Friday, December 27, 2013

Ignoring Bond Yields

The market is in the see no evil stage.  We have 10 Year Treasury yields at 3%, extreme bullish sentiment, low put-call ratios, and the Santa rally.  What could go wrong?  And January is a bullish month, so they are just buying 'em here.  I can't follow the crowd so easily.  It makes me nervous getting long these markets, more than going short.  I don't want to be short here either, but I will look to short this bloated market when we get to January, given that we don't go down much for the next 3 trading days.

TWTR looks so overextended, and toppy now, it reminds me a bit of TSLA in May, but I don't see the same upside for TWTR.  First of all, TWTR has a much bigger market cap that TSLA.  Second, TWTR will also have a lockup expiring in the coming months which will provide plenty of supply to dampen the price rises.  TSLA didn't have that.  I can easily see TWTR getting greedy and doing a secondary while there stock is sky high and further adding to the supply.  Social media stocks are a bubble, and you have to treat them as bubble stocks.  Fundamentals eventually will matter, but it is more about supply and demand right now.  

Monday, December 23, 2013

Balloon Gets Bigger

It is a game of chicken now, dare to short a freight train?  With the big news from the Fed out of the way, the investors will be piling in, and we have gotten a monster relief rally and pretty big gap up.  I see the low put/call ratios, the high levels of bullish sentiment, and  overbought conditions, but I don't like to short around Christmas.  It usually doesn't go down this time of year.  I will revisit the short side with more conviction in the early parts of January.  Right now, there is little incentive for longs to sell, when they can wait till January and avoid capital gains that they have for 2013.

It will be a slow time for this market, not much to do, but wait for January.

Thursday, December 19, 2013

Bond Long Squeeze

The 10 year yields are squeezing higher this morning, and it will be a huge headwind for the stock market.  Yesterday was fast money traders looking to catch any rally, and shorts being squeezed intraday by the HFTs and eager beaver longs.  There will be payback for a senseless rally in the coming days and weeks.

Taper is huge news, no matter how much the bulls shrug it off as being inconsequential.  The Fed dovish talk doesn't matter, what matters is that they are actually reducing bond purchases, the lifeblood of this market.

With the taper now starting to roll, I am extremely bearish on this market.  This is a huge fundamental change, and no, it was not priced in because most were expecting a taper to start in January or March, depending on the data.  Fed has said the data is strong enough to taper.  That is a game changer and we will feel the selling pressure in January.

Wednesday, December 18, 2013

Lots of Fed Hope

It is puzzling to me how there is so much talk of taper, yet, hardly anyone expects the taper to happen at this meeting.  The consensus got throttled with the Fed no taper announcement on September, in particular, the ES and Treasury bond shorts.  So I am betting that there are almost no fast money shorts going into this meeting, in ES or ZN / ZB.  Fool me once, shame on you, fool me twice, shame on me.

Well, everyone is not going to be fooled this time, so the vast majority expect no taper, and I am one of that majority.  However, I don't expect much of a pop in stocks on that news, because it is pretty much consensus.  In fact, I expect a small pop, and a vigorous selloff going all the way into triple witching Friday.  So I would be a seller on any pop that comes right after the no taper announcement.  I don't expect any pops on the no taper news to last for more than an hour.

As I have said before, the Fed has always acted more dovish than consensus.  They sometimes talk tough, but they NEVER act tough without a 100% telegraph of that tough action.

Monday, December 16, 2013

Strange Overnight Price Action

Seemingly a huge stop order got triggered in the overnight session and we were down more than 10 handles at one point, but amazingly, we gapped up big and are running even higher.  These are not normal moves, hard to explain, other than everyone wants to get long ahead of the No Fed Taper rally.  Feels like most are not expecting any taper, and at the same time, expect a rally off that news.  The market has not priced in anything close to a taper in December, so if we don't get tapering, I really don't see a rally lasting at all.

Today is a head scratcher, I think we will be higher tomorrow, so I am just watching and waiting for a buying opportunity which probably won't come today.

Friday, December 13, 2013

Study TWTR's Price Action

If you want a lesson in trading super charged, momentum bubble stocks, print out the 30 minute chart for the past two weeks in TWTR and put it away for future reference.  This is eerily similar to the May price action in TSLA, just without the catalyst.  No catalyst, and you get a move of 40 to 59 in two weeks for a $20+ billion market cap company.  That doesn't happen often.  It reminds me of the dotcom boom, except without the satellite plays that fueled so many other tertiary names.  This is just TWTR going solo, leaving behind the rest of the momos in the dust.

The takeaway from the May surge in TSLA and the December surge in TWTR is that in order to fuel a huge move higher, you need a small float, large and vociferous short interest (probably most important!), a popular product, and huge growth potential.  Mix it all up and you get a formula for an explosive move higher.

Thursday, December 12, 2013

Waiting for a Bigger Dip

This time, I don't think you can buy the dip down to 1780.  It worked last week, and worked before that, but the energy of the selloff is different.  More pernicious.  Plus, with the December taper talks getting traders more nervous for next week, and the heavy IPO and secondary calendar, I don't see a quick recovery.

Also, we are unable to gap up off a strong selloff yesterday, which is different price action than what we're used to seeing over the past 2 months.

Contrary to prior action, I actually expect a sustained selloff this week culminating in a weak Friday, something that would catch a lot of longs off guard ahead of the FOMC next week.  Probably the best stock to buy on the dip that I expect to continue till Friday is TWTR.  Expecting TWTR to test 55 sometime next week.

Tuesday, December 10, 2013

TWTR Sparks Momos

The horses change, but with stock bulls looking for the next quick buck, are coming back to social media stocks.  It seems absurd for TWTR to be valued at $30B, with no profits, and with miniscule revenues.  But the stock market is about supply and demand.  TWTR is a recent IPO and the float is small, so you have limited amounts of stock available.  Also, TWTR is the one that has the most growth potential, which is what these momo traders want.  They don't care so much about profits as about growth rates.  It is much faster to grow a company when the revenues are tiny compared to relatively big revenues of a FB.

I am a long term bear on all these social media stocks, they all depend on advertising, and most advertising on the internet isn't effective, and has limited growth potential.  But I see a miniature version of the TSLA explosion higher (during May-August) in TWTR just because of the tight float, huge growth potential, and large number of skeptics shorting the stock.

As for the market overall, I am continuing to see a lagging Europe, despite the continuous inflows.  The supply and demand dynamics are getting much less favorable now for worldwide equities.  The higher valuations are bringing out more IPOs and secondaries, and attracting more hot money that will be just as quick to leave later.  For the rest of the year, I don't see much selling just because of the nature of the stock market up a lot in December.  The reluctance to sell stock because of tax reasons keeps the supply of stock for sale limited.  But, after that, it should be an interesting January/February 2014.  I expect heightened volatility as the supply demand dynamics of a saturated market take over.

Friday, December 6, 2013

Another Dip Viciously Bought

Well that dip didn't last long.  If you didn't buy yesterday's close, or didn't buy right after the tiny dip on the nonfarm payrolls, You either had to chase or miss the move.  The feared 200 print again on nonfarm payrolls was all hype, no substance.  Even the 10 year yields didn't go up, and the 30 year yield actually went down today despite the above expectations jobs number.

 The new norm: the rips seem to come on faster velocity than the dips.  It is counter to what the market should usually do, which is go down faster than it goes up.

But the greatest fear these days is to miss a continuation of the rally, rather than dealing with a big correction.  With big gains this year, the long term holders will be reluctant to sell this month and have to pay capital gains.  They would rather sell in January, when we should be higher like always, right?  So it is going to take a totally unexpected news item to bring this market down more than a couple percent for the rest of the year.  I just don't see it happening, with the Fed unwilling to taper earlier than expectations.

Right now, we are in a bad spot for traders.  For the nimble, I recommend shorting early next week.  But honestly, I would rather trade individual stocks than trade index futures here, the market is going to be dull.

