Investor Positioning

Last week and this week.  Two tales of news, price, sentiment, and investor positioning. 

Last week:  1) The week starts with relief that the Greece vote had the "good" team win, ended up being a nonevent, relief that a supposed bullet (to me, a rubber bullet, to most others, a silver bullet) was dodged.  ES 1340.  2) More relief that the Fed didn't do nothing (worst case scenario avoided), and gave the market what it wanted, like it usually does, and the market didn't have a sell news reaction.  This much relief opens the door to future angst.  ES 1352.  3)Angst happens.  Philly Fed disappoints.  ES 1343.  Goldman fronts run their short call to cover at lower prices, and the market keeps falling.  Usually the opposite happens with these Goldman calls.  A bearish sign for upcoming days.  ES 1321. 

This week:  1) Angst over the EU summit fearing nothing will be done, market gaps down big on Monday and selloffs intraday.  ES 1308.  2) Two days of low volume bounces as the nervous already sold on Monday, and now the bargain hunters take over.  ES 1326.  3) A return to angst on Thursday because Obamacare was upheld by the courts, viewed as a negative by investors.  ES 1308.  At this point, most investors are resigned to a weak close of the quarter, and heavily positioned in cash.  Merkel cancels press conference fueling rumors of a EU summit deal.  ES goes from 1307 to 1323 in one hour.  4) The details of the deal come out, totally unexpected, ES up to 1340 in overnight session, Europe continues to trade strongly despite monster gap up, ES goes up to 1347 for a monster 24 point gap up at the open.  Shorts cover like crazy, underinvested hedge funds panic buy to keep up with the averages, FOMO takes over, they don't want to miss the train.  The ES choo choo train high on hopium.  Monster moves in crude oil, gold, euro, and a huge squeeze at the close.  ES 1358.  This is not relief, but hope.  Hope that the worst is over and that we'll start a new uptrend with this EU summit news. 

We had a net 6 point move, from ES 1352 to 1358 over 6 trading sessions, and went from angst over the Greek vote, to relief that it didn't bring disaster, to anticipation of Fed action, and delayed disappointment and weak economic data to bring back angst.  Angst goes more extreme with fears of nothing happening at the EU summit, and then Obamacare being upheld increases the fears even further, and then we get the rescue.  This is not relief, but surprise and hope.  Hope that the EU has kicked the can far enough for the market to rally for at least a few weeks, which is all the hedge funds are asking for to keep up with the averages. 

We are back in the hope part of the short term trading cycle.  That is dangerous considering that the rally off the June 4 low is now 4 weeks old.  We are now vulnerable to another intermediate term downtrend like May 1 to June 4.  This EU deal has brought on a lot of hope, that Germany will bailout the southern Europeans.  But the global economy is too weak to have a sustained rally from these levels.  Crude oil and copper tells me that clearly.  You can get jumpy hedge fund money to buy here, but that's about it.

Only Looking Short

It is now TOO DANGEROUS to play long.  At 1350, you are playing with fire on the long side.  No, it is more like lighting a Roman Candle backwards, with the wick pointed at you.  I am not expecting an immediate splash downward, but we have pretty much reached the price objective.  Upside is very limited here, we could maybe squeeze another 10 points to 1370.  The time objective has yet to be met, but that will likely be met with low volume narrow range trading next week.

I am stalking a short position, perhaps even starting today if we get to 1353.  More likely, I will start a short position next week.  This Euro news will calm the bond markets, but it won't calm the European economy.  Only way that happens is if Europe takes a page from Obama/Bernanke 101: a tax cut/pork fiscal combo with QE.  We are far away from that and need to see more dead bodies (perhaps Merkel's?) before we get those other goodies.

