Road to Re-risking

We are climbing it.  The Wall of Worry.  I don't even know why anyone would worry anymore.  Haven't the ECB and the Fed given investors the green light by saying:  we've got your back, we will save the world with euros and dollars coming out of every orifice of the financial beast.  The August to October time frame was a trip to the detox center, a trip to an Indian sweat lodge.  The financial system is now "cleansed" from weak hands, worry warts, and eternal pessimists.  They are clearly risk free, and the market, with the removed baggage, has been moving with a light footedness of the post crash markets of 2009 and 2010. 

It takes time to re-risk, both from a logistical and a psychological perspective.  Deriskers will not immediately re-risk.  It takes time to suck them back in, to regain their trust.  So the market will not rocket higher to 1400-1500, but it will climb, slowly and steadily, with dips that will be bought because the central bankers will not let anything fail.  And then slowly but surely, this rally will get old, too many will be back on board, and we'll be ready to fall again.  But that is a long time coming.  Just ride the wave higher, buy the dips, and stop trying to short.  The time to short will come several months later.  The time for shorts has come and gone.  It is now the bull's time to feast.

Fed is Dovish

Who is actually surprised by that?  They will keep rates low till 2014.  Last year it was till 2013.  Ok, next year it will be 2015.  These fortune tellers actually think they can predict the economy 2 years out.  Look how wrong they were in fall 2007.  It doesn't help to think what should be done.  My job is to react to what will be done, and that is more QE and more pump priming.  The question about QE3 is not if, but when.  And then it will be on to QE4.  I believe the dollar has made a long term top, and gold a long term bottom over the past few weeks.  US equities are in a bull market, but with S&P at 1325, there isn't much upside.  It looks fairly valued.  The only way to go higher is to get overvalued.  That will be hard to do unless we see enthusiasm for stocks again like the good old days.  Those days are long gone. 

FOMC Meeting

Today is an FOMC meeting.  Usually you get some kind of rise ahead of the meeting but when most people don't care about it and it is a nonevent, it will trade like just another trading day.  The volatility is dying out as one would expect with a rising market.  It is a fool's game to try to pick a top here, I won't do it.  I'll be waiting on the sidelines for a dip to buy.  Like everyone else. 

Up and Away

It is a bull market in US equities.  You have to follow the bull market trading plan if you want to trade with the highest probability.  Shorting is ruled out unless you reach extremes in optimism, which we have not yet done.  There is going to be a dip of 3-5% when some "spooky" headline comes out of Europe and you have to buy it.  Not much to do while you wait.  Bull markets are waiting games.  Trade less, hold longer. 

Topping

We are reaching the peak of US earnings season, and with it, a typical pattern of topping out as the earnings come out.  It is a strong market, so I don't want to enter into a short too soon.  Perhaps when we get some of the big tech earnings come out, we may have a sell the news reaction.  And I'm sure there will be some "spooky" headlines thrown in from Europe for the scarecrows to flee.  That might be the dip that one would use to cover and reverse to long.  Nothing high percentage yet, perhaps 60-40 odds.

BTFD

Yes, you have to buy any dip greater than 10 points.  We got a 20 point dip this morning, and the buyers snapped up the shares voraciously.  Downgrades in Europe don't matter.  That is yesterday's news.  A Greece default won't matter, past a day.  Europe is a basket case, and the market has put it into the corner, quarantined it and deemed the rest of the world contagion proof and it's all OK.  Yes, even China, now that the Chinese government wants stocks higher.  This charade can last for several weeks.  I won't say several months because the S&P is already near 1300, there just isn't a huge amount of fuel to take this thing higher.  The herd is already crowding into US equities and shunning everything else. 

Monday is a US market holiday, and it looks like derisking ahead of the long 3 day weekend.  Look for them to re-risk when they come back on Tuesday.

Downside Coming

We have consolidated for 4 days between 1260 and 1280, building up a wall of optimism to tear down.  The wall was complete with the nonfarm payrolls report, which all the shorts were afraid of shorting ahead of.  So now that the good news is out of the way, it will be a free fire zone with Europe as the main course, with China weakness on the side menu.  The cat is now out of the bag:  the US is the last one standing.  All the fund managers are crowding in to the US long equities short Europe/emerging market equities trade.  This trade can go on for quite a while, since it has only recently been mentioned. 

I expect next week to test the bulls, with a sharp pullback which shouldn't last more than 3 days.  Best trade is probably to buy that pullback as the money flows will support US equities for some time to come as it sucks away institutional money from other parts of the world.

First Week of January

I usually avoid short during this time because of the institutional money pouring in.  It doesn't mean the market can't go down, but I don't like playing for downside so early in January.  Next week, it is a different story.  ADP employment numbers were blowout, but the market has already given up the pop on that number in premarket.  This market looks like ripe for a pullback, perhaps another European mini panic attack.  Ahead of tomorrow's nonfarm payrolls, I will let the bulls roam, next week I will be looking for shorts if we are between 1265-1280.

Monster Gap Up on First Trading Day

What's new.  The institutional money pours in and the only way to balance buy and sell orders is to raise the price.  That's the gap up.  It is 15 years in a row for a gap up on the first day of the year.  Now after the gap up, it can keep going higher (more likely than not) but no guarantee.  Only the gap up is the guarantee.