Wednesday, December 4, 2013

Closer to BTFD Opportunity

Yesterday,  we had a continuation of weakness that has been uncommon.  It is a function of a lot of complacency leaving many without put protection, and stronger economic data stoking the tapering fears again.  Today, we had another fakeout after a stronger first hour, and now we are going for 3 down days in a row, which is definitely a change in character since we bottomed in October.

I see a confluence of strong support around 1770, so we have limited downside here.  The US is still the strongest of them all, with Europe now crumbling, because it doesn't have the POMO program to pump up their markets.  We are getting very close to a beautiful BTFD moment.  I don't see any deep selloffs unless the Fed surprises the markets with a December taper.  With the 10 year yields where they are, they will not rush the taper, and will wait and see.  Buying the close today should prove profitable by next week.

Monday, December 2, 2013

From Strong to Weak Hands

The past week we have consolidated above 1800, trading flat but gathering up more bulls in the process.  Also, getting more skewed call volume over the past several trading sessions, a sign that greed is taking over.  I am seeing short term topping signs, as the smart money sells to the dumb money.  The 10 year yields are sticky above 2.7%, and do not want to go down.  It looks like we will see a concurrent selloff in the 10 year with the S&P, as the biggest fear in the market is not overvaluation, but the Fed tapering with stronger employment numbers.

I don't see a December taper, because most of the Street do not expect it, and the Fed under Bernanke has NEVER surprised to the hawkish side when it comes to policy action.  On rare occasion, they have talked tougher than expected, but they have never acted tougher than expected.  

We are near saturation, there is very little upside for the next several weeks.  But also limited downside due to the lack of pullbacks.  Right now, I can only recommend looking for spots to short sell.  Going long is only advised after 1.5-2% dips. We will not dip more than 3% for quite a while, so 2% dips are safe to buy.

Monday, November 25, 2013

Blog Break

See very little compelling with this market, long or short.  Likely more grind higher action with remote chance of a 1% whack out of the blue.  Nothing new.

I will be taking a blog break for the week, and will not make any more posts barring something breathtaking happening in the markets.  I will continue to make a few tweets on Twitter.

Friday, November 22, 2013

Sellers in Europe

Despite 20 straight weeks of inflows into European equities, they are lagging the world indices.  Even the ECB rate cut and negative interest rate jawboning didn't provide a lift.  Europe has no growth, and no QE, so there is no endless flow of money to buy up all risk assets in euros.  So you are getting this lagging performance even with relative undervaluation.

It has been a while since we've gotten a true scare in this market.  We are vulnerable to a sharp one day move lower because of the excessive complacency.  Yesterday saw some heavy call activity in the equity and index options.  Even though buy the dip will still work, it will be more like 75% probability of it working rather than 90%.  The percentages will keep going down for that strategy as the market gets more saturated with weak hands.

This 1800 level is significant, and with so many already on board, we won't be able to just blast through to new highs so easily anymore.

Wednesday, November 20, 2013

Picking Tops in a Strong Market

We are in the super bull phase of this 5 year long bull market.  During this phase, it is tempting from a valuation and overbought perspective to short the market when it looks shaky.  But it is actually dangerous to short a strong market like this after it has already gone down 1%.  Because these are the type of markets that can slowly grind higher, not giving investors a chance to cover on a bigger dip, forcing you to either hope for a drop or get tortured with a 1000 cuts as we go higher bit by bit.  These kind of grind it up bull markets drop quickly out of the blue, but the drops don't last for long.  So you will have many more up days than down days even when the market is mostly flat.

The best approach for this type of market is to either wait for the market to flatten out for a few months, and then strike on the short side, or just buy the dips.  It is still the best strategy, even though it is well known.  Because right now, so many are still looking for dips to buy stocks, and the market just hasn't offered many to investors over the past month.

The market feels toppy, but I won't fall for the trap to short it here.  I will wait to buy the dips.  And will only short rallies when they get overbought to a truly extreme level.

Monday, November 18, 2013

The 1999 Rules

Another day, another new all time high.  ICLD is gapping up 40% after already going up over 200% on Friday.  A move from 2.55 at Thursday's close to 13.50 at today's open.  Over 500% in less than 2 trading days.  Animal spirits are out.  Gaps up are the norm.  The more daytraders that trade the stock, the higher the gap up. This was what happened in 1999, when there was nothing "bad" on the horizon.  Daytraders get bold, and drive up momentum pump and dumps to extreme levels.  

1. If you feel the urge the short, wait a few hours and short when it's 10% higher.  
2. Buy the close on the flavor of the month daytrader stock.  Sell the gap up open.  
3. Forget the sentiment polls, put-call ratios, and overbought levels. Only short when stocks seem like they will never go down. 
4. Don't think this has to end soon.  It won't.  
5. Fundamentals will not matter, investor psychology trumps everything from now on.  

We have reached escape velocity on the stock market.  Normal rules do not apply, you have to pretend like you are in outer space, because the movements will be abnormal.  The bubble is now pumping full throttle, embrace it, because it won't end soon.

Saturday, November 16, 2013

Year of Misdirection

What we are seeing is money funneling from the financial assets which are bonds and commodities into equities.  I believe we have seen 90% of the move, and we'll soon see investors shunning equities again.  There will be no great rotation from bonds to equities, because the countries with the most financial assets: U.S., Europe, and Japan are aging.  What you are seeing in 2013 is a  huge fakeout in the financial world.  Because of fears of Fed taper, and a strong bull market in stocks, investors are getting out of bonds and going into equities.  That is a huge mistake.

I don't look at day to day economic numbers to determine my view of the market.  I look at the big picture. I see a "recovery" that is 5 years old and we've yet to have any meaningful economic growth that wasn't a reversion to the mean (i.e., 2009 and 2010).  Now that we've had the bounce back from the financial crisis, you have no economic acceleration.  Logically, how can the economy grow when there is little job growth, little wage growth, and all the money is going to the rich?  The rich don't need to spend more money, they have everything they need, isn't one Tesla enough?  Isn't one yacht enough?

There is an aging, slow growing population in developed economies, there is not any sound economic growth in the emerging markets (China is a real estate disaster waiting to happen), and financial assets have risen substantially for 5 years.  There is no pent up demand.  You have used up the low interest rate/refi bullets.  There is no appetite for government stimulus.  It is all up to the central banks, and they have manipulated interest rates to near maximum potential.  Unless the Fed goes into QE overdrive and drives long term rates to a Japan like 1%, you have taken up all the benefit from lower interest rates.  Corporations have issued a huge number of bonds to lever up their balance sheet to buyback their own stock.  They are not investing in the future, they are just managing their balance sheets.  You have a slight uptick in economic activity due to the wealth effect from a surging stock market, which is not sustainable long term.  That is a not a recipe for economic growth.  It is a recipe for a boom that will soon turn into bust.

Yet, in this kind of environment, investors are piling into stocks because of the huge outperformance and don't want to be in bonds because of the potential Fed taper.  Well, Fed taper is probably 90% priced in, and the equity market will have a taper tantrum when it does arrive, which will limit the taper from $85B to around $75B and remain there for a long time.  That to me is still very bullish for bonds.  And with little economic growth, despite the remaining QE, equities become extremely vulnerable to a potential recession, which I don't see many people predicting.  At these valuations, a recession takes the S&P to 1500 easily.  I am bearish for 2014, but given the uptrend, we will need to chop around for a few months before the trend changes.  Thus, I am predicting a flat and choppy 3-4 months and then the beginning of a new bear market.

Thursday, November 14, 2013

Bears are Endangered Species

We got a monster intraday move off the gap down yesterday and it seems like quite a bit of short covering when we hit new all time highs, ahead of Janet Yellen today.  Eventually it will be a surprise when the Fed doesn't pump the market, but it still seems to catch bears off guard and make bulls bolder.  I am now itching to go short for a swing trade, something I haven't felt like since August.