Crude Oil Canary

Crude oil does not lie.  It is telling a story of a sharp drop in industrial demand.  If you are just looking at the change in demand, the drop coming from Europe and China are alarming.  Brent crude oil is trading just above $90, and WTI is now below $80.  This is 2010 territory.  Back then, the S&P traded in a range of 1010 to 1255.  The slowdown in China is being underestimated amidst the onslaught of European headlines.  But China is trading worse than Europe.  Europe is mostly priced in, but China is not.  There is still hot money in China, and China will not bottom until that hot money leaves.  Still several months away.

Overnight we got the surprise move from the EU summit, agreeing to directly recapitalize banks, which is just semantics, because you either give it to the governments to give to the banks, or just give it to the banks.  In the end, the banks get the capital, which is what matters.  So this is nothing.  The continuing of the bond buying of Italy and Spain is somewhat significant, but just a continuation of what the ECB has been doing, just onto a difference balance sheet. 

I see a sell the news reaction for the first half of the day, but I don't see much downside, perhaps down to 1325-1327.   Next week, we can continue rallying off this into the nonfarm payrolls next Friday, but beyond that, is asking for a lot from a weak market.  Still waiting for the 1350-1360 zone to short, should get there next week. 

A Grind

The emotion has been mostly sucked out of this market.  The volatility is quite muted considering that the general view is sort of bearish.  I agree that the market will eventually head lower but we will likely have further countrend action in the coming days.  I am still leaning bullish, but less so than Monday.  I am short term bullish, intermediate term bearish.  Which is kind of tricky to play, so I am waiting for the right setups. 

I am hoping for the market to get back up to 1350-1360 zone to put on shorts.  Perhaps we can do that next week.  Otherwise, I am looking to buy dips for short term quick trades for the next few days only.  I will not go long after the first week of July.  I think this market is set up to go back down again eventually.

Range Bound

Not expecting another big selloff here.  The EU summit will result in nothing as usual, and expectations are low as usual. 

The low that we hit on June 4 was climactic, and will be able to keep this market above 1295 for the next couple of weeks.  We are pulling back to work off the overbought reading since the rally off the bottom.  We should grind higher from today for the remainder of the week.  I am leaning bullish.

Nothing Day

The shorts aren't going to push their luck today ahead of the weekend.  I am expecting a rally in the second half of the day. 

It's a Bear

The tell was that even a Goldman pump and dump play where they are covering their shorts after making a short S&P call couldn't lift this market at all.  This after yesterday's QE3 bullish call from Goldman.  You can't get any scummier than that.

A very weak market, and I fully expect us to go down to 1290 on this move, which will likely get bought for another oversold bounce.  Expecting 1290 by next week.

Big Picture View

Let's step back from the day to day action.  It is now a poor daytrader's market as the volatility is dying out.  From a fundamental view, equities are a sell.  The global economy is slowing rapidly and this time, it doesn't look like the US will escape.  Aside from Europe, you have China in a slow motion crash (just look at crude oil) and the upcoming fiscal cliff in the U.S. 

It seems like investors are clinging on to QE3 hopes as a reason to buy stocks.  Otherwise, there are no other compelling reasons.  At 1350, the market is not cheap.  I would say its expensive, considering the portion of the cycle that we're at.  It is not like the late 70s or early 80s, when stocks were dirt cheap.  We are nowhere near that valuation level.  It makes us vulnerable to deep corrections and bear markets when the economy weakens.  Just watching and eyeing a possible short on Friday or Monday.

Rerisking

The Street got very bearish in May and early June, and a lot of traders went to cash.  That cash is being deployed, and the wave should continue for another 2-3 weeks.  The long side is the side to be on when this rerisking happens.  Just don't overstay it.  It will get hairy again after this reprieve.  Not much upside, but we ain't going down much either.

Fed will give the market what it wants, which is a Twist or whatever and save their QE3 when the market is in the 1220-1260 range.  Remember, Banana Ben is a stock jockey.  He will not fire any bazookas when we are at 1350.  I would buy any dips of 10-15 points for rest of the week. 

