Thursday, May 31, 2012

Weak Economic Data

Today's economic data all came in below expectations.  Among those, the Chicago PMI caught my attention.  It was the 2nd month in a row of numbers well below consensus.  The economy is slowing and will get even slower as we head towards the fiscal cliff.  Only QE3 can save the market.  If we go below 1250 on the year, it is almost a guarantee than the Bernanke put comes in.  So there is a floor on this market in the 1200-1250 area. 

Rumors of IMF bailout for Spain, giving us a little intraday short squeeze here.  These rumors will come through intermittently as funds plant rumors to squeeze shorts and dump their short term longs for profits. 

Wednesday, May 30, 2012

Power Reversal

Yesterday was one giant phony rally.  It set up a bearish island reversal, the most powerful formation known to man!  I don't see us going back to the 1320 zone now.  That area is behind us, left in a pile of dust.  The countertrend rally is over.  Prepare for 1260 next week.

EURUSD on a Mission

The most bearish market right now is the euro.  It doesn't matter if the market is up, euro still manages to go down.  It finds a way.  The only time it ever rallies is from jumpy shorts who want to flatten out before the weekend.  Then it goes back down again.  This has been going on all May.  Sure sentiment is bearish, but it would be asinine for it to be bullish in the face of such a ferocious downtrend.  The downtrend should continue for another couple of weeks until some poor Euro longs cry uncle and spill their guts out.

The ES continues to be the strongest of the weak despite its massive relative overvaluation to Europe and Asia.  Fund managers are still hanging on to their US goodies, viewing them as treasures and throwing out everything else, oil, gold, emerging markets.  This bear trend will not end until we get them throwing out their treasures.

Tuesday, May 29, 2012

Biding Time

Market is working off the oversold condition.  Rallies have been selling off intraday, which tells me that long term money is reluctant to buy at these levels.  It is fast hedge fund money trying to capture a bounce and sell before the next guy does.  They do not want to stay long for long. A game of musical chairs. 

The selling pressure has died down. We are inching up and gapping up almost everyday now.  But not much buying power or selling power.  After an effortless selloff from 1415 down to 1290, it is taking this much time and effort just to get to 1330, only to struggle to stay there.   Seems to me that line of least resistance is down.  Eventually the sellers will take control of this market and test the bulls in the next couple of weeks.  We likely get to 1260 on that panicky downwave.

Saturday, May 26, 2012

Fiscal Cliff

I began to hear about this fiscal cliff in 2013 last month and the talk will get louder as the year goes on.  The expiration of the Bush tax cuts and federal spending cut mandates are due for 2013 but that is if the politicians let it be.  Will they let it be this time?  They didn't in 2010, extending the Bush tax cuts for 2 years.  And last year, they extended another gimmick, extending payroll tax cuts.  Obama is no dummy.  He knew that if he didn't do the tax cut extensions, the economy would turn into what Europe is right now.  And he would have no shot at reelection  And Republicans never met a tax cut they didn't like. 

But this time, it will be tougher.  The Republicans do not want the economy to have hope heading into the elections, and tax cuts give it hope.  So they will try to make deals with the Democrats that they know won't be accepted to keep anything from passing.  This political game will cause the market to have another temper tantrum, like last fall, but this time, it will be over something domestic, not European or fake, like the debt ceiling.   The U.S. economy is addicted to tax cuts, and needs them, like a crackhead needs another hit.  If it doesn't get that hit, it crashes hard.   I am expecting the S&P to at least test 1120, sometime in the 2nd half of the year.  The three legged stool has lost 1 leg, Europe, and another leg is badly maimed, Asia, the US is the last leg standing.  It will get chopped down soon.

Greece and the Eurozone is a red herring.  Those are well know facts at the forefront of the financial news cycle.  The real catalysts for 2nd half weakness is the fiscal cliff and the popping of the Chinese real estate bubble.  China is in deep deep trouble, and only recently getting some press

All the fund managers have crowded into the last safe haven, US equities, and they will get blown out as the negative fiscal situation takes center stage.  An alarming fact is that Apple, mostly by itself, drove the S&P to new 52 week highs.  And I see Apple near the peak of its earnings prowess as competition, the law of large numbers, and margin pressure will deflate the stock over the long term.  You chop off the head, Apple, the body goes with it.  Earnings growth is slowing down rapidly sans Apple.