First there is the psychological barrier of 1800 just above, and the complacency of the crowd.  Second, long term yields are rising, which will keep a lid on interest rate sensitive sectors.  Lastly, I am seeing Europe starting to lag, at the same levels as when the debt ceiling deal was announced, almost 1 month ago.  In the meantime, the S&P is up 50 points.

ES 1790 will be a premium short entry, and one that I will take if it happens by Friday.

Monday, November 11, 2013

Choppy Till March

The amount of issuance of stock is starting to catch up with the market, as investor inflows and stock buybacks are met with supply.  There is a limit to how much corporations can lever up to buy back their own stock.  Who is going to buy corporate bonds from an already levered out company when the economy is slowing down?

Corporate bond market spreads over Treasuries will be a canary in the coal mine.  The worst case scenario for this market is to see corporate bond spreads blow out, financials underperform, and breadth deteriorate.  Right now, the stock market is pricing in something that appears unlikely to these eyes: an economy that can stand on its own without increasing asset prices and/or increased deficit spending.  With investors finally getting positive about stocks and pouring money in, you have already used up a lot of potential buying power from the retail crowd.  Thus, these inflows will buoy the market on dips for a few months, but the increase in stock supply will dampen any rally attempts, leading to flat, but choppy markets.  By the middle of next year, I see the market having the biggest shakeout since 2011, falling from its own weight of overvaluation and optimism.

Friday, November 8, 2013

Topping Process Starts

This is the beginning of the end.  Of the TINA bull market.  There is no alternative.  People are not enthusiastic about stocks, but they also see how it goes up everyday, in a 5 year uptrend, and with a weakening bond market, they are piling in.  The inflows will not last.  There is a secular shift to investing in bonds from stocks.  It is due to an aging population in developed economies, seeking safer assets.  And no, gold is not a safe asset.  That is why you are getting a highly unusual downward reaction to a blowout jobs number.  Traders know that the Fed QE meme is much stronger than the stronger economy meme.  

Yesterday, we saw the momo stocks just get destroyed, with the Musk stocks (TSLA and SCTY) leading the way.  The charts are now damaged, and will need time to repair.  They should be buys in a couple of weeks.  I think you need to buy today, as we are getting the first meaningful down day since the debt ceiling deal.  It will get bought.  As I write this, the futures are already climbing back from the knee jerk selloff on strong numbers.  The next one day selloff is the one to avoid, not this one.

Wednesday, November 6, 2013

Momo Train Back to Social

With the Twitter IPO tomorrow, and the cleanse that you received after earnings drops in FB, YELP, and TSLA, you have gotten rid of many of the weak hands which clears the way for the next big move higher.  We are still in the basing period, but the next surge higher should be in the social media and cloud stocks.  Solar should also be a player, as its growth is starting to win over the momo crowd and has moved it from fad status which it had in May to momo bellwether.   TSLA is probably left behind because it could just be viewed as a car maker, after yesterday's earnings.

 The Chinese internet names have been sullied by the NQ disaster, so you can't really trust those names.  It really it comes back full circle to what you have to buy.  They are NFLX, FB, LNKD, YELP, P, SPLK, CRM, SCTY, FSLR, SPWR, and add in DDD with it earnings beat and perhaps you have super powered burritos with CMG, but I wouldn't touch that, just because it is not sexy enough.  You need stock that fills the imagination with crazy growth, I just don't see a huge bubble happening in an upscale Taco Bell.  I am sure TWTR will like a fire under YELP, as this stock will be cheaper in comparison, giving justification to pay up.  YELP still has a lot of short interest and has completely shrugged off a subpar earnings report.

I do expect a pullback in the market to start within 2 weeks, so during that pullback, you have to snap up these names and ride the surge higher in December.

Monday, November 4, 2013

Momo Moving to Solar

Just like in 1999 and 2000, the momentum train is fluid, and the leading horses shift every few months.  The momentum train that started off this year with NFLX expanded out to TSLA and the solar names, such as SCTY, FSLR, and SPWR.  Then you had FB blow out the earnings number and that put a huge run into the social media and cloud plays like YELP, SPLK, and CRM.  Somewhere along the way, the Chinese internets joined in the fun, with BIDU, QIHU, etc. getting pumped up.

Now we are working our way back to the solar names, with SCTY and FSLR leading the way.  The hot money got a little scared by the subpar reaction in FB and YELP and want the safety of stocks that are less sensitive to a deteriorating economy.  Based on past bubbles, you will get a return to the FB and YELP group after a short period of basing.  We should probably accelerate higher again sometime this month.  Although there is a fly in the ointment is the toppy action that I am beginning to see in the broad market averages, with small caps and financials beginning to underperform, a bad sign long term for the market.  But I don't see a big pullback that would stall the momo fever, due to the end of year tailwinds in a strong up year.  This gives these momo names a lot of room to run higher as fund managers chase beta in a flattish market.

On the market, I am neutral at the moment, we should trade this tight range from ES 1745 to 1770 for the next several days.

Thursday, October 31, 2013

Europe is On Fire

We are making another dramatic comeback upwards from a healthy selloff overnight after the FB AH pump and dump and the FOMC sell the news reaction spooked short term traders.  Right now, European equities are the hottest financial asset in the world.  It was massively underweight in global portfolios for years and years, and finally this summer, fund managers started to accumulate.  Experienced traders who trade the overnight market realize that the ES makes its overnight move usually during the European trading hours.  Asia really has little effect on the ES.  With a strong Europe, like the strength shown today, you usually end up with a gap up in the U.S.  You may sometimes get a flat open, but difficult to get any sizeable gap down with the kind of strength exhibited in Europe.

This European trend of equity accumulation before the US market opens makes it tough to go short overnight.  Like any other hot money trend, it will run out of steam, but European equity outperformance should last for the rest of the year.  As for FB, I think it is untouchable from the long side for at least another week.  I would look into getting long the tech momos again after TSLA earnings probably disappoint daytraders.

Wednesday, October 30, 2013

Fed Will Not Stop QE

The Fed with Bernanke has never disappointed the market.  Never.  So you know they will do nothing now, and the Street has finally caught on after the surprise no taper move last meeting.  Everyone is on to the dovish games, and they don't want to look like idiots expecting anything but more prime pumping.  But there comes a point where the market fully expects the Fed to always pump more money if you have even a slight slowdown, which is reflected in equity overvaluation.  We are in a structural high unemployment economy, there is an excess of labor, and that will give the Fed all the excuses it needs to keep QE going forever and finance the US budget deficit.

We have a setup of a near parabolic move higher since October 17, and the Fed doing nothing could be the final blowoff top which could be shortable for a one day pullback.  You don't expect two, because you have a class of investors who refuse to buy stocks on an up day who are woefully underinvested and will pile in on the first down day.  Thus making it hard for the market to go down for more than a day.

I am still a believer that you will see a huge piling into tech momentum plays after the earnings dust settles, after the fast money players playing the earnings pop get out.  It should be by the end of next week.

Monday, October 28, 2013

Stocks Accused of Fraud

One of the first lessons of stock trading that I had engrained in my head was to never buy a stock accused of fraud.  No matter where the source is coming from, it puts a huge dark cloud over the stock.  Usually the accusers are right.  In almost all cases, investors/journalists are loathe to accuse any stock of fraud.  Short sellers are some of the most analytical and rigorous investors out there, and do some of the best work in finding fraud among smaller speculative companies in the OTCBB and Pink sheets, many of them shells used to profit from selling stock, not running a business.

NQ was accused of fraud by Muddy Waters and they are probably fraudulent.  I read the Muddy Waters accusations and wasn't too surprised that NQ wasn't able to specifically deny the most fundamental accusations of the company.  The conference call was quite vague, it sounded like a script rather than a factual response to the claims made against them.  Anyway, I see no reason why any fund would want to buy these Chinese companies when you can't trust the financials.  China is one of the most corrupt countries in the world, their stock market is a glorified casino, and embezzlement is rampant.  How can a country like China, that has grown as much as it has, have a stock market that has gone basically nowhere for the past 15 years?  If hedge funds and managed futures accounts are ways for shrewd Americans to suck money from investors, public companies are a similar avenue for insiders to cash in while providing nothing of use for the investors.