Getting In

Those on the sidelines are starting to get off.  The early birds got the worm, but we're still in the middle innings of this move.  Time wise, not price wise.  We are not going to 1400 on this upleg.  Most of the price gains have been made, but it doesn't mean we go right back down.  We should stay above ES 1325 and make our way towards 1360 eventually.  This rally likely has at least another 2-3 weeks left in it, most of it should be consolidation between 1325 and 1360.  There will be more short covering ahead of the FOMC announcement tomorrow. 

Triage

In the field of battle, you have soldiers that get wounded and killed.  With limited resources, you have to decide who to treat among the wounded.  Those that just have minor cuts and bruises receive no treatment (France).  Those that have deep cuts and broken bones receive treatment (Italy).  Those that have shrapnel all over their organs, broken bones, massive internal hemorraging and blood loss are left to die (PIGS).  You don't try to save everybody.  In order to maintain the whole, you need to get rid of the dying that weighs down everyone else. 

Europe is still in denial.  They are still trying to keep Greece in the Eurozone.  It is a sign of the times.  Short term (and misconceived) thinking.  The fear that Grexit would collapse the Eurozone, keeps Europe from doing the right thing.  Getting rid of Greece, Portugal, Ireland, and Spain.  If they are having this hard of a time getting rid of little old Greece, imagine them trying to get rid of Spain.  They won't.  This Eurozone crisis will keep dragging on because of this short term thinking of saving everyone.  The main effect of this bailout everyone policy is to drag down the value of the euro.

Europe has to let PIGS default, save the remaining bailout money to save Italy.  Forget about Spain, Portugal, Ireland, and Greece.  Let them default, leave the Eurozone,  devalue their currency, and move on.  They are uncompetitive with the euro as their currency, unless the PIGS accept wage/asset deflation, which is about as likely as hell freezing over.   Trillions of capital that will be used to save PIGS bond holders (not the country) tells you all that you need to know.  The capital markets have politicians at their whim and ALWAYS get what they want.

P.S. Just watching and waiting, not much of an edge either way today.  I don't expect much in the way of opportunities for the next few days.  Probably best to just take a BTFD strategy.

Squeeze Ahead of the Event

Those nervous about those Greece elections need to turn off their cable sets and stop watching CNBC.  The amateur shorts got nailed shorting ahead of uncertainty.  You either go to cash or buy ahead of events.  You never short them.  It is part of my events playbook which keeps me away from the short side ahead of these anticipated/feared events. 

Coordinated Central Bank Action

Yesterday's news reminded me of Y2K.  There was all this fear about possible catastrophe over some computer glitch going from 1999 to 2000 and the Fed pumped a ton of liquidity ahead of it.  Greece elections is like Y2K.  It is fundamentally meaningless, but it stirs up intense fear among the investor community.  Somehow Greece exiting will cause contagion.  I think it would do the opposite.  It would strengthen the remaining members because there is no longer precious capital going down a gaping hole.  I think the market rallies on that news.  If Greece stays, there is always the possibility and uncertainty of exit.  If they leave, they are forgotten forever and the market can move on to more relevant things. 

Market is addicted to free money.  Whenever they get signs of possible coordinated central bank activity, they love it.  Where is the pain point which leads to ECB/European/Fed bailouts?  Do we measure it with the Eurostoxx index, Spanish bond yields, or the S&P?  That is something to think about.  I definitely don't see any action at these price levels.

It seems like Spanish/Italian bond yields will be the measuring stick.  If the Spain bond yields go towards 8-9%, then we probably will get action.  The equity market won't/isn't panicking over 7%.  So we'll have to go to higher yields before we get action.  Remember, only when the market starts to panic do the central bank bazookas come out.  The Spain bailout was just a rifle shot.

Expecting selling in the first half of the day, but not that much conviction.

