Monday, October 31, 2011

Gap Up Signal

The market will not run away like a frieght train.  But also won't drop like a rock.  Still lots of fear in this market.  Expecting a gap up.

Sunday, October 30, 2011

The China Bubble

The baton is being passed from Europe to China.  On Europe: if everyone is bearish and knows how bad things are, then its too late.  The fundamentals justify the bearishness, but the European stock prices reflect this.   But China is different.   I am still surprised at how many believers remain in the China story despite the stock prices being quite weak.  Maybe it is because they keep growing, that has traders mesmerized.  But then why aren't the share prices going up?  Why is it so much weaker than US equities? 

I have never seen such a big disconnect between GDP growth and stock prices in a major market.  When you have 9.7% GDP growth, the stock market shouldn't be so weak.  It has to be the real estate bubble.  The smart money is now out of China.  They know that the gig is up.  The dumb money is getting anxious.  Property prices are falling now. 

China GDP growth has been induced by a property bubble that has non-real estate companies investing in real estate.  You have insane projects like high speed rail that no one can afford, empty malls, ghost cities in the middle of nowhere.  It is not quality GDP growth.  It is just dumb central planning.  The banks are loaded up with bad loans.  They will become zombie banks.  This is a repeat of Japan in 1990.  Chinese companies face the double whammy of growing wage pressures and a bursting real estate bubble.  The profit numbers will look like a train wreck in 2012.  I see a lot more similarities between China and Japan, than I do with U.S. and Japan.  China has a real estate bubble based on overinvestment, just like Japan did in 1990.  The US was an overconsumption story.  China is an overinvestment story. 

This will have ripple effects on the commodity exporters of iron and copper, and to a lesser extent crude oil.  That is why Brazil and Australia have been so weak.  The market usually foretells of dire situations.  I see the Australia dollar getting weaker along with their stock market.  Same for Brazil.  I wish there was CDS on Beijing and Shanghai real estate, because I would go all in on that trade.

Friday, October 28, 2011

Big Volume

There was a very bad sign which some may have glossed over.  Nasdaq volume at 2.8 B, NYSE volume at 1.4 B.  Just this past Friday on another strong up day, Nasdaq volume was just 1.6B and NYSE volume was 1.1 B.  This past Monday, another up day, it was Nasdaq 1.7B, NYSE 0.9 B. 

The massive volume that took place yesterday, on a big up day is an ominous sign.  Usually when you get this at the bottom, its a positive sign.  But when you get this kind of heavy volume on a big up day on good news, that is a negative.  A lot of stock changed hands on Thursday from weak hands to strong on the short side.  On the long side, those that are buying in now are nervous, either because they were too underinvested and are being forced to chase even when they don't really want to.  They will be easily shaken out on the next pullback.  The big volume tells me a lot of sellers met those eager buyers. 

Thursday, October 27, 2011

Crazy Market

This feels like the fall of 1998 when we bottomed and went up in a straight line for 3 months to new highs.  My thesis last week where we would top out at 1235-1240 and go back down to 1150 has quickly been invalidated.  Luckily, I didn't put any shorts down on that thesis as I still thought it was too early to short from a time standpoint. 

Now it's time to reevaluate what happens for the next few weeks.  There are so many bears in this market that it makes it tough to be a steadfast short.  Sometime late next week I'll look to take a longer term swing short.  In the meantime, shorts are just quick trades.  Also don't want to be long when we're up 210 points in 3 weeks. 


Everything is OK now.  Don't ask, just buy.  The market was too conservative and too many are underinvested.  But after 200 points higher in 3 weeks, the crowd can't resist piling on and overshooting to the upside.  I am selling the euphoria today at the open because it is based on good news.  If there was no news, there would be no way I would be selling a monster gap up.  The shorts are officially extinct after this killer gap up. 

Wednesday, October 26, 2011

MF Global

The octopus of the European debt has reached MF Global.  MF Global is a fragile firm, it nearly blew up in 2008 because of a rogue trader who got squeezed short in wheat futures.  They are leveraged to the gills to make up for their low margin business.  It is a crisis only if you are weak, and MF Global should have gone bust a few years ago, now the market wolves are going after it again.  I don't think they'll let the prey live this time. 

