.  That 6 week window allows for one to play for rallies in a bearish market.  That range should be around 1120 to 1220, so we are in the lower end of the range. 

Wow

This gap down is straight out of October 2008.  It isn't as bad as then, but these 30 point gap downs out of the blue tell you that we are not done testing 1100.  I don't see that happening in August, but it should happen sometime in the next 2 months.  Expecting weakness throughout the day, but it will be a buying opportunity if we go down to ES 1138-1140 zone.

Dollar is Doomed

The one benefit of the dollar was that it was a safe haven reserve currency.  It is losing that safe haven status because of the gigantic twin deficits, trade and budget.  The Fed isn't helping either with endless QE.  Who would have guessed that the euro would be relatively unchanged in the low 1.40s while the S&P tanks 200 points (with a European sovereign debt crisis) over 2 weeks?  In May of 2010, you had traders clamor for the dollar in those times of uncertainty.  Now you don't see that anymore.  Traders now clamor for gold.  Or Swiss franc.  Or yen.  Gold is now considered superior to the US dollar in times of uncertainty. 

S&P is the only ratings agency brave enough to point out the elephant in the room.  Taxation is the only way that a country can maintain the strength of its currency.   If you have no taxes, there are no government revenues, and thus no government.  That country's currency has no value.  A dependence on tax cuts to maintain a sound economy reduces the value of that currency, because the ability to tax is impaired.  Decreasing taxes without decreasing government spending increases the amount of currency in circulation.  Every single measure that the US government and the Fed has taken is dollar negative.  The Bush tax cuts, $300 checks in the mail, wars in Iraq and Afghanistan, TARP, 2009 stimulus package, the payroll tax cut holiday, etc.  The Fed has kicked it up to new unheard level of money printing adding 2 trillion to its balance sheet in 2 years.  And more is coming.  It is becoming a joke, because people are getting used to this insanity, and the market is begging for more.

Tax cuts are favored by both parties, Obama wants that payroll tax cut again because he knows without it next year, 2012 economy will get ugly and he has no chance to get re-elected.  So even though these tax cuts are temporary, they are the permanent temporary items that keep getting renewed. 

The S&P will never go back down to 666 low in March because of the weak dollar (The running joke of the world, the US Treasury strong dollar policy).  Look at Zimbabwe's stock market.  It is the top performer over the past 5 years.

Unless the US begins to embrace austerity and Bernanke is fired, you will continue to see the dollar go lower.  Commodities prices will remain high, and the government will continue to print out more phony CPI numbers.  QE3 will cause a stampede out of the dollar which will make your head spin.  Can you blame central banks for diversifying out of their dollars into other currencies and gold?  They see their currency adjusted returns in the toilet getting 1-2% on Treasuries while the dollar is getting flushed.  Sometime within the next 12 months, gold and silver will go parabolic.

January 2008 and August 2011

There are a lot of similarities between now and January 2008.  I decided to compare the two.  If we really are heading into a beginning of 2008 type of environment, the dollar will be getting much weaker, gold (2011's version of crude oil) will be getting much stronger, and equities will be range bound for the next few months with a retest in a couple of months.

August 2011

January 2008

Probably Higher

We're probably going higher for about a week, perhaps to ES 1197.  I don't know what will happen today or tomorrow, the intraday action is hard to predict right now, but the general trend should be up, with big pullbacks, till options expiration, next Friday. 

Rumors Probably True

Whenever rumors, even when denied are this pervasive and have such a strong effect on the market, they are usually true.  Soc Gen is probably in trouble and Europe is having their Bear Stearns moment.  Remember, Bear Stearns was in March 2008, not in September 2008.  So I do think we'll bottom soon.  Either today or tomorrow.  If we bottom today, we likely have already hit the low in the premarket at 1103.  If we bottom tomorrow, it will likely be around ES 1080. 

Not Cheap

If the market was cheap, it would not be going down 15% in a week.  Insiders would be buying aggressively.  I find it hard to believe that this market is 80 points better than the May 2010 market when we bottomed at 1040.  The global economy was stronger then, the only difference was that the decline in 2008 was fresher in everyone's minds.  There are very few bargains out there.  You are betting on someone else to buy your stocks at overvalued levels.  That is a tough bet to make in this economy.  Don't blame HFT.  HFT only affects your fills, it doesn't have an effect on market direction.