No Shorting

The market is having a hard time going down.  It is a struggle to go down 1%.  It is acting like a beach ball in the ocean.  You can't keep it down.  This is the opposite of the action we saw in May.  The bears had their shot on Tuesday and Wedneday to take this thing down below 1300 and failed miserably.  I am getting more constructive and a down day today will encourage me to get long.  I am watching and waiting for the buy opportunity. 

Micro Trading

If there is one thing that I should have learned from past mistakes, is to position yourself so that your trades do not conflict with what you want to hold for the next several days.  For example, let's say one is short from Monday at the open at 1329.  If the prices comes down to 1300 on Tuesday, and I want to cover at 1295, I should be getting ready to cover on any signs of a reversal.  I.e., heavier volume, volume spin (price going nowhere but volume staying high), or refusal to go down much on bad news (Spain 10 yr yields shooting higher).

Especially because I thought the market would eventually go back up.  Yesterday, I was getting more constructive on the long side after the Spain bailout and because of next week's FOMC meeting.   So I was not a comfortable short.  I was a just a renter. 

If I am short and we are close to my price target, it is better to cover then to try to squeeze out a few extra points from a predetermined price target.   Same goes for the long side.  But I have noticed that the long side gives you much more time to get out profitably than the short side.  In other words, the market spends more time forming tops than forming bottoms. 

Bearish for the day, expecting weak action. 

Schizophrenic

On Sunday night, ESU hit 1342 and there was excitement about the big rally coming.  By the time we got to the US open, it was at 1329.  By the futures close at 4:15 ET, it was 1300.  We went from excitement to gloom in less than 24 hours.  That is not common.  Usually it takes a few days to go from excitement to gloom.  This behavior is not sustainable.  This kind of trading signals indecision and usually leads to a trend change.  Since the trend has been down, the probabilities tell me we are going higher in the next few weeks.  I think we make a low this week between 1290 and 1300 and that will drive us to 1360 by July. 

On to the Next Rumor

It's a funny thing, but it seems almost all rumors are positive.  I rarely hear negative rumors these days.  The negative news never gets rumored, it just comes out.   If you wait for the news to act, you have to trade backward (go short on positive news, long on negative news).  If you can anticipate the rumor/news, you can trade forward.  If you trade straight forward(going long on positive news, going short on negative news), you will probably lose money.

Smart Money is Selling

The rally we had last week was not based on Fed QE3 hopes.  It was based on this Spanish bailout.  We went up 60 handles last week off the lows based on these rumors.   Now we are up on strong resistance at SPX 1340.  The market is overextended.  We have the Greece elections next weekend.   Very few funds will want to buy up 5% off last week lows ahead of the Greek elections.  The only buying going on here is dumb money and weak shorts.  Already we are down more than 10 points off the overnight highs.  I am expecting at least a test of SPX 1300 later this week. 

Bailout World

Traders are exceedingly short term focused, seeking catalysts in band aid solutions that don't get to the core of the problems.  They want quick face ripping rallies off these band aids.  They could care less what happens in 3 months.  This coming Spain bank bailout is one such example.  Are we supposed to believe that the eurozone problems will be solved with these kind of bailouts?

One would have to have lived in a cave the last 4 years  to not realize that insolvent banks WILL get bailed out eventually.  They always do.  Whether its US or Europe.  The Chinese banks are probably in the worst shape and they too will eventually get bailed out, either publically or by stealth.

Politicians and central banks will never bite the bullet.  The easiest thing to do is overspend and print money to spread out the pain among the rest of the paper currency holders.  Remember this during the darkest hours, they will print loads of money.  So we will not see another 2008.  Maybe mini 2008s, like last fall, but no big ones.  Wall St. has learned its lesson.  Buy the crashes because they precede torrents of liquidity.  Paradoxically, the worse the crisis, the more money that will be printed and the more the markets will rally.  It is like a coiled spring, the more you press down on it, the more potential energy that builds.