Europe has already been shot and left for dead, a situation that is deemed hopeless by the fund community.  There is no hot money left in that region, only sticky, slow money that is mandated to invest in Europe by charter.   And of course short sellers.  Europe will outperform the U.S. in the 2nd half this year, after badly underperforming the past 2 years.  The economy will worsen ahead of the fiscal cliff as corporate spending slows down in preparation.  Corporate profit growth will go negative, spooking the bulls.  It will be a doozy of a 2nd half, this time the downturn will be led by the U.S., not by Europe. 

The reflexive buying of dollars in a downturn will be turned on its head, it won't happen.  The Fed will do a QE3 later this year ahead of the elections as an FU to the Republicans who hate Banana Ben.  This will rip the face off the shorts, but this time, it won't cause a lasting rally, because the economy will be unrecoverable at that point.  It will only fuel a run on the dollar, confounding dollar bulls who think the dollar goes up when the market goes down.  Gold will go through the roof.

But let's not get ahead of ourselves, we should consolidate the up move from earlier in the year and digest those gains, make a false move higher in a couple of months, and then begin a new bear market.

Friday, May 25, 2012

Recent Market Action

Information gained on this market this week.
  1. The market will not make a V bottom.  We're not going to panic and capitulate.  It will be a grinder where rallies get quickly sold and selloffs get quickly bought.  I expect a lot of 1-2 day rallies that fade quickly.  Also a lot of sharp short covering rallies, many which will be fueled by Euro rumors. 
  2. 1330 is a big barrier, and is a good spot to attempt short positions.  I feel more comfortable shorting this market than going long it, but I will take small stabs at longs if we test 1280-1285 support zone. 
  3. The dollar is strong because the euro is weak.  But as I've said many times in the past, the dollar is a deeply flawed currency, more than the euro.  They are all a bunch of muppets feeding the desires of the financial markets.  I wouldn't be surprised if we got at least 2 QE announcements this year, one from the ECB and one from Banana Ben.  
  4. Intraday volatility remains surprisingly low for such a weak market, which is the reason the average trader is not scared.  This is the lowest volatility correction that we've had since the bottom in 2009.  Not a good sign for bulls.
  5. The fast money is now short.  You have to think like a short seller to anticipate moves.  Short sellers are closing out positions ahead of the long weekend.  

Thursday, May 24, 2012

Markets Don't Wait

Yesterday, we had quite an unusual intraday pattern considering we were not grossly oversold.  Usually, when you have a gap down and selloff down 20 handles in the middle of the day and the previous day was flat, the market can't rally much for the rest of the day.  But we had a huge face ripper as if the previous day was a big selloff and we were extremely oversold.  We weren't.

 And today, I expected the initial pullback off the gap up and then a run higher into the lunch time hours to set up a weak close.  But the run up died out within 30 minutes shy of the overnight highs and we are hitting new intraday lows.  It seems the algos are anticipating future moves so far ahead that they are taking the markets to their price targets ahead of time.

New Range

Expecting the market to be rangebound over the next several trading sessions, from 1285 to 1325.  If we get panic, we could make a low down around 1260, but market doesn't want to go down there yet.  I would be a seller around 1325 and be a buyer around 1285, but a reluctant buyer at 1285, worthy of a small position.  As the selloff goes on, more traders are joining the short side so there will be more vicious short covering rallies in the next couple weeks. 

Wednesday, May 23, 2012

A Face Ripper

Something smelled funny when the euro kept trading weaker but stocks wouldn't go lower.  Too many shorts piling in ahead of the EU summit hoping for a sell the news, but the sell news happened before the event!  HFT and algos have speeded up this market such that you have to try to anticipate the anticipators.  Still bearish, but the bottom is coming soon, but it won't be a V bottom, should be a U bottom. 

Winds of Change

The market is not acting as strong as it used to.  It just feels heavy.  Lack of capitulation, but steady selling.  It needs a QE, which is the only thing that will save it.

The global economy is hooked on cheap money and QEs.  But the problem with this is that to get a fix, the economy has to be weak.  More specifically, the stock market has to be weak, because we know central bankers are nothing but stock market jockeys.  They pretend to look at all the data but they only react to one:  stock prices.

It is not what you learned in Finance 101, discounted cash flows of companies don't matter anymore.  It has turned into a pure money game.  How much liquidity will be pumped?  That's all that matters now.  But the problem is that you get diminishing returns on liquidity as you do more and more QEs.  Eventually, all you end up doing is increasing inflation.