I bring this up because as much as the stock market has squeezed higher, the sovereign debt yields haven't come in.  And we still have that Greek monkey that's still on the market's back.  We don't have a crisis, its just a long squeeze on PIIGS debt holders.

Now that the so-called "scary" event is out of the way, the hesistant will dip their toes into the water, right when we're about to top out.  It is getting closer to the time to position short for the big whack lower.  It will come out of the blue like it always does.

Tuesday, October 25, 2011

Low Expectations

Most traders are expecting there to be nothing concrete coming out of the EU summit so I don't see much of a selloff if nothing is accomplished.  But we probably won't rally much either, since we've gotten to such high levels with lots of resistance above.  CNBC crowd seemed nervous ahead of tomorrow's event so we shook out a good chunk of the fast money today.  Any further dip tomorrow is probably buyable for a quick trade. 


Last chance to get on board before we go to 1400!  This is the only significant dip we're gonna get this week.  The market is just too strong to hold on to a short ahead of the EU summit.  I expect us to keep going higher after a very brief pullback on the news.  The market is set to squeeze into the beginning of November, where the laggard funds will pile in hoping for a year end rally, only to buy at the top. From a price standpoint, we're close to a top, from a time standpoint, we've still got a couple of weeks of topping left. 

Monday, October 24, 2011

Wednesday Non Event

Unless something very unexpected happens, such as Germany refusing to go with the plan, which is very unlikely, you will get a very brief sell on the news, it might last 1 or 2 hours.  And then we'll be back to higher prices.  The US is dragging the other world markets reluctantly higher.  China is being dragged higher, Europe is now failing to make new highs while the ES keeps making higher highs.    From now to Wednesday, I expect us to pullback to relieve the overbought condition.  We have run too far too fast. 

Friday, October 21, 2011

Faux Crisis

It is tough being a short these days.  Every other person is short because they buy into the European crisis rhetoric and that's somehow going to crash the markets like Lehman Brothers.  The Europeans don't have a serious crisis.  Greece does, and maybe Portugal and Ireland.  But they can go bust and it will be like Argentina defaulting.  No one would care.  Sure, it could cause short term panic for the brainless who think contagion will happen because they see CDS spreads blowing out fearing Europe is on the verge of a 2008 repeat.  But crises are born from excess.  I don't see much excess over the past few years in Europe.  They are cutting back government spending and taking their medicine.  You get the short term result:  a recession which cause credit spreads to widen, earnings to lag, and a breeding ground for fear mongers.  Italy and Spain are solvent.  With the ECB providing a backstop, there will be no liquidity crisis for those countries.

The Europeans aren't so willing to inflate their way out of this problem because Germany has the most power, and they are the most hawkish country in the world.  So this is what you get:  a weak economy, with a currency that doesn't want to go down much even with the world betting against it.  If this really was a serious crisis, do you think the S&P would be down just 3% on the year?  And much higher than 1 year ago?  One year from now, the euro will be much higher vs. the dollar, and equities and precious metals will be higher. What may end up being the weakest are those commodities most sensitive to China, like industrial metals like copper, nickel, tin, iron, etc.  The real estate bubble bursting in China will have negative ramifications for commodity exporters, like Brazil and Australia, but it shouldn't really have much impact on the US or Europe, who don't have that big of a market for exports to China.

Thursday, October 20, 2011

No More Juice Left

The shorts have been squeezed to death.  They are as dry as the Sahara.  No more juice left in them.  They are masochists fighting this rally.  The rises are faster than the dips.  That is unusual.  Fear should be a stronger emotion than greed.  Obviously this market still remains very short.  So fear shows up when the market goes up, not down!

The big volume bars on the 1 minute charts have been on the up bars.  Which means massive buying/covering in an instant.  Fundamentals remain terrible so eventually the rally will be retraced, but only after the last short is squeezed.  All those October puts are officially worthless.

