Lowering QE3 Expectations

A few weeks ago, the market was totally sure that there would be QE3 by September's meeting.  But now the consensus is not so sure.  It makes for a trickier environment.  If we had the consensus believing that QE3 was on the way in September, then it would offer an easy sell the news opportunity.  Now that is not the case.  Of course, things can change with whatever Blue Horshoe messages come from Bernanke to the Wall Street Journal's Hilsenrath.  This Jackson Hole speech shouldn't offer any promises of QE3 in September, but that doesn't mean they won't pull the trigger.  My gut tells me we go higher from here, top out and then make a strong move lower.  It just doesn't look like a top yet, with the investing community still not totally sold on buying this market. 

QE3 is Coming, Surprise!

The eager beavers at the Fed are chomping at the bit to print more money.  It is what they do.  And they act as if they are doing us favors and saving the world economy.  How many PhDs do you need to press the print button?  QE3 will not increase earnings for corporations, unless they print so much money that you will see $150 oil, and you can add a 1.5x to everything, asset AND consumer prices included.  The problem I have with the market is not the economy, but the valuation relative to earnings growth.  Earnings growth is just not there, but we're still priced at levels that seem rich considering the low growth environment and already high profit margins. 

As for the market, I see a pullback that is imminent, one that should knock out some of the complacency in this market.  But I still expect higher highs and higher lows for at least the next few weeks, due to the anticipation for QE3 and ECB bond buying.  Until then, we'll have more boring, low volatility trading.

Blueprint for a Top

As we grind higher and higher, here are a few things that I am looking for that will show that the top is near:

1.  A chase for performance, gravitating towards the higher beta outperformers like AAPL.  Tech stocks go up disproportionately.  Check. 
2.  Lagging transportation stocks, and lagging lower beta stocks.  Check.
3.  A break to a new marginal high that gets the crowd bullish and believing in 1500, etc.  Sentiment indicators indicating lots of bullishness.  Not there yet. 
4.  A shot of good news that get those on the sidelines into the market, an ECB bond buying program announcement, a China stimulus package, or QE3.  Still waiting. 
5.  Increase in volatility while the market goes nowhere.  Not there yet. 


So we have 2 out of 5 on the checklist, once we get 4 out of 5, I will be looking more actively to sell short. 

Slow Trading

The volatility has gone out the window and the market is struggling to break out, but also doesn't want to go down, so we have the VIX go down into the 15s.  A small pullback looks imminent with the elevated call activity in index and stock options.  I just don't see this thing going below 1386 on any dip, and the upside is limited as well.  But likely a slow grind higher into August options expiration next Friday. 

Dip Gobbled

The market wants to go higher, the dip yesterday down to 1350 support was quickly bought and not giving investors time to get in at lower prices.  Even with the disappointment from the Fed and ECB, we are back above the close from last Friday.  Good price action on disappointing news is a sign of a bullish market.  The economic data is just a distraction, its what will Ben and Mario do?  That is all that matters.

Buy da Dip

The market lulled me to sleep the past few days and woke me up today.  ECB will deliver, and probably soon.  Today is another fear induced buying opportunity in a giant Ponzi scheme rally.  Bill Gross recently mentioned that equities are a Ponzi scheme.  He forgot to mention that its a Ponzi scheme sponsored by the U.S. government and Fed.  It doesn't take away from the short term trading opportunities which are based on perception, not fact.  The perception that is now forming is one of central bank rescues, leading to sharp rallies, and even though we got short term disappointment yesterday and today from the Fed and ECB, they will provide the goodies eventually.  So fund managers don't need to buy puts, since they got a free one courtesy of the central banks.  But remember, once the put is exercised, there isn't another one at least for a while.  But the put is still open, and if that is the case, the market will not fall much.

There is a strong air of skepticism about the rally over the past few weeks, because the economy is weakening noticeably and earnings are lackluster.  I agree with the skepticism, but the stock market is about perception more than reality.  Eventually they merge, but right now the divergence should continue and perhaps widen before it reaches a breaking point when optimism peaks.  In the meantime, you can buy weakness until the bullets are fired.