We are still up on the year, there is no way Bernanke provide put protection here.  Its still out of the money.  My bet on the strike price is between 1100 and 1200.  We'll see.  Maybe with the election and Bernanke doing anything to improve the economy and prevent Romney from getting elected, he might raise that strike to 1250 and really piss off the Republicans looking to get rid of Obama.

I remain bearish, we can perhaps make a buyable low on Friday if we get down to 1260-1270.

Tuesday, May 22, 2012

A Good Short Spot

The market finally bounced yesterday and had a strong finish for the first time in several days.  Usually when you have a long string of weak days and then a sharp rally, it is a good shorting opportunity.  I believe that to be the case this time, with the market sending off some serious bearish signals.  There is an EU summit meeting on Wednesday.  I wouldn't hold my breath that the Europeans will get something done to save the market.  They have a track record of acting only when the markets are panicking. 

Monday, May 21, 2012

Facebook Under $38

Facebook is trading under its offering price in the premarket, right now trading at $36.65.  Wall Street fleeced the public again.  I was really shocked to see how much hype there was last week with FB, I don't get it.  It's a horribly overvalued company which is already past its peak growth rates.  GOOG is such a better company.  If you are going to get most of your revenues from advertising, it would be good to have your users click on the ads.  No one clicks on the ads!  I never believe in new paradigms and phantom growth drivers.  I heard that a lot during the late 90s and all of it was an excuse to justify ridiculous valuations.  Social media is the latest fad and it will die out and become a small niche of the internet. 

Still bearish on this market.  Stay with the trend.

Friday, May 18, 2012

Bear Market Prelude

This is bear market action.  Something feels different this time, the fact that we don't capitulate, we drip down in drabs with traders playing for a bounce and hoping for a rally to sell into.  This never happened in the selloffs in 2009, 2010, 2011.  We always had quick selloffs with big down days thrown in regularly.  And the selloffs were never this calm and collected and continuous.  We are down 120 points in 2 weeks and there is no capitulation.  No really big selloff days, limited volatility intraday, just steady selling with rallies dying within hours, not even one day.  I think we have to get down to 1260 before we can get a real bounce.  The bagholders are just weighing down on this market and the smart money is steadily dumping their holdings.

Face Ripper?

Are we gonna get a face ripping rally with the FB IPO?

Fat Chance.  It is not common to get a week long accelerating selloff that doesn't bounce at all by options expiration Friday.  In the rare times that it does happen (e.g., January 18, 2008), it is a sign of huge selling pressure and lower prices.  We ended up gapping down huge the following week.  Aside from the October 2008 selloff, the selloff in January 2008 was probably the second scariest selloff I've witnessed.  It doesn't get as much hype as the Bear Stearns March 2008 bottom or March 2009, but the speed of the down move was a prelude to a bear market.  Expecting more weakness today as the capitulation gets closer.

Thursday, May 17, 2012

Global Slowdown

The U.S. is not immune to the global slowdown.  Not with fears of the upcoming fiscal cliff, slowing manufacturing numbers, and stronger dollar.  Europe is a mess as we all know, but it has been China that has been trading the weakest of them all.  The Hong Kong H-shares index is in crash mode. It is a train wreck out there in China, 50 bp reserve ratio cuts will not get the job done.  The aftermath of real estate bubbles are always devastating.  Especially in the case of China, where construction is such a huge part of GDP.  Watch for interest rate cuts coming soon in China, would not be surprised if they enter into a QE to join the global liquidity party.  Or will they start more bridges to nowhere projects?  Will they build more ghost cities?

On a side note, there is so much hype about FB, I cannot imagine how it will end well after the opening print.  At the offer price of $38, the market cap is $104B, for a company that makes money off advertising, with no one clicking on their ads.  Are you kidding me?

No Rallies Part 2

The drip drip downtrend continues, but the drops are getting bigger.  No capitulation yet, still too many hopeful for a rally to sell into, especially with EXCITING Facebook coming!  COVER Shorts! 

Bulls will give up all hope after the FB IPO bombs.  The bulls' last hope is FB.  Remember that.  They will not sell until they see that FB IPO meant nothing for the bags they are holding underwater.  Of course at that point, we will be much lower and near the bottom.  You will not see a capitulation until after the IPO. 

Facebook Insider Dumping

Those Facebook insiders are ramping up the selling.  Its going to be $18B.   It was originally supposed to be $12B.  Then $14B.  Now $18B with more insiders turning into eager beavers looking to cash out and leave the bag for the retail investors to hold. They are cashing out like crazy, they realize an absurb valuation when they see it and they are taking full advantage.  Once again, the Wall Street hype machine will fleece the dumb money buying in after the open tomorrow. 