EU Summit

Why are traders so nervous ahead of the EU summit?  Expectations are low already, plus nothing ever happens at these summits/meetings anyway and the market shrugs it off all the time.  Usually greeting the nervous investors with a gap up on Monday.  It proves what I believe to be a cornerstone of finance.  Perception overwhelms reality in the minds of Wall Street.  It doesn't matter what happens at this summit, Europe is well on the way to using the EFSF as a bailout vehicle.

P.S.  When they finally finish up the details of the EFSF, probably within 2 weeks, that will likely be the top of this move.  

Wednesday, October 19, 2011

No Man's Land

After giving back half of yesterday's gains, we are back to short term neutral.  Over the rest of the week, it is hard to bet on either side.  I remain on the sidelines waiting for the bulls to push us back towards 1225-1230 to short.  If we dip down to 1180-1185, I would consider a short term long.  The big whack down to 1150 will have to wait at least a couple of weeks.  The longer we wait, the more energy we build for a bigger move lower.  Market players are still nervous but getting more comfortable buying in this market.  Most still are afraid to short after the 160 point face rip higher. 

Tuesday, October 18, 2011

Not Going to 1250

I don't know when the drop will happen.  But this move that started 2 weeks ago is now building a top.  Friday was the day that tech shorts got squeezed.  Today was the day that financial shorts got squeezed. Most of the weak hands have covered.

1230 is an extremely important zone which has marked short term tops twice already this week.  The volume came in heavy in the final hour.  This is what I have been waiting for.  Heavy volume where panic buyers and patient sellers meet with lots of supply changing hands.

Monday, October 17, 2011

Short Leash

I don't like the price action for a longer term short.  I am giving this short a short leash.  I will look to cover on the weakness in the early going.  We'll likely chop around for the next few days.  I expect one more tech earnings related gap up later this week, probably when AAPL reports blowout number afterhours on Tuesday. 

Friday, October 14, 2011

Taking a Shot

We're back to the highs on Wednesday which was rejected right at the SPX 1220 level.  It is a good spot to start a short position.  Euphoria over GOOG earnings, and the better than expected retail sales is enough good news for me to feel comfortable shorting.  It is a strong market but a lot of that is reflected in the prices already. 

Thursday, October 13, 2011

First Pullback

Don't expect a collapse right away.  After the huge run up that we've had, the first pullback is usually bought.  Expecting a dip and run scenario today.

Wednesday, October 12, 2011

Consolidating Before Big Drop

Today was day 1 of the consolidation at the top of the range.  We should have a couple more days of consolidation between 1195 and 1215 before we get the big drop down to 1150, most likely next Monday.  Now that the parameters are set, I will be looking short between 1210 and 1215 tomorrow.  Expecting a gap up.

To the Moon Alice!

There is no stopping this market.  There are more bears to grind.  More shorts to squeeze.  We will go straight to 1370, consolidate for a few days, and go down to 1100 in a straight line.  Being sarcastic here.  We bottomed as I suspected last week, and now any pullbacks will be voraciously bought by underinvested bulls and bleeding shorts.  I expect any pullback to last 2 days, 3 days max.  I've delayed my short as I don't like the sentiment, its too bearish.  We are going to 1250 by end of this month.

Badly Positioned

The crowd is just not well positioned for more upside.  Everyone is loaded up with cash, waiting for a good entry to buy stocks or are short.  The market puts pressure on the weakest hands, and those are the short side.  This looks like the last gasp, just get me in no matter what type of gap up.  Shorts throwing the towel, fund managers coming in to buy so they don't underperform even more.  Expecting weakness in the first hour of trading.  The time to short has come. 

Tuesday, October 11, 2011

Looking Short

I am very close to entering a short position.  The situation is almost just right, it would be nice to have some good news to short into, perhaps the Slovakia passage of the EFSF will do it.  We tagged SPX 1200 and have sold off in the past 30 minutes.  We've rallied 125 points in 5 trading days.  We are set up for a pullback very soon.  Target on the pullback is 1130.  I am thinking Thursday or Friday.  It should be a whopper of a 1 day decline which gets the crowd bearish again. 