Friday, October 25, 2013

Bidders Underneath

After the earnings beats and gap up from MSFT and AMZN, I expected the market to gap up higher than it did.  I was looking for a selloff at the open based on previous experiences with overbought markets that gap up based on bellweather earnings beats.  The market hasn't given an inch.  No selloff.  It just goes to show you the strength in this market, with bidders underneath, waiting to get on even the slightest of pullbacks.  We got that pullback on Wednesday, and it was eaten alive and disappeared within hours.

I see the sentiment polls. There are a lot of bulls and shrinking numbers of bears.  But I also know that when the VIX spikes like it did on October 9, you don't top out two weeks later when there is no catalyst.  That is why despite the high bullish sentiment, I don't see a top anytime soon.  At the earliest, I think we top out by November 15.  At the latest, early January.  I still think the Nasdaq will outperform the S&P, as the market flattens out and fund managers look to outperform by buying momentum stocks.  Tech also tends to be one of the strongest sectors in Q4.

Wednesday, October 23, 2013

Momo Earnings

NFLX gave a huge reality check to the momo fever.  After days like yesterday, when the overall market was going up but the momentum stocks were going down, flashing red lights came up.  After a huge run, you see that the buying has just been exhausted short term.  The earnings expectations are sky high for these momentum names now, after the earnings beats this year in FB, LNKD, TSLA, YELP, and the others.  It is almost taken for granted that these stocks will beat earnings and gap up the next day.  Next week, you will have LNKD, YELP, and FB reporting earnings and I just have a hard time seeing them go much higher after earnings due to high expectations.  I expect these stocks to take a rest for the rest of the month, as profits are taken and earnings are used as a sell the news event.  Then you get in there and buy these stocks up for the monster run into the Twitter IPO on November 15.

On the overall market, I am still very constructive, we have had a huge run since bottoming 2 weeks ago.  So we should flatten out here, but I don't expect much of a pullback, maybe 20 SPX points, before we grind higher again.

Sunday, October 20, 2013

Embracing the Bubble

There is no growth in the world.  When you see investors clamoring for Japanese stocks for their growth prospects, you realize there is global growth starvation.  When you see investors viewing moribund Europe as a hot sector, the desperation shows.

In this environment, big growth rates stand out.  The Elon Musk phenomena with TSLA and SCTY soaring in May opened trader's eyes to the profit potential of investing in these overvalued growth stocks.  Why toil away with all the others begging for a few percentage bounce in AAPL, when you can get 20% weekly returns in names like TSLA.

FB just injected nitro into this bubble with their earnings beat in the summer.  It is massively overvalued, but has the growth to fuel the imagination, which gives it 350 horsepower acceleration.  You don't get a 33 to 54 move, a 60% move in 3 months in an AAPL or even a GOOG or AMZN.  A big cap name like FB making that kind of move ignites the animal spirits.

Here is the thing.  The thing about bubbles is that the larger they get, the hardier they become.  Small bubbles fade away easily.  But the big bubbles have staying power.  Think 1998-2000 tech bubble.  Think 2006-2007 China stock bubble.  It is counterintuitive but there is a critical mass which gives bubbles staying power.  There has to be a certain level of acceptance among the institutional  community, otherwise the bubble never gets anywhere.  Retail is not a big enough part of the market these days to drive bubbles for long.  You need institutional support to a certain extent for a big, lasting bubble.  That is what is happening in social media/neo internet, Chinese internet, and the Musk stocks now.  But the institutional support is still not mainstream, which means the bubble is nowhere near saturation.

There just aren't enough institutional sized stocks in these specialized sectors to satiate the demand.  Off the top of my head, it is FB, LNKD, NFLX, YELP, P, BIDU, QIHU, SOHU, YOKU, YY, VIPS, TSLA, and SCTY.  That is 13 stocks, out of perhaps 5000 institutional sized companies worldwide, plus a few that I might have missed.  That is not even 0.3%.  In fact, I will start a portfolio with those 13 stocks and update their performance from October 18 close for the next couple of months.  I expect these stocks to massively outperform both S&P and Nasdaq.

Remember, bubbles usually do not end at the end of the year.  This is a seasonally ripe time for bubbles.  There will be no big dips till year end, the only way you will outperform is to ride the bubble.  Those who embrace it will prosper.  The cautious will just be left in the dust by those "lucky, haphazard, reckless" growth investors.

Friday, October 18, 2013

V Bottoms

If you look at a daily chart of the last 3 years, since QE 2 was launched, a new pattern has emerged.  No longer do you have back and filling, or consolidation, after a bottom.  The market now just goes full bore into a new up trend.  Look at what happened off the bottom in the end of December 2012, the bottom in June, August, and last week.  They were all liftoff moves, lasting weeks, with hardly any down days.  The market is not giving  investors much of a chance to buy low, before moving higher.  It is about as bullish a market as you can get.

Now we are in the next upmove off the bottom, and this time, there are no negative catalysts on the horizon.  After the June bottom, you had the fear of Fed tapering, after the August bottom, the fear of Fed tapering and the debt ceiling.  Now, there is nothing to scare the chicken littles.  With the deal out of the way, expect a grind higher into 1775 as the skeptics slowly melt away.  The momo names will be the vehicles for outperformance by underperforming funds, that have been too cautious this year. The bubble in tech will continue.  Expect FB, TSLA, NFLX, YELP, P, etc. to go into overdrive over the next few weeks.

Monday, October 14, 2013

Pullback Opportunity

There was no deal over the weekend, so you have the gap down on bad news.  This is the opening that the market is presenting for the opportunistic.  Sure, it's not as good an opportunity as the one you saw last week.  But it is clear now that the Republicans don't want to push the nuclear button when they got pressure from business groups to not screw around with the debt ceiling.  Which means they will raise the debt ceiling even if they don't want to do it on a clean bill.

We may get down to ES 1675-1680, intraday, but the pressure to raise the debt ceiling will force a deal together.  And from what I saw on Thursday and Friday, there is a huge pent up demand for stocks after the uncertainty is lifted.  Europe has been quite strong over the past few weeks despite US weakness.

You got the same preview of strength in December 2012 before the fiscal cliff deal got shot down on December 20.  This market looks like it wants to hit 1720 after the deal dust settles, beyond that, it will be a wait and see scenario.

Friday, October 11, 2013

Pullback Before the Deal

Yesterday showed the pentup demand, the torrents of liquidity waiting to be unleashed on deal uncertainty being lifted.  $85B/month is not child's play, it is still ongoing and lifting all boats when the sentiment shifts towards more bullishness.  If for some reason we get a little pullback because of the deal not getting done over the weekend, I would use that opportunity to get long risk on Monday, around ES 1670.  A 1% pullback would be a total gift set up for a nice little run to ES 1700.  The wiseguys are picking up shares to sell to the squares after the deal is announced.  Just hoping to see one little shakeout before the gap up higher on deal news next week.

Thursday, October 10, 2013

Gaming the Debt Ceiling

My last post was about timing the debt ceiling.  Well, we got the momentary drop below 1650, but it lasted for all of 15 minutes, the 15 minutes of fame that bears are given in this kind of bull market.  It looks like there will be no panic ahead of the debt ceiling because frankly, everyone and their mom knows that a deal is coming before October 17.  So you are going to get the bottom a few days before that date.  No one wants to miss the debt ceiling deal rally.  And it shows in the sentiment numbers.  After the weakness we have seen over the past week, the AAII investors have increased their bearish opinion by 3.5%.  But they have also increased their bullish opinion by 3.5%!  These hardy dip buyers have not budged an inch during the weakness.  Now I see any debt ceiling rally as a potential fakeout before another move lower.