Expecting intraday weakness today, but I think we'll squeeze into the close based on traders buying/covering ahead of the Facebook hype. 

Wednesday, May 16, 2012

No Rallies

This is the worst type of decline if you are long.  The market only rallies for hours, not even 1 day.  We have yet to see a rally of more than a couple of points by the close since the beginning of May.  You have a substantial subset of investors and traders that will only sell on a rally.  That subset is deep under water this month.  They are begging for a rally to sell into.  And they aren't getting it.  It is drip drip selling, no panic, no sense of doom, just steady sellers who don't let this market breathe and bounce.  I expect more weakness until you get a high volume day, either an intraday reversal or a flushout where we go down 2-3% in a day and finish at the lows. 

Tuesday, May 15, 2012

In Deep Trouble

We are on the edge of the final cliff dive.  We've been rolling down gently but that is unsustainable.  The markets are now built for quick panic declines with markets moving based on headlines.  This also means that we're probably going to bounce right back after the panic.  I am looking at the Spain 10 year yields and it reached new 2012 highs, although still well below 2011 highs.  I was premature on the Europe bottom call, the economy in the Eurozone is so weak that a bottom is elusive.  I am expecting a very weak 2nd half for today and we should plunge down to new lows.  Expect a volatility spike soon.

Monday, May 14, 2012

One More Push Lower

We are going to have to go lower to find a bottom.  The unwillingness of this market to have even one strong rally day last week tells me we need to go lower.  Not a lot lower, perhaps down to 1320.  Either at the end of today or intraday Tuesday, we should find the floor and bounce strongly off that level.  I don't see a V bottom however.  We'll probably need to put in some work between 1320 and 1360 for a few days before moving higher. 

Friday, May 11, 2012

Early Strength Late Weakness

We'll probably get reflexive buying and short covering on the JP Morgan news and gap down open and then fall apart in the 2nd half of the day after Europe closes.  Europe is trading stronger than the US this week.  I stand by my belief that Europe has made an intermediate term bottom and that the US will follow soon.  Expecting us to close near the lows today but probably show a little strength early in the day.

Wednesday, May 9, 2012

Sum of All Fears

On CNBC yesterday, Tres Knippa, a trader in Chicago, went from moderately bearish to moderately apocalyptic.  You have a slice of the current market sentiment, expressed by the talking heads, and through the extremely high equity put call ratios.  Traders are scared.  And yet we only went down to 1344 and bounced back strong to close near unchanged.  The market is almost sold out and we are close to a strong intermediate move back that will rip the face off the shorts.  Sure you might be able to squeeze out another 1 or 2% from the short side on this move, but facing 6-7% of risk to do that.  I'll pass on those odds.  The next up move will last at least 2 months. 

My conviction is only stronger with all the doom and gloom, with Europe acting relatively strong, and the resilience of this market. 

Monday, May 7, 2012

Europe Probably Bottomed

Today, the European markets likely have put in an intermediate term bottom that should last for at least a few months.  I can't say that the US market has put in a bottom with as much certainty, because it hasn't capitulated, but European equities, especially Spain, has already capitulated.  Europe trades quite well despite all the bad news (elections, PMIs, etc).  Then again, all the bad news was pretty much expected. 

You will hear the fearmongers speak loudly for the next few days, talking about corrections and bear markets.  They are wrong, Europe was the nexus of fear over the past few weeks, and when that market bottoms, it takes away a lot of the bear's ammo.  You can make your own interpretation on how that will play out over the market in the coming weeks.  I have a bullish lean to what is currently going on in the market.

Friday, May 4, 2012

Close to Short Term Low

Today just may be the bottom pivot to thrust us into new yearly highs.  The market expected a weak number and got it, but its not much below consensus and probably close to the whisper number.  Expecting 1380 to be a strong floor for this market as jobs jitters is now out of the way.  Plus Europe is trading unusually strong compared to the US today, probably means we got a gap up Monday coming.  Looking for a long entry.

Wednesday, May 2, 2012

Jobs Report Fear

The market is providing another entry point for getting long.  The correction that lasted 2 weeks is now over, but it shook up a lot of bulls.  We now have a wall of worry which we will climb.  The expectations for the nonfarm payroll report are being lowered, and I would not expect a weak jobs number to keep the market down.  On the contrary, it would be a time to get long on a bad number.  We are about to launch into the final thrust higher of this bull market, it will squeeze any remaining shorts and will be concentrated in the outperformers, mainly tech.