These attacks on Soc Gen and Italy and Spain would be brushed off if the fundamentals didn't justify the weakness.  But fundamentals in Europe are horrible, so its hard to fend off the attacks.  Last May, the market was able to bottom and brush off the European weakness because of the lower valuations and better economic outlook.  You have to get to lower levels to really be able to bottom strongly and thrust higher.  All oversold bounces are selling opportunities until we get to at least May - July 2010 levels.

Tricky Market

It is a very bearish market, but we are so oversold that I can feel a strong bounce that lasts for at least a week coming.  But we are well off the lows so I don't think you can buy safely here.  You have to wait for extreme intraday oversold levels where the market is plunging on a 1 minute timeframe and then you buy.  Confusing matters is yesterday's big rally which got a lot of traders bullish and the market too high.  It is probably safe to buy at ES 1090 to 1100 this week for a bounce next week.

Going Lower

We tried to bottom yesterday but you are getting volatility that is greater than May 2010.  That is a warning sign to me that what we have is worse than May 2010, but not as bad as October 2008.  Yet, prices are higher than they were on May 2010, when we bottomed temporarily at 1040.  So there is still plenty of downside if the crowd really panics.  Europe is facing a crisis which is not like its mini crisis in 2010, it is getting full blown when they start going after France.  You have to bring out your crisis playbook here, the normal rules don't apply.  Panic can happen in a flash.  Looking for a retest this week of 1100.

FOMC Announcement

The market is set up for disappointment going into the Fed meeting.  We are just up too much on the hopes that Banana Ben will save the day.  He probably will say something about discussing QE3, but I don't think what he does will be enough to satisfy the daytraders.  It could be a shake and bake and then run higher into the close.  I don't think we'll have another weak close today because most of the margined players probably got taken out yesterday.

Watch for a Volatile Bottom

The overnight session is giving us a hint that the market is almost ready to bottom.  70 point overnight range is telling you that the market wants to bottom.  The fundamentals are in place for a bottom with the ECB now going with QE and Bernanke likely to come in with his version soon.  This is not 2008, but it is much worse than May - July 2010.  And prices in the US anyway are higher so US stocks are going to vulnerable to further selloffs later this year.  But before that, we should bounce hard.  Looking for early weakness off this big gap up.

Global Margin Calls

That last hour was margin calls and forced selling.  It is continuing in the after hours.  I am seeing Europe outperform the US in the past few trading sessions.  They get to the strongest markets last, and the US equity market has been the strongest.  I expect much higher prices after Bernanke hints at QE3 tomorrow.

ECB Buying Italy and Spain Debt

What is lost in the scary headlines about the S&P downgrade is the very significant change in attitude of the ECB.  They are now willing to monetize Italian and Spanish bonds to stabilize the Eurozone.  This will stop the speculative attacks and put a floor under these bonds.  Unlike PiG (Port, Irel, Greece) ,Italy and Spain aren't insolvent, just lacking the liquidity due to the fear in the market place.  The ECB is now providing that liquidity.  This good news is being overshadowed by mass media fear mongering over the S&P downgrade.  I agree with S&P, US is in a long term mess, but it is a problem that isn't imminent.  Europe is and for at least a few weeks, the Europe crisis will be abated.

S&P Downgrade

This has to be one of the most telegraphed moves by the ratings agencies in a long time.  S&P finally did what most feared, downgrading US debt rating.  Based on the moves in the other smaller markets in the Middle East over the weekend, it looks like there will be weakness overnight. 

The fundamentals don't change because of a ratings downgrade, the US Treasury market is still the most liquid in the world and the safe haven when markets tank.  In a perverse way, any short term dollar weakness caused by this debt downgrade would be bullish for the US stock market. 

After the big down move we saw last week and the surge in volatility on Thursday and Friday, the market is close to a short term low.  On Monday morning, retail money will be bailing out after freaking out over the weekend doomsday headlines about this debt downgrade.  I believe that will be the final capitulation of this move.  If we get a gap down, that will be an exquisite buying opportunity for a swing trade. 

