Bottomed in Overnight

Well, we got the fear from Hurricane Sandy, unfortunately, it was only allowed in the overnight session, would have liked to see panic on Monday if trading was allowed.  We never got that panic, so we're back to middling markets, with no edge.  I would sell any rallies that take us to 1420 zone as I expect a revisit to those Globex lows sometime soon.  Europe and China are now outperforming the US, a sea change from what has happened over the past 3 years. 

Potential U Bottom

The behavior of this market with the market only down 60 points from the highs is getting the Fast Money nervous.  That takes away the potential for a V bottom, which usually only happens when you get either a selloff that happens so quickly that it takes traders unprepared, or a selloff so deep that you end the down move with heavy liquidation.  This selloff has been slow in developing which means we'll not go down much below yesterday's lows.  I doubt if we even touch 1390 on this downleg.  And then a few days of volatile back and forth trading and back towards 1450. 

Mini Waterfall

We haven't had a waterfall decline since May.  This one is building up momentum, the crowd is going from bullish to bearish.  Anecdotally, I am seeing nervousness about tech, which is spilling over to the general market.  With the FOMC meeting tomorrow, I doubt that we see a flush out within the next 2 days.  But since we've already opened up the can of worms, there isn't any going back until we finish this little waterfall that we are working on.  The time window for a waterfall decline is the remainder of October.  As November comes around, most of the earnings will have already been reported and the decline will be in its 3rd week, which is usually near the end of most pullbacks in an uptrend. 

Big gap down today just confirms that the market is very vulnerable over the rest of October.  Any 10 point ES rallies intraday are selling opportunities for the rest of the week. 

Earnings Backward Looking

Weak earnings are not going to be reason we go into a bear market.  They are a symptom of a weakening economy, but markets can go up when the economy is weakening.   Just look what happened from June to September. 

The bear market will be begin when the Fed and ECB can no longer "beat the number", as in beat the expectations.  Expectations are quite high, because we can't seem to brush off these mini bear raids with such ease. 

The usual textbook relating the economy with the stock market doesn't apply right now.  Usually a weakening economy leads to a weaker stock market which then bottoms right when all the bad economic data hits, as the market looks forward to the boom cycle.  But we've been going up even with weakening data, as if the bust cycle and the boom cycle are occuring simultaneously.  We've never seen such hyperactive action from the big central banks.  They are manipulating the bond market, but can that spillover to meaningful lasting manipulation of the stock market?  If you can answer that question, you have the crystal ball for the next year of stock market action.  I am leaning towards no, they can't. 

Surprising Weakness

The market crumbled much quicker than expected.  I have never seen a market being led down by tech except during the tech bubble, so I don't expect the Nasdaq weakness to cause the S&P to collapse.  We should crack 1425 this time down and take us to 1400-1410 zone for a buying opportunity.  The time window for a sharp move lower is probably only about 10 days, so the bears have to get busy and do their damage while it's their time.  Once we finish up with earnings and enter November, I expect the bulls to retake control.  There is a slim chance that we get to 1370 on this down leg but the cautious posture of the investment community due to weak earnings makes it unlikely. 

Don't Have to Swing

 "There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. "  - Reminiscences of a Stock Operator

Right now, I don't see much of an edge in any short term time frames.  No trade feels urgent to me here.  The Fed has rigged the market and the intraday volatility is low.  It has been a rather uneventful month of action post QE forever.  The Fed got what it wanted, a risk rally, a weaker dollar, and higher probability of Obama re-election with the higher stock market.  S&P is overvalued but it was overvalued a 100 points lower so it doesn't make much of a difference short-term.  Longer term, it does set up more interesting times but we've got to see more signs of distribution and topping.  The crowd just isn't bullish enough here considering the resilient market for this to be a good short opportunity. 

Emerging markets have been outperforming over the past month.  Investors are really reaching here going for emerging markets to play catchup, or even Spain because they will ask for a bailout.  I would view emerging markets, which is basically another way of saying China, as being the worst market for long term investment at this point.  Spain would probably be close to the top of that worst long term investment list.

