Monday, July 30, 2012

Back to a Grind

The VIX is at 17.  The market volatility is getting sucked out.  With central bank backstops, the complacency builds momentum and we will grind higher.  The longer the Fed waits to do QE3, the longer the grind.  But eager beaver Bernanke can't stay still, he's got the itchiest trigger finger among the central bankers.  He will shoot money bullets at the slightest signs of weakness.  And keep shooting until he's replaced.  Draghi is Bernanke Light, less filling but made from the same stuff.  Mad money printers are taking over the world, giving governments a free pass to spend by artificially lowering their interest rates, and it will not stop until inflation gets out of control.  We are not at that point yet, but it will happen within the next few years.  Prepare for a grind the next few weeks.  It will get tedious and I will just wait to strike when it gets close to a breaking point.

Friday, July 27, 2012

Zero Gravity

We have liftoff.  Just reached new recovery highs after the June 4 bottom on the S&P.  The market has spoken, the fund managers are frontrunning QE3 and SMP.  Draghi has now come out with headlines about bond buying, LTRO, rate cut, the kitchen sink! 
Fund managers know that if they wait for the official announcement, its too late to buy.  So they are buying ahead of it.  The Fed's mouthpiece, Jon Hilsenrath, has provided the equivalent of the August 2010 Jackson Hole speech, signaling an upcoming QE3.  The Fed will likely delay the official QE3 announcement till September to build up the anticipation.  ECB and Fed are dangling crack in front of the financial community.  We are likely headed higher into September, the money printing rally has kicked off!

Central Bank Rally

The central banks are winning.  Everyone knows that earnings were bad and the economy is getting worse but with central bank backstops, the market can't stay down.  Everyone knows that QE3 is not a matter of if, but when.  Same with ECB bond buying.  So until we get QE3 or ECB bond buying, the bulls will always have a positive catalyst.  It looks like its just better to wait for Banana Ben or Super Mario to save the world and then short.  I expect the market to drift higher until the FOMC meeting on August 1. 

Thursday, July 26, 2012

It's a Fiscal Problem

The market reflexively rallies on these comments from central bankers promising more liquidity and bond buying, but that doesn't solve the problem.  The Europeans aren't ramping up their government spending/tax cutting as much as the Americans.  That's the difference. 

Next week, on August 1 is the FOMC meeting, and on August 2, is the ECB meeting.  I am sure we will have a lot of anticipation going up to those 2 events.  If they don't bring out their big guns, the market will be extremely disappointed.

Tuesday, July 24, 2012

Point of No Return

The crisis in Spain has reached a point of no return, from a market standpoint.  We are now going to have to hit rock bottom before we turn around.  Also, Greece is now on the drink of default and exit.  The market will not bottom until the bazookas come out from the ECB.  It looks like we need to see lower levels and more panic before that happens.  Same goes for the Fed, who will only act if the market is lower, at least under 1300 and probably needs to be closer to 1250.  I don't see a range bound market anymore.  The situation is just too dire for us to stay in this benign range. 

In the Middle

The market has pulled back after the surge last week and we are now in the middle of range.  Monday brought on some fear, but it was too short lived to really shake the bulls.  With AAPL up ahead after the close, I don't expect aggressive action by the bears.  Also just a few minutes ago, the Flash PMI numbers came out, and even though they were worse than last month, we are rallying on it because traders probably expected worse.  GDP numbers on Friday and next week's FOMC meeting will be the events coming up.  I don't get it, but GDP tends to move the market even though it doesn't forecast anything about the future. 

With Spain and Italy's equity markets so depressed, it doesn't seem like the same trigger for a crash.  A scare, perhaps, but no crash.  You only crash if there is a lot of air underneath, not when you are near 2009 low levels.  Only if China crashes, would I consider that as having potential to crash the US market. 

Friday, July 20, 2012

Up on Bad

This week, the economic numbers keep coming in below consensus, earnings are slowing, and the earnings plays still pop and the market still keeps going higher.  It looks like the May selloff took out the weak bulls.  Now, you have mostly the true believers in this market who will only sell if things get really weak.  The hedge funds are up sh*t creek.  They have been selling the dips and buying the rips, and can be seen by their massive underperformance versus the S&P this year.  The S&P w/ dividends is up over 9% in the first half of the year, and hedge funds are up 1.7%.  They are underperforming bonds, stocks, everything.  This is on top of last year's very poor showing where they got trounced by the S&P. 