Yesterday's bottom will not be the one that will launch us to new all time highs.  If there is a short-term deal, that kicks the can for 6 weeks, we are back in the same situation all over again, and at that time, it will be the Republicans with all the leverage, because Obama has promised to negotiate once a short-term deal has passed.  So we will repeat this process all over again in 4 or 6 weeks, or whenever the next deadline is.

They finally got to the leaders over the past two days, seeing how FB, TSLA, NFLX, YELP, and company have gotten crushed.  I believe it is the pause that refreshes for this group and a good dip buying opportunity.  We will soon see all time highs for the aforementioned names.

Tuesday, October 8, 2013

Timing the Debt Ceiling

We are now in the middle of debt ceiling politics, before the final phase when negotiations begin.  Right now, both sides are waiting for the other to blink first.  It is a game of chicken, as you get closer and closer, one side will move out of the way.  It is a collision course until someone becomes the chicken little.  Until Monday, it was just assumed that the debt ceiling would be raised without too much disturbance to the markets, an inevitability.  But politicians don't feel the heat until the stock market starts going down, not 1%, but 2-3% at a clip, and fear rises.  We are still in the 1% down stage, but we could have a quick 30 drop lower which would get the politicians attention.

In some ways, you almost need the market to go down before you get action.  If the market just remains sanguine, as it has, then the politicians take their time which only will make investors more nervous the closer we get to October 17.  I believe there is a puke move lower within the next 3 trading days, which should take us below 1650 momentarily.  That will be the moment to buy the dip, not now.  But I don't think we suddenly skyrocket after the debt ceiling deal, I just expect us to go back to range trading the 1680 to 1710 area.  It may just be better to short volatility instead of buying the market, as volatility is quite expensive at these levels, with realized vol not even close to implied vol.

Friday, October 4, 2013

Small Caps and Nasdaq

The Russell 2000 and the Nasdaq have been strong outperformers during this pullback.  Two cases don't make a pattern, but the two tops made in 2000 and 2007 happened when the small caps were underperforming the S&P 500.  So that is not the case here.

It seems everyone is thinking similarly, they will buy dips based on political headlines expecting a resolution by October 17.  Now that is the likely scenario, but I wonder if the dip will be so accomodating.  It is one thing to buy a 1% dip, but then it is another thing to buy a 1% dip and see that dip go to 4-5%.  Most investors are complacent here, and that leaves a lot of room for a big dip when we get closer to that deadline without a deal.  And most likely, it will take a stock market selloff to get politicians willing to make a deal.

With the way this market is trading, and the Boehner promise, if we don't have a deal by early next week, you will start seeing VIX break 20 and S&P will break 1650.  I view it as highly probably that will be the case, but I am not shorting.  With the strength of the small caps, I do think we eventually make new all time highs after the debt ceiling is raised.

Tuesday, October 1, 2013

Shutdown Hyperbole

The government shutdown is at the center of the financial news for the moment.  Well, we finally got the government shutdown, and the market yawned.  Well, not exactly, because we did get a healthy gap down yesterday morning, which was based on expectation of a government shutdown.  Shutdown is an overstatement, when you still have many parts of the government still running.  Congressmen are still getting paid, no?

This market is now going to be dead set on the debt ceiling, and we just aren't oversold enough to have a good long entry point into the teeth of the fear tactics.  There will be a good buying opportunity leading up to the deadline, but I need to see more volatility and angst before I pull the trigger.  Right now, we are setting up for it, but not close.

Too late to short, and too early to buy.

Saturday, September 28, 2013

Mind of a FB Buyer

The stock market is a schizophrenic animal.  Facebook is the poster child for the wishy washy nature of stocks.   It has confounded my logic for what is clearly a junk business model.  A company that makes money from advertising when no one clicks on their ads.  Wall Street agreed with my point of view for 14 months, until that magical, mythical earnings report in July.  Beating low expectations set off the ignition switch.  From then on, I knew it was suicide to short FB.  In January, it was NFLX putting on the biggest earning short squeeze I have ever witnessed in my career, springing its path toward 300.  In May, it was TSLA having its ignition turned on after blowing out earnings,  supercharging the stock to permanent parabola status.

The continuing disappointment in AAPL has left a huge void.  First NFLX, then TSLA, and now FB are filling in the niche of growth stock darling.  It takes multiple growth names to fill up the void left by such a large cap name as AAPL.  What I find fascinating is the eternal love of AAPL.  It is the Peter Lynch model for investing gone wrong, buying a stock because it makes a lot of money and its  products are used everywhere.  It works on the way up but after a stock like that peaks out, the downslope is treacherous.

When I first started trading stocks, I would look at balance sheets, income statements, P/E ratios, Price to book, price to revenues, and all the other things called fundamentals.  But I soon realized that the market could care less about those things.  The market would reward growth beyond anything, as if everything else was trivial.

That is when I noticed that the people moving stock prices are proactive, not reactionary.  The difference between a momentum investor and a value investor is this:  Momentum investors take a proactive approach to investing (momentum), buying when he sees growth, and prices rising, regardless of valuation.  Momentum investors are the buyers on the way up.  Momentum investors are the ones hitting bids and lifting offers.  That is what moves stock prices, not limit buy orders set below the market.

Value investors need to wait for the prices to come down to meet their value criteria, reacting to a lower price, which means they are buying on the way down, after the earnings have already expanded, and started to flatten out, after the story has gotten old.  The stock market is not like shopping, things that go on sale aren't necessarily a good thing.

 Stocks are about hitting the three bagger, the five bagger, finding the next MSFT.  That can only happen if you have a stock that leaves room for the imagination, crazy future projections of current growth rates, a buzz about it. That is why you had the biotech boom, then the dotcom boom, and now this.  Stocks like FB and TSLA have never been about the fundamentals, but a ticket to dream of hitting it big in the stock market.  Even in such a benign stock market environment, there is little growth in the economy, so you have very few stocks that can capture the imagination of investors with big growth rates.  FB and TSLA have now become the two biggest icons of this exclusive group.

Eventually these bubbles will come crashing down, but that is a 2014 story.  Bubbles thrive at the end of a good stock market year.   Ala 1998 and 1999.  So party on until the calendar turns to January.

Thursday, September 26, 2013

Microcosm of the Year

It is that kind of market.  You have a huge uptrend followed by a small range with occasional bursts of range expansion, which really leads to nowhere.  We are in that small range and it is surprising why anyone would want to buy volatility at these levels when the realized is so low.
We are kind of in the middle of nowhere, I have very low confidence what will happen over the next 2 weeks, although I don't think we'll be going up much or down much.  What I do expect is a sharp rip higher after the debt ceiling gets raised and there are no more hurdles for this market.  So we have maybe two more weeks of tight range trading with a potential rip at the end of the rainbow.  Cash is probably the best thing to hold at the moment, just wait for a long entry on any further dips down to 1670-1680.

Monday, September 23, 2013

Dip then a Rip

The market overshot on the Fed no taper news.  The next catalyst will be the debt ceiling, and since this market is filled with chicken littles, it will shake up this market a bit.  Not a lot, because institutions aren't suddenly going to dump their holdings in the hole, en masse just because of an expected debate over the debt ceiling which will be raised.  This is nothing like 2011, when you had the European sovereign debt panic lurking in the background while investors were sweating over the debt ceiling.  There are no external problems with this market, there is no financial panic lurking.

We should pull back to 1680, get the chicken littles nervous ahead of debt ceiling, and then rip higher when it becomes obvious that the debt ceiling will be raised.  Anyway, its much better risk reward buying the dip ahead of debt ceiling than shorting ahead of it anticipating some kind of panic.  This market isn't set up to panic, since Fed has proven they aren't going to taper unless the bubble gets bigger.

Expecting a trip down to 1680 this week or next week, it will likely be the best buying opportunity before we rip higher to 1770 by December.