HFT Ruled Market

You don't have much zig zagging in this market.  It is just find the direction and go there, and stop, and flat line.  This is what has happened for the past 4 days.  The market just looks dead, not many humans involved, just bots battling against other bots.  We are closer to the support this market should find but it doesn't "feel" like a bottom.  The volatility is low and everyone is just watching.  You need action and traders to trade to create bottoms.  We might have a rally anytime now, but I don't think it will last more than 2 days from these levels. 

Following the Script

The market is pulling back off the nonfarm payrolls high and we're probably halfway through the first phase of the pullback.  We should continue to weaken for the rest of the week into Friday, as traders cut risk ahead of earnings which will come out in full force starting next week.  There is strong support in the 1400-1410 zone, so that is probably the area to buy/cover.  I see very little probability that we get back to 1460 before we hit 1410.  No positive catalysts so de-risking will be the name of the game.  And there is a lot to de-risk, we really got too much buying into "good news" over the past month. 

Crowd is Less Bullish

It is true that the investing public is less bullish now than on September 14 when we were trading at the same prices.  But you have to realize that the funds and retail piled in over the last 3 weeks, a lot of buying power was spent.  So you've satisfied 2 groups of bulls, those that wanted to buy momentum, they bought right after QE infinity, and those that wanted to buy the pullback, which happened last week.  There could be a minor subset of investors waiting for a deeper pullback to get in, but it seems from all the market talk that most of the big money isn't in that group, and were anxious to get in before the train left.  So if the market plays out like I think it will, if we go back down to 1425, it should prove my thesis that most of the buying power was used.  And the market will almost certainly continue down from 1425 to 1400 before finding support. 

Today's nonfarm payroll report is a classic example of data fitting the purpose.  You had weaker data reported the last two months, to get QE 3 fired up, and then you had positive revisions to more accurate numbers this month after the QE gun was already shot to boost sentiment.  So Obama gets a boost in both cases.  I may sound like a conspiracy nut, but the unemployment rate going down to 7.8% during THIS month is laughable.  Why the sudden drop in those looking for work?  We know most of the public looks at the unemployment rate and not the number of new jobs.  These jobs numbers are almost as blatantly made up as the CPI numbers, if that is even possible. 

Intraday Volatility

You can just feel it in the action.  This is much different than when were trading at 1453 in mid September in a super tight intraday range.  The action is much more two way, with eager buyers and eager sellers.  Increased volatility intraday while we churn.  Same price, different price action.  There is a battle going on, where as before, the bears not only didn't put up a fight, but they didn't even show up.

The Obama - Romney debate was an excuse to gap up the futures, and I'm sure we'll get a spike higher on a favorable nonfarm payrolls report, but afterwards, the cycle sets up for weakness heading into Q3 earnings.  The market has given us a lot of information since September 25, our first sizeable down day after QEinfinity.  As expected, we bounced back off the first pullback, as it is almost always bought after a strong uptrend.  The question now is do we consolidate for a few more days early next week or do we go down in earnest right after the nonfarm payrolls report.  I don't know, but either way, I would be favoring the short side over the next 2 weeks. 

The Last Hurdles for Bears

The ECB, BOJ, and NFP.  The bears somewhat fear the first two, and don't fear the last one.  They should fear the last one.  The nonfarm payrolls are due for a beat of consensus, and wouldn't that fit in nicely with Obama's campaign.  After all, we did get beats on ADP the last two months, so we're due for a catch up by the US government labor statistics.  They're all made up anyway, and they will do what they can to achieve objectives: provide an excuse for QE3 last month(weak number), and help Obama's re-election this month(strong number). 

We are in a manipulated financial world, but supply and demand still matters.  We have had a lot of ETF inflows since the ECB and FOMC went balls to the wall.  Despite these inflows, we've made no ground higher over the past 3 weeks.  Despite the cries of 1500, 1550, new all time highs, QEinfinity has not caused prices to rise.  The market jumped, and fell right back down. 

The intraday volatility has increased since last Tuesday.  It is noticeable in the intraday trading.  This increase in volatility while trading sideways, a sign of a topping process.  I believe the last gasp higher will be on a strong nonfarm payrolls number, and then it should be the start of a pullback in earnest next week.