I am surprised that there are hardly any redemptions at these funds, it seems like another big asset class that has mediocre performance, but with big fees.  Worse than mutual funds, if that is really possible.  I am betting that the hedge funds will have to soon chase for performance, getting aggressively long, and will start getting desperate if the market doesn't fall soon.  That is the only downside I see with shorting right now.  The market is in denial, but it may stay that way until more hedge funds pile in and mark a top. 

Thursday, July 19, 2012

Tide of Fund Money

Tuesday saw a huge tidal wave of fund money come in.  The ETF flow numbers hit $25.7B, when the number is usually within +/- $3B.  So you had 10 times the normal inflow on Tuesday.  This usually doesn't mark an exact top, but it tells you that most of the gains on the upmove have been made.  I covered part of my short for a loss, and will add again later.  Earnings lowball estimates saved the day, and most heavily followed earnings plays have gone up after bad earnings.  It looks like the top will take some time, as it often does, so we may have to spend another week or two at these levels to draw in more hedge fund money before the flush out.

Tuesday, July 17, 2012

The Effect of QE

Based on what happened after QE1 and QE2, traders are salivating over how much the market would go up after QE3.  But you can't give all the credit to QE for rallying the markets in 2009 and 2010.  The market was depressed in both instances, and was ripe to rally on any sign that the economy was stabilizing.  Right now, the market is not depressed, it is only 5% off the highs for the year, and we're at 1350, not 800 or 1050.  Big difference.  And earnings are slowing down, not rising like 2009/2010.  We're in a different point in the economic/investor cycle.  We had the panic in 2009 and the bottoming of the economy, and the natural bounce back from recession.  But now the recovery is 3 years old, and more importantly, the investor cycle is much more complacent than in 2009/2010.  Did we have traders regularly use the term BTFD in 2009 or 2010? 

It is a different animal now, the transformation from bull to bear is occuring before our eyes.

Monday, July 16, 2012

Trend Channel Voodoo

I was looking through some of the messages on the Stocktwits site over the weekend.  In particular, I noticed a lot of technical analysis being done by traders.  To this simpleton, it made no sense.  It was random.  The trend lines, the trend channels, moving average lines, the Fibonacci numbers, etc.  Voodoo.  In particular, I noticed a lot of drawings that were similar.  These guys aren't too imaginative.  They think mostly the same way.  Most of them drew an uptrending trend channel to fit the highs and lows since the June 4 bottom.  It was projecting higher highs and higher lows till we reached 1400.  Probably on June 4, we were in a downtrending trend channel which they probably drew out to the depths of hell.

I will look at charts just to see past prices.  The only technical analysis I believe in is past resistance and support  I only believe in horizontal support and resistance.  Because it is reflection of past support and resistance, where actual emotions were involved, not somebody's wild imagination drawing an uptrend or downtrend line projecting into the future.  I don't have the inclination to draw trendlines or trend channels to predict.

Since technical analysis "seems" scientific and analytical, traders flock to it as if its some roadmap to riches.  It is called technical analysis after all.  It sounds smart. 

For this trader, the fundamentals will always trump the technicals.  European weakness is mostly priced in, but China's crash is still far from being fully priced in and the US market is ignoring everything and hanging sky high above the rest of the world's equities as the global equity safe haven.  If I had a dime for everytime I heard "best house in a bad neighborhood."  How about "most overvalued house in a bad neighborhood"?  The fundamental and sentiment picture could hardly be worse than it is now, with US stock investors clinging to QE3 hopes in the face of the the weakest global economy since 2009.

Unlike QE1 and QE2, when the market was much more cheaply valued and the economy was on an upward trajectory, the market is now much more richly valued with an economy on a downward slide.

QE3 will not save us this time, it will just provide the fuel for a last gasp rally which will be a monumental shorting opportunity.  With the number of fatal blows that the bears took over the past 3 years, I doubt too many bears will be brave enough to seize that opportunity.

Friday, July 13, 2012

ES Lagging Crude

If you just watched crude oil, you would guess that the ES should be around 1360.  Because crude oil has been acting very strong while ES has been going down day after day.  It is unusual because crude oil has been so tightly correlated with the stock market.  This must be the most fearless 6 day decline in history.  It is quite informative to see the rally from 1320 to 1370 be met with a lot of hope, but the decline from 1370 to 1320 has not been met with much despair.  This feels like the early May situation. 