Saturday, September 21, 2013

Growth Stock Bubble

FB, LNKD, TSLA, NFLX, YELP, P, SPLK, etc... are the growth darlings of this market.  When there is a lack of corporate earnings growth, the ordinary stocks struggle to make gains.  Since we hit 1680 on the S&P in May, the market has been range bound, with a slight upward bias.  Under these conditions, where the average stock chart has leveled off, investors look for stocks that will outperform.  No, it will not be AAPL.  That is a has been with growth diminishing.

Growth stocks are the only stocks that can attract big outperformance in an environment where the the stock indexes are already up so much.  It reminds me of the dotcom bubble in 1999 and 2000.  The last year of the bull market in 1999-2000 saw most stocks lagging the indices, because the indices were being pumped up by tech stocks going parabolic, while everything else was flat to down.

We are entering the late stage of a bull market where the growth stocks massively outperform everything else.  What is the polar opposite of the most hated financial asset (long term Treasuries)?  Stocks like TSLA, FB, NFLX.  We are right in the middle of the move, with perhaps another 3 to 6 months left.  You have to be a buyer of these stocks on any dips of 5-10%.  They will rocket back up to new highs quickly.  Into the teeth of the debt ceiling debate, where fear is pervasive, these stocks will be the ones to pick up into the hole.  Coming out of the dip, they will rip higher confounding the valuation bears.  My year end targets for these momos are TSLA at 250, FB at 60, LNKD at 300, NFLX at 400, YELP at 100, P at 40, and SPLK at 75.  The Twitter IPO will drive the euphoria into overdrive.  All the while I expect AAPL to struggle to get to 500 by year end.  It will be a tale of two cities market for the rest of the year.  Get ready.

Wednesday, September 18, 2013

Tiny Taper

In all likelihood, we will get the tiny taper from the FOMC meeting today.  I have yet to see a meeting since Bernanke has become Fed chairman where he was more hawkish than expected with his actions.  Now he has talked tighter on rare occasion, more than the market expected, but he has never acted tighter than expected.  NEVER.

So you have that historical backdrop to this meeting, so while I do expect a tiny taper of $10B from the $85B/month, I cannot rule out the Fed putting on their skirts and doing nothing.  I would put the odds of that at about 30%, which is higher than the market is pricing in.   I put 65% odds of the Fed doing $10B/month, and 5% odds of $15B/month.  The odds are zero of them doing anything more than $15B IMO.

So based on the probabilities that I see here, you have a 30% chance of a huge spike up after the meeting, which would put the ES at 1720 in less than hour.  And you have a 65% chance of a moderate rise to 1705-1710 after some initial back and forth trading.  And a 5% chance of a moderate fall to about 1690-1695.  In any of those cases, I expect the VIX to fall after the announcement.   The VIX is too high considering the amount of volatility we have been experiencing, which is minimal.

Monday, September 16, 2013

Double Barrel of Good News

The market is loving the news over the weekend, with the Syria deal with Russia, and then Summers withdrawing.  I don't view either bit of news as game changers, because the market was already over Syria last week and Summers wasn't going to do anything different than Yellen, since he's bought and paid for by Wall Street, while Yellen just likes printing money.

After a rally from 1625 to 1695 over the past 2 weeks, a 1% gap up on good news is usually an intraday short opportunity.  Especially with the FOMC meeting coming up on Wedneday, I cannot imagine significant amounts of capital will want to get long at these levels. 

The buying that you are seeing in premarket is mostly shorts covering their positions to cut their losses.  And there was quite a bit of shorting last week on the premise that the market has gone up too far too fast ahead of Fed tapering. 

Looking beyond the next couple of days, if we get the expected tiny taper and the relief rally accompanying it, we should be around ES 1720, which would provide an excellent short entry point for a move back down ahead of the debt ceiling budget talks in the coming weeks. 

Thursday, September 5, 2013

Crude Oil is Topping

I don't see many good trades on the horizon that are high probability.  As I mentioned before, I am bearish on stocks, but I am more bearish on crude oil.  While stocks have been avoided because of Syria, crude oil has been accumulated because of it.  Based on my view that the importance of Syria has been exaggerated, crude oil is overpriced.  Global growth is not sufficiently strong to drive crude oil prices higher from here.  And based on COT data, speculators have already made their bets on higher crude oil prices, it would be difficult to get more speculators on board.  Without more speculators getting long, fundamentals need to drive crude oil higher, and I don't see that happening.  Lastly, crude oil seasonally tops out in September, after the driving season has concluded and before refineries enter a maintenance period which lowers demand. 

I was surprised to see such a strong rise yesterday which only reinforces my view that we will not break 1600 on any move lower from here.  But this correction, should be more drawn out than the one in June.  I am expecting more of a messy U bottom that lasts most of September than a quick V bottom that we witnessed a few times earlier this year. 

Tuesday, September 3, 2013

Bracing for September

There is shroud hanging over this market, worrying about Fed tapering, Syria, upcoming debates over the budget and the debt ceiling, etc.  It has weighed down this market since August 15 when market participants started to price in some of the upcoming events.  I was feeling quite bearish at the time, if you look back at some of the tweets during my blog break.

I expected something more than what we have gotten so far, the reaction to all the potential negative catalysts has been tamer than I expected.  So while I initially felt like 1560 was a lock when we had that first move down to 1650, I no longer think that way.  I am not as bearish about this market due to its resilience in the face of bearish headlines.  Yes, we are making lower lows but nothing that usually forewarn of a coming waterfall decline. 

So while we have our relief gap up on the non attack of Syria, it should not last for more than a couple of days before the taper worries resurface and Congress returns to vote on Syria and start preliminary rhetoric on budget deals and debt ceiling.  So there are still negative catalysts out there that should give us one more wave lower, down to about 1600.  But I just don't see this market going below that level this year.  I am expecting a fairly shallow, but messy correction (more U than V bottom) before we go back above 1700.  This market will not die easily, and we should be prepared to buy after the next wave lower. 

Thursday, July 25, 2013

Topping Out

The action feels toppy.  We have had a huge rally right up and slightly over the May highs, but now we've gotten positive earnings from AAPL and FB and now we are going back down.  I am also seeling relative weakness in oil and the Nikkei.  The biggest reason I am getting bearish is the steepness of this rally, the air underneath, while facing a Fed that will likely get louder about tapering in the fall and with no earnings growth.  The market is boring now, but I expect an interesting August with a return of fear. 

The put/call ratios got very low late last week and earlier this week.  The market is now vulnerable to a pullback, although its not a screaming sell yet.  I may get more bearish if I see more signs of complacency.

Friday, July 19, 2013

Earnings Disappointments

We are getting a string of earnings disappointments in tech, EBAY, INTC, MSFT, GOOG, etc.  We haven't seen action like this in quite a while.  Even when earnings were mediocre last quarters, stocks tended to trade higher after earnings.  It is getting to the point where on a micro level, the profits are not justifying the macro trade of long US equities.  But the irrationality should continue because earnings haven't gotten bad enough.  There is still plenty who view the 2nd half as being stronger which I highly doubt. 

We made a small break of the May 22 high and are trading back below it thanks to disappointing tech earnings.  The capital spending is just not there for tech to go much higher.  At some point, the music will stop.  Perhaps with the decreasing appetite for riskier bonds from investors, you may shut off the corporate bond window which has been fueling a significant portion of these stock buyback programs.  Without the continuing stock buybacks, stocks will have a hard time going higher. 

Tuesday, July 16, 2013

Feeling Toppy

This market has made it all the way back to the May 22 highs of 1687 on the S&P.  The market has a memory, and whenever it gets back to a past significant high, it has a difficult time busting through on the first attempt.  Also given the steepness of the runup over the past several days, this looks like an easy money short zone for 15 to 20 points.  But I wouldn't look for 30, because we may or may not get it, and if you don't get the 30 pointer, and wait for it, you may eventually have to settle for 0 points. 