ECB Starting QE

This rumor, if it is true, which I believe it is, is a game changer.  You now have the two biggest central banks monetizing debt.  This will squeeze the European markets higher, thus moving the US markets higher.  The S&P downgrade is mostly priced in, so if it does happen as rumored, it should just be a blip which would be a buying opportunity.  I expect a squeeze into the close when traders realize what is going on here.  There is now another QE program, this time in Europe.  Plus, I expect a QE3 from Banana Ben at anytime.

SPX 1180

The market wants to test 1180 already.  We're in the middle of the give up stage when the volatility is the highest.  The worst thing that could have happened today was to have traders get complacent again with the nonfarm payrolls beat.  That leads to action like this.  I am looking to nibble on the long side when we get to SPX 1180. 

Sucker's Gap Up

Those buying stocks on the better than expected nonfarm payrolls will get a big shock in the first hour of trading.  This is an extremely vulnerable market and the focus is squarely on Europe and the speculative attack on the PIIGS.  I expect us to selloff in the first half of the day. 

Give Up

Today felt like a short term panic with the plunge at the close.  I am still looking at lower levels for the final bottom, but we're close enough that it is worth getting some long exposure.  VIX spiking to 32 is a step in the right direction.  I have a gap up signal for tomorrow.

SPX 1220-1227

We are crashing through 1227 as I write, and 1220 is close by.  This market is a lot weaker than many think.  This is not your March or June market.  This feels more like May 2010, when the VIX spiked to 45.  VIX right now is at a relatively calm 26.8.  The thing is, we are much higher now than back then, which is a bad thing if you are a bull.  On the other hand, Europe is even lower.  I always thought it was unsustainable for the SPX to outperform the world markets by such a big margin.  The market thought stimulus would last forever, but that is only the case if the market is weak, not strong. 

Complacency

Yesterday was probably the first day when there was a whiff of fear in the air.  We had to break 1250 to get it, and at the end of the day, the Fast Money crew was claiming the price action to be good and talking about a possible double bottom.  The Investor's Intelligence sentiment survey has bulls at 46%, bears at 25%, which is not a good sign.  For comparison, at the June lows, bulls were at 37% and bears were at 28%.  Granted, this doesn't take into account the action over the past couple of days, but it is still too many bulls. 

More than that, just watching the traders on TV talk, and on sites like Elite Trader,  they are looking to buy the dip.  Market usually doesn't oblige the majority, especially when the price action is counter to the sentiment.  Expecting a weak close today. 

VIX Down

There is complacency in this market, and the VIX being down from 24.79 to 24 even though the market is even lower shows that traders are not very willing to buy put protection.  Anecdotally, there are a lot of people looking to buy this dip, including those on CNBC.  I continue to stress that one has to be very cautious buying stocks here.  I think we go to SPX 1220 soon.  And I don't think we see much of a bounce before we get there.

Triple Bottom?

Not a chance.  Of the last 3 times we were in the 1250s, in March, June, and now, I would say now would be the worst of the 3 times to buy.  The reason is that the crowd is just not that fearful.  I see Jim Cramer touting this dip as a buying opportunity.  I don't remember him being so complacent in March or June.  Look at the sentiment surveys, they are just not that bearish.  Traders are conditioned to buy at these price levels so you don't see many throwing in the towel despite 8 straight down days and 90 points of downside.

Not only that, I see negative global divergences from the last time we were here in March, such as a much weaker Europe, deteriorating indices in China and the emerging markets, and no QE.  I am expecting us to burst through 1250 and test that SPX 1220-1225 area which marked the April and November 2010 highs.  We should be able to get a decent bounce from that level.  We could perhaps get there as soon as Friday.  Any bounce from SPX 1250 won't have much legs and will be sold fast. 

US Credit Downgrade

The debt ceiling plan will probably lead to a credit downgrade, and most in the market expect the same.  Thus, any selloff on a downgrade should not last long, like any rally on a debt deal didn't last long.  Problem is, you have more data coming in supporting a slowing economy and Europe weakness pushing the PIIGS closer to the brink of panic.  It is a slow motion panic in Europe, but those stocks are so beat up that there just isn't that much downside and I don't know anybody that is bullish on Europe.  Nobody. 

With the nonfarm payrolls coming up on Friday, I expect fund managers to pare back on risk today and tomorrow.  We will likely be testing the lows in June.  The lows in March are probably safe unless there is a speculative attack on Italy or Spain, which I don't see happening yet.