Monday, October 10, 2011

In an Uptrend

The market turned from a downtrend to an uptrend last Tuesday.  Traders are still adjusting to this new uptrend, and that is why you get these monster gap ups on nothing.  Most are positioned for weakness and when it doesn't come, they cover and squeeze the market higher.  I will look to short around 1185 to 1190.  But now I believe the safer side to play is the long side, since we are now in a uptrend.  The short I want to take will just be for a quick pullback, where I plan on covering, and reversing to long.

Friday, October 7, 2011

Shorts are Scrambling

That was a short squeezer of a number.  Now that we are at the levels that we reached 1174, the upside is limited from here, maybe 20 points at most.  So it is risky to put on longs here.  But at the same time, I just don't see this market pulling back so we'll stay green today as shorts don't want to go home short overnight sitting on large losses.  Also, probably another up day on Monday where you can think about putting on shorts.   I am not eager to short this market.  Even though I think we'll pull back to 1130 or so, I think we go a bit higher first and stay there for a couple of days.  If we are higher on Monday, I will think about putting on shorts then. 

Thursday, October 6, 2011

We Bottomed

Not too helpful when we've already run up 90 points off the Tuesday low.  But all the signs are there that we're going to grind higher for the rest of the month.  We got extremes in sentiment readings, Europe is outperforming, and we V bottomed without turning back for the last 90 points.  It was a fake breakdown below 1100 and then a rip higher.  That usually only happens at intermediate term bottoms.  It isn't 100% guaranteed, but probably at least 80%.  I would look to buy any pullback next week as we'll probably keep going higher.  There is some resistance at 1174.  I expect a gap up on a strong nonfarm payrolls number tomorrow.

Wednesday, October 5, 2011

Either Way

Market is no longer oversold and not yet overbought.  Probably range bound for the next three days between 1095 and 1135.  Next week we should retest 1068 and then break it on down to 1036.  I will not be shorting because it is getting late in the selloff and I see a lasting bottom coming up very soon.  Now that China's slowdown is being priced in, the selloff is almost over. 

Tuesday, October 4, 2011


The bottom seekers were waiting in the wings for the market to rally in the final 30 minutes and they piled in.  Watch for them to pile out when we get the gap down tomorrow.  Yes, I am getting a gap down signal.  There was very little panic this morning, or at the lows in the afternoon.  It was a massive short squeeze and it will just set up a bigger drop next week.  The faster we bottomed, the better for the market.  But delaying capitulation is only going to build up the selling power for a bigger thrust lower.  I now believe we will hit SPX 1040 by next week.

Bottom Today or Tomorrow

The market is in the last part of the freefall.  Odds are extremely high that we bottom today or tomorrow.  The velocity of the selloff is unsustainable and the bounce back will be quick and sharp.  It is too bad there is no bad news to cause panic.  But there are very few perfect opportunities, you just have to play the odds.  The odds heavily favor the bulls at these levels.

Monday, October 3, 2011


This is looking like October 2008 action.  We had the biggest waterfall decline I've ever seen from October 6 to October 10.  This one will be tame in comparison, but we are in day 2 of the waterfall decline.  1066 and 1036 are the levels to watch.  1095 support will likely fail.  We should start seeing some panic once we break under SPX 1100 and test new lows for the year.  Waiting to see the white of their eyes to try to pick the bottom.

Europe >> China

Europe is now taking over the role as strongest market.  It has outperformed the world over the past 5 trading days.  The European market is taking on Teflon-like qualities, even fears of an imminent Greece default doesn't make it flinch.  It is ignoring the ongoing crash in Hong Kong/China.

Market darling China is now the global weakling getting sand kicked in its face.  It is helpless in the face of a real estate bubble that is popping.  Calling it a hard landing is funny to me.  It was a bubble and no one has the guts or the brains to admit it.  Inflation is not the problem over there.  It is overconstruction and bloated real estate prices.  Probably the biggest real estate bubble we have seen since Japan in the late 1980s.  Far bigger than what you saw in the US.  Jim Chanos was right.  China is Dubai X 1000.