This is still a strong market, and you have to take the dips as buying opportunities.  But this is one of few shorting opportunities that I have seen over the past few weeks. 

By the way, I would rather be short crude oil as a proxy for market weakness than the S&P.  The S&P is the strongest market in the world, so anytime you can take a fairy highly correlated proxy that I view as weaker and short that instead, it makes more sense. 

Thursday, July 11, 2013

Never Underestimate this Bull

The US stock market is the only game in town.  It is now considered safer than Treasuries!  You have such a supply and demand imbalance, not enough US equity being supplied, demand from asset managers who now believe that the US is the best house in a bad neighborhood, from corporations buying back stock because they have no need to invest their cash.  All of this is fueled by a drive for yield which now has investors shunning junk bonds for equities! 

Going down in the corporate structure to the riskiest asset which now is considered the safest.  Yet, we still have plenty of die hard bears who cannot accept that stocks can go up without a strong economy.  It can be confusing to wrap your mind around this market when looking at 1) long term fundamentals, 2) short term asset manager positioning, and 3) supply and demand. 

But 2 of the 3 favor higher equity prices, only the long term fundamentals favor future equity weakness, but the last 20% of a move is notoriously irrational and make no fundamental sense.  Think Nasdaq in 2000, China in 2007, global equities in early 2009.  So we are in that last 20% of the move here, so we could get up to 1800 on the S&P for no other reason then its the only asset that is viewed as safe.

Monday, July 8, 2013

Grind Higher

We are on the upslope of the V.  The V bottom on June 24.  These V bottoms usually take about 4 to 6 weeks to play out to completion, right now we are just at 2 weeks.  So we have about 2 to 4 weeks of this uptrend left.  I am leaning on the beginning of August as a potential top. 

The area to watch for a potential stall point is SPX 1650 to 1660.  So most of the upside has been made off this bottom.  But at the same time, I don't expect to see much downside.  1600 should provide a sturdy floor to this market, if we do have a pullback. 

In general, the rise in yields will limit the extent of the equity rally, as well as the expected Fed  taper in September.  Expect lower volatility and boring trading in July, as we will be climbing the wall of worry.

Wednesday, July 3, 2013

U.S. Equity General

As the privates and seargents get bloodied up, the general stands at the rear with a few scratches.  The U.S. equities have been holding up the best to the threat of QE tapering and global slowdown.  This past correction after the FOMC meeting has been a minor battle, nothing serious enough to endanger the general.  You can only injure and kill the general if you have a major battle.  The S&P 500 will not go down much unless you get that major battle. 

The privates (emerging markets) and seargents (Europe) are always going to be in the line of fire, in even the small battles.  Emerging markets got battered, and Europe is of course underperforming the U.S.  This past wave of selling should provide a few weeks of benign markets, before we get the next bigger wave.  

During this benign period, which should be all of July, I foresee the S&P working its way up to 1650, with the emerging markets struggling to rebound.

So if you want to short this market, you should short China/emerging markets.  If you want to go long this market, you should go long U.S. 

By the way, Egypt doesn't matter.  It just provides a possible short opportunity for crude oil.

Friday, June 28, 2013

V Bottom

It has never paid to sell weakness in the S&P 500, so you have these fleeting dips that get snapped up without much fear or capitulation.  The Fed is so scared of any stock market or bond market weakness that it starts jawboning the market higher whenever you get dips. 

It happened yesterday when the Fed blabbermouths said the market "misinterpreted" the Fed.  Well, what is there to misinterpret?  The market sold off because it now believes the Fed will not sit and do nothing if a bubble grows.  So if the Fed won't allow the stock market to bubble up even higher by tapering, doesn't that automatically make stocks less attractive?  In effect, it has become the Bernanke put and the Bernanke covered call.  Shorting calls (tapering when markets bubble higher) against the common so there is limited upside.

But all the money in the world is squirreling their money into U.S. equities, it is the most loved market in the world.  So it will be the most resilient to any downside, and if you are going to buy any risk asset, it should be U.S.-based, either bonds or equities. 

I think we made a low this week that should last till at least August.  You have shaken out the weak hands from stocks, and bond market panic is likely over.  I expect a run back up to SPX 1650 by next week. 

Tuesday, June 25, 2013

The First Bounce

This little rally attempt on the gap up here on the China is not going to zero relief will not last long.  I give it one day tops, for this bounce.  We are in a fragile psychological state and we haven't gone down to low enough levels just yet to satisfy the margin clerks. 

The technical damage from the selloff after the Fed announcement is significant.  1600 was broken easily and there is carnage in the bond market.  This will have repercussions that will last for a while, so I don't expect us to just shrug off the peripheral weakness.  Yes, the S&P is the strongest market in the world, and it will be where the investors will flock to when the coast is clear.

It still seems as if traders are trying to play for the bounce, and don't want to miss a good buying opportunity.  The capitulation may take a bit longer than I expect, but we should see it this week.

Monday, June 24, 2013

Killing the Bonds

I have never seen anything like this in the bond market.  I have never seen a bond market rate spike while equities are going lower with commodities weak.  This is clearly not an economic move, but a move based mostly on fear and liquidation.  These type of moves do not last for long.

The fundamentals of the bond market are excellent, you have central bank buying and an economy that is too weak to bear higher rates.  Bonds are in a bull market, and it should last longer than the equities bull market.

I expect capitulation within 3 trading days, with buy levels on the ES around 1550.  I am waiting to buy, I don't believe it is worth it to short at this point in time, it is getting late in the pullback.

Thursday, June 20, 2013

Bond Market Leading

The initial reaction to the Fed meeting was clear.  The bond market wants to go lower, and that is scaring the equity market.  Usually weakness in bonds doesn't necessarily lead to weakness in stocks, but what we saw with the selloff in gold is that financial assets are highly correlated, so when any major asset sells off too much, it panics investors and they sell everything. 

Right now, the bond market is leading the stock market lower.  But I remain bullish long term on the bond market, so I don't think this selloff will last long.  What did surprise me was the vigor with which the USDJPY bounced back from its deep selloff after the Fed announcement.  It tells me that a lot of the fast money was long yen going into the meeting and they are unwinding in a hurry.  It seems like this dollar uptrend will eventually have a blowoff top before it goes the other direction.  It is the TINA currency.  There is no alternative. 

I do expect this selloff to extend as post options expiration often leads to a lot of volatility and the charts are setup for a capitulative selloff down to 1560 to 1570. 

Tuesday, June 18, 2013

The Fed Event

A lot of anticipation for some kind of fireworks for this Fed meeting on Wednesday.  Right now, it seems like the consensus is for the Fed to mention that QE will be data dependent, and that they are not going to be taper yet, with hints of a future taper.  What has happened over the past month is what has been going on for the past 3 years.  A weak emerging markets, a dead in the water Europe, and a beach ball like buoyancy of the US. 

S.O.S.  There is nothing new under the sun.  The S&P gets small scratches as the surrounding troops, the Nikkei, Shanghai, and Europe get maimed.  

I do expect a sell the news event on Wednesday, but if there is a pop on the announcement, I will look to short, not the S&P but Japan or emerging markets. 

Thursday, June 13, 2013

Yen Shorts Under Pressure

The irrational upmove in the USDJPY has been scaled back by a huge chunk.  It has bitten a big chunk out of latecomers buying into the yen weakness rhetoric.  Japan is in a structural deflation for a good reason.  They are old, and old countries experience a natural deflation as demand for goods drops.  All the money that Kuroda is printing is just going to be sitting at the banks, propping up JGBs.  The Nikkei is full of globally economic sensitive companies that depend on a strong China, and good global growth, not just a weak yen.  Japan has to deal with a weakening China and weakening global growth, along with a domestic economy that is in structural zero growth territory. 

That being said, the yen unwinding seems mostly finished, as the USDJPY selling over the past several days seems capitulatory.  And the ES has support around 1590-1600 area.  You have to be a buyer of dips now, as I still have the view of this being just a pullback in a long term uptrend.