All this will lead to a perpetual state of purgatory.  In order to create economic booms, you need to suppress demand and let it build up for it to explode into economic growth in the future.  But with all this money printing, demand is never sufficiently suppressed during the downturns to have explosive expansions.  The recessions don't last long enough for demand to get pent up.  The expansions are weak, unless force fed huge amounts of pork or bubbles built.  All that is left is higher nominal prices that feels like the economy is doing ok looking at asset markets, even when the average person doesn't feel it.

If you have enough productivity and efficiency growth, the pain is invisible.  If you don't, the pain is palpable.  With the kind of fiscal and monetary policy run by most of the world, and continuous population growth, the extra money ends up chasing the same number of goods.  Leading to high inflation.  The only way to prevent high inflation is increase productivity or find more resources to reduce commodity costs.  Well, we are at peak oil so there goes that resources boom.  Shale gas is a short term boost in energy supplies, which fades fast once the wells peter out, which is quicker than conventional gas wells.  Make more with less.  But with most technologies maturing, and few game changers like the microprocessor or the internet on the horizon, there will be minimal productivity gains in the near future.

The end game will be a loss of faith in fiat currencies and a drive to protect from inflation by either buying stocks, commodities, or real estate.  The poor will not be able to protect themselves, unable to afford stores of wealth.  The rich will do well.  More inflation means higher nominal prices which drive the animal spirits until the imbalances get so great that you get another crash.  Rinse and repeat.

The New Widow Maker

Move over Nat Gas.  You have a rival now.  For the title of widow maker.  Gold.  On Friday, we had a huge rip higher on QE3 hopes on the bad jobs number.  And then a key reversal day Wednesday and a crash lower yesterday on dashed QE3 hopes and the unwinding of the fear trade.  Gold needs an inflationary environment/weak dollar to maintain a long term uptrend.  We had that up to 2011 before China hit the wall and Europe entered into a deep recession.  It is now a disinflationary environment.  Sure, gold can have brief sharp rallies based on fear, but those kind of rallies don't last for long.  You need inflation, not fear to have a strong sustainable gold rally.  I like gold in the long term over the next 2 to 3 years, but that is a long time away.  I can't be bullish on gold here until we see China bottom out and the ES go much lower.  Both events are likely several months away.

 Just watching for now, the S&P could go either way. 

Did Chinese Insiders Buy Stocks Ahead of News?

Lowering interest rates after a popping of a real estate bubble will have minimal effects.  The Chinese are all in on real estate, they view it as their sole source of protection against inflation.  You see, the Chinese stock market is rigged against the outsider, the insiders are so corrupt that they commit outright fraud or skim off huge chunks of profits into their pockets. 

I would not be surprised to find out that Chinese government insiders loaded up on stocks earlier this week ahead of insider info on the coming rate cut news to dump for a profit tomorrow.  It is that corrupt over there. 

Europe has been the story up to now, China will be the story for the next year.  It should have minimal effects on US small caps, but will affect the commodity producers and a few select large caps with large China exposure.  Japan, Korea, and Taiwan will be the hardest hit.

I am expecting a gap and crap today, after the huge rally yesterday, but we will likely go up in the final hour of the day since no one wants to miss the overnight rallies or be caught short.

P.S. - I will make the blog invite only on Monday.  If you sign up with a blogger account, I will add that email.

Invite Only

To block unwanted users and prevent trolls, we will be changing this blog to invite only in the coming days.  You will need to make a blogger account with your email address and send the email to get an invitation.  Once verified, we will add you to the blog reader list.  Unlike other bloggers that have gone to to a paid subscription model, the blog will remain free.  Although we believe our content is much more valuable than most of the paid subcription blogs with useless charts and historical data studies.  Our email is marketowls@yahoo.com

Exquisite Short Opportunity

If we can get between 1302-1306 in the RTH, that would set up a wonderful opportunity to short this weak market at a premium price.  I expect any rallies that happen in the first half of the day to fade in the second half.  If we selloff right from the open, I will just watch and wait for a short opp. near the close.  Still expecting a very weak Thursday and Friday to set up a test of 1255-1260 on Friday. 