The VIX is too low when the earnings are coming in this weak and the economy is only getting worse.  Expecting a sharp up move in VIX anytime now.

Thursday, July 12, 2012

The Red Zone

If you have ever run a long distance race, you know that going too fast will exhaust your endurance and your body will break down and slow you down for the rest of the race. But if you run too slow at the beginning, you are putting yourself too far behind others. You need to run fast enough to keep a good pace, but not so fast that you hit the red zone.

Well, China has been the rabbit, running at a ridiculous and unsustainable pace for the past several years. Now they are in the red zone paying a heavy price. There is too much capacity, too many ghost towns built, too many empty uneconomic buildings. The return on capital for most new construction projects is deeply negative. This has put a huge burden on the Chinese banks who are holding the toxic loans for all these projects. Add in the real estate bubble and you have a disaster. 

A soft landing hard landing debate misses the point. This is a crash coming after a popping of a real estate bubble. It is not a part of the economic cycle. It is a popping of the massive bubble in Chinese centralized planning. The Chinese officials thought that they had solved the economic cycle and could get rid of busts and just keep booming.  Capitalism doesn't work that way, even if its krony capitalism.  We are beginning to see investor nervousness about China, something we haven't seen before, I am seeing more CNBC guests worried about China.   China naysayers like me used to be ridiculed last year for ringing alarm bells, are no longer. There are more joining the China bear camp.   This migration once fully mobilized, will cause a Chinese equity market and real estate panic.  It should happen sometime in the fall, similar to the Euro scare last August, and that will crush commodities and drag down equities with it. 

Bearish.  Earnings will pull down the market.  Stay short.

Wednesday, July 11, 2012

Hedge Fund Special

Straight up and straight down.  We are down 4 straight days after the mother of all face rippers from 1307 to 1374.  The smart hedge funds know when to pile in and they leave the bag for the latecomers to absorb the risk.  It used to be more halting moves when retail and mutual funds traded a bigger percentage of the total, but now the hedge funds and HFT bots rule the roost.  Fed minutes later today should disappoint, as they were for the meeting when the markets were up, and Fed usually doesn't like to mention QE3 when markets are up. 

Tuesday, July 10, 2012

Getting Ready for Earnings

There is not much on the calendar other than earnings for the next couple of weeks.  It should be a bearish catalyst as the Q2 numbers begin to show a slowdown, and the outlook should be horrible.  If there is one thing about earnings, the market focuses much more on the outlook than the past quarter.  I can't imagine too many companies with positive outlooks, with the way Europe and China act.  Also do not underestimate the caution that CEOs will take ahead of the fiscal cliff.  That adds more uncertainty to the mix.

If the market wasn't so far above the lows, it wouldn't be such a problem, but we rallied huge off the June bottom, there is a lot of air underneath for disappointment.  Sentiment is rather complacent right now.  Bad earnings outlooks and complacency is a bearish combination.  I added some short yesterday and will add more today. 

Friday, July 6, 2012

QE3 is Coming

The numbers are rigged.  The Fed is the man behind the puppet.  All the data has been massaged to give the Fed an excuse to do QE3.  An under 50 ISM, a slightly below consensus 80K nonfarm payrolls.  Bad Philly Fed number.  Numbers massaged to give room for more QE, but not so bad to make it seem like the economy is falling off a cliff.

The first dip after this strong run should be bought, but I won't touch it.  I will look to short the next rally off this dip.  And that short will be for a longer term trade.  Waiting for the short opportunity, wanting to get in short VERY soon.

Thursday, July 5, 2012

Good Jobs = Bad News

The market needs QE3, it is a junkie.  ADP came way above expectations, and nonfarm payrolls will likely at least meet expectations, after underperforming ADP for the last couple of reports.  But this only makes the Fed less likely do to QE3.  Of course, this is assuming that prices stay the same.  If the stock market goes back down near the put strike, 1250, we will get the Fed panicking into QE3.  So higher, we don't get QE3, lower we do.  So we'll probably have to go lower because this market is not self sustaining, it needs QE to sustain higher.  1370-1375 is a strong resistance area, offers great risk reward short.