Tuesday, June 11, 2013

Nikkei in 2008 Mode

The moves in the Nikkei have been as violent as the moves that you saw in all the stock indices in 2008.  5% up and down moves are happening with ease.  USDJPY is trading wildly as well.  Abe and Kuroda are both clueless, they didn't know what they were messing with when they tinkered with the natural forces of the market.  They think there is a free lunch with money printing.  Only if you have the reserve currency is there a free lunch, ala Fed.  There is no demand for the money printed in Japan, more adult diapers are sold than baby diapers.  There is zero growth, of any kind, economic, population, productivity.  Japan is a zero, investors really have run out of ideas if there best one is to invest in Japanese stocks. 

Now the wave of margin calls and derisking from the short yen, long Nikkei trade is unwinding with noteable after effects in European and U.S. equities.   A lot of weak hands, a lot of hot money is in Japan.  It is finding its way to the exit as they didn't sign up for this negative volatility when they bought into the hype. 

Expecting a brutal day today, closing at the lows, probably down to 1610. 

Friday, June 7, 2013


I was expecting a USDJPY crash at some point this year, considering how so many speculators crowded into the trade, without the underlying fundamentals to support it.  But I didn't expect the crash so soon after the launch of Kuroda's bazooka QE program and with the equity markets flying high.  It goes to show you that you can often predict a good selling price but you can't time when the trade will go in your favor.  I thought USDJPY at 102 was a good long term short opportunity but I didn't want to tie up my capital on a trade that could take months to turn profitable.  But I knew if I had unlimited funds, I would have definitely had a long term short USDJPY position in at 102. 

The rapidity of the crash underlines the fragility of the yen weakness thesis.  Traders don't really know that the BOJ has been much more conservative in expanding its money supply than either the ECB or the Fed over the past 20 years.  And Japan still has a current account surplus, despite its trade deficit.  And its trade deficit is nothing compared to that of the U.S.  And there is no rate differential between US and Japan, so you have no positive carry on a yen carry trade.  That is the BIG difference between now and 2007, when the carry was over 5%.  So you can't assume a USDJPY getting to 110 or 120 like 2007 despite a rallying stock market because there is no positive carry. 

Also, we quickly forget that the Fed is a rampant printer itself, so the BOJ isn't alone, and with my expectation of a moribund economy for the next few years, QE will be here to stay.  I do expect the USDJPY to bounce next week but there is no long term uptrend, it was just speculators piling in hoping greater fools would bite and believe the rhetoric.

We had a V bottom yesterday on the USDJPY crash, which underscores the resilience of this ES.  It is a dragon.  You can't kill it with one swipe of the sword.  Multiple swipes will be needed.  But it is a different ball game now.  Bears with timely shorts will get paid, unlike the last 6 months. 

Thursday, June 6, 2013

One More Push

Premature on the BTFD call yesterday.  A potential cascade lower down to 1595 is possible now, but that's only 10 points away from current prices.  Whether you buy at 1605 or 1595, it should be a profitable trade with limited heat unless we have a different market, which I put at a low probability.  Still going by bull market rules.

Interesting to see Treasuries acting quite weak despite equity market weakness.  I really don't see how the Fed reduces asset purchases, the economy is getting worse, not better.

Looking for a bottom today or tomorrow, to ride into next week.

Wednesday, June 5, 2013

BTFD Again

This dip has lasted a bit longer than the previous ones, but the market seems hesistant to go down much.  1620 is a floor for the ES and you can buy here looking for another run higher after the jobs report.  Once the jobs report is out of the way, there are no more negative catalysts with Japan sufficiently deflated after the air got too thin in Tokyo.  Expecting 1650 before 1600. 

Tuesday, June 4, 2013

Slaying the Dragon

The S&P is a dragon for bears.  It is not an easy foe.  The uptrend has been ongoing for so long, that it will take multiple daggers to kill this dragon.  It is probably smarter to take on easier prey, or take a bearish view in a different way, such as going long Treasuries, or short the Nikkei or China, or going short the USDJPY.  Yes, I am feeling bearish these days, it seems we've reached a price point where it will be difficult for the market to add on gains.  But at the same time, there are so many who were left behind in this neverending rally that dips will be bought for a while.  

A day like Friday hasn't happened since last fall.  I don't remember the last time we had a panicky selloff into the close on a Friday.  It may have been last October.  It is a shift in price action that is quite different than what we've seen for 6 months of dips being bought instantly.  I do think we will probably trade back up to 1650 soon, but I don't know if we get back to 1670 soon, which is what would be the pattern for the past 6 months where dips didn't last more than a week.

Its probably not a good time to short just yet, but I think rallies can now be sold short without fear of it going to new highs.

Friday, May 31, 2013

Nikkei Bubble Popped

I don't really understand it, but Japanese stocks are the most loved equities in the world right now.  If you forced to buy equities, I would still choose the U.S. over anywhere else.  One of the last places I would put it in is Japan.  There is a reason Japanese stocks have gone nowhere for so long.  The companies just don't make enough profits.  And a big percentage of the Nikkei is in cyclical sectors, much more than the S&P.  And the USDJPY is not going to go up much more here, because if it did, the JGB bond yields would be that much harder to control.  And Japan cannot have JGB bond yields go up much, otherwise the interest payments would be too much to bear.  Japanese domestic economy will have zero growth for a long time, aging population, more competition for exports, I don't know how you put a big P/E multiple on that. 

Right now, S&P looks like the best house in a bad neighborhood, as has been the case for the past 4 years.  But the neighborhood is just getting worse.

Expecting a downtrending day today. 

Wednesday, May 29, 2013

Vicious Gap Reversal

That was a huge gap and crap that we experienced yesterday.  One of the classic, the coast is clear, let's bid them up on first trading day of week only to get smacked down later in the day.  That first hour move hour was a giant fake out which ended up luring in bulls for the intraday slaughter.  Haven't seen such a big gap up being sold since last summer.

It is a new ball game, we no longer have don't ask, don't tell moves higher.  Bears have finally grown a pair.  It was about to happen on Tuesday but there were no greater fools to be found above 1672.  The boundaries have been marked, 1680 will not be taken out without a huge fight.  We are in near nosebleed territory now, the air is thin. 

TSLA continues to prove it is the strongest stock in the universe.  It transformed into the Incredible Hulk about 2 weeks ago, it is one of the few fail-safe stocks to own now.  There is a trader's premium on top of a high valuation for a stock with buzz that can go up without having to show profits.  A huge bonus in this moribund economy.  Momentum money is starting to give up on NFLX and older momos that need to show profits to go higher.  Long TSLA, short AAPL(x 2 to make it beta neutral) is like shooting fish in a barrel for the next 3 months.

Thursday, May 23, 2013

Marking the Boundaries

There was something to take from Wednesday's price action.  There is a 90% chance that we break 1600 before 1700.  The uptrend was getting parabolic, put/call ratio was getting too low, and after 6 months of going almost straight up, gravity eventually takes hold.  This doesn't mean we have to have a sharp pullback right away.  We will likely hold support at 1625 and make another attempt at 1680.  But it does mark the boundaries of this move higher, which is ES 1680, Nikkei 16000.

The overnight action in the Nikkei was dramatic.  But that is what happens when you get a parabolic move higher and blow out all the shorts in the process.  The Nikkei looks like a bubble, fundamentals are still horrible with zero growth there.  What is surprising to me is that the USDJPY is not really panicking down on that Nikkei crash lower.  I guess the market view is that Fed tapering will mean a stronger dollar, although I don't agree with it.

I missed the short opportunity, and I want to kick myself for trying to time the perfect short.  But I mostly gave up on trying to top tick short parabolic moves a long time ago after a few bad experiences.  Right now, I am only interested in the short side, even though I think we will probably bounce back to 1680 sometime in June.  Likely to stay on the sidelines in index trading until I see the ES bounce back to the 1680 zone where I will put on shorts for a big move down to 