Making Hamburgers

The permabulls have been taken out.  This market is grinding down the dip buying bulls. Ground beef.   In the past, it was a swift execution.  Scary, but minimal pain.  We haven't seen anything like this.  This is Chinese Water Torture.  More pain to come until the Fed plants a seed in the media that it is doing QE3.  And it better be a big one.  I'm sure Banana Ben will beat expectations by a few billion, and hit the "whisper number", not to disappoint Wall Street. 

G7 today, ECB tomorrow, Fed on Thursday.  We probably bottom on Friday. 

Even Weak Dollar Can't

Save this ship.  It is the Titanic.  A truly bearish market.  Bull hopes ride on QE3 and Europeans patching together some plan or ECB bond buying/LTRO.  It is the same playbook that doesn't fix the problem.  It just moneys over everything to soothe the market's tantrums.  A QE3 rally when it happens will end much more quickly than the QE2 rally.  Unless they print Ts not Bs.  Yes, trillions.  600B will not get the job done this time.  They'll need at least 2T.  The global economy is much weaker now than in 2010.  And stock prices (in the US anyway) are much higher.  We are eventually going to head much lower in the fall.  And it will keep going lower into 2013.  Unless they print at least 2 Trillion of QE.  I don't think they'll do that much unless we crash.

U.S. - Europe Gap

Is the United States 50% more valuable now than Europe compared to 3 years ago?  How does one explain the huge discrepancy in performance for such highly correlated developed markets similar in size.  Has Europe gone back to the Stone Age?  Last time I checked, Europe isn't using arrowheads to hunt and women aren't gathering nuts and berries.  Is the U.S. now the role model for running economies throughout the world (tax cuts, government stimulus, QEs, and IPhones)? 

Can this all be explained by the B.B.'s bullets, going hog wild on pork stimulus, and running gigantic budget deficits?  Perhaps on the fiscal side.  Corporate profits definitely get a boost from tax cuts without reduction in spending.  But not really on the FX side, because the euro is actually weaker now than the dollar compared to 3 years ago.  So in dollar weighted terms, U.S. is closer to 60% more valuable than Europe over that time.

This trend is unsustainable.  The valuation gap has gotten enormous.  And unlike Japanese companies, European companies actually have a decent return on equity.  This is setting up for a monster reversion to the mean in the coming years.  A recession in the U.S. and the popping of the Apple bubble will likely be the trigger. 

Stay Short

Sometimes the toughest thing to do is to stay short after the market is down big expecting a snapback rally.  But we aren't oversold enough for us to have a snapback rally.  We just hit a countertrend rally high on Tuesday.  This continuation of the downtrend needs more time and lower prices to meet its objectives.  I thought we had the capitulation this morning but I don't see it in the numbers.

The euro being up today against the dollar will give courage to buyers here.  But that is bull bait.  If a stronger euro didn't rally the market by now, why do you think it will suddenly rally it in the 2nd half of the day? 

Deadly Price Action

Looks like we're still too high.  Thought we might get a temporary bottom but horrible price action on that ISM number.  An on consensus number when everyone expected a bomb should have popped us 10 but instead we pop 3 points and then go right back down.

The market needs to find fair value, but with all the bottom pickers out there, it takes longer than it should.  We haven't had a down 2% day yet this year.  Still too much complacency, even a bear like me expecting QE3 soon. 

Mass Dumping

The downtrend is near an end.  This is the capitulation that I've been waiting for.  The nonfarm payrolls is a blessing.  It will bring QE3 much more quickly now.  You just need to see the $40 pop in gold to confirm that.  Funds will now be lining up to catch the QE3 rally in the coming months.  1260 will have to wait.  Today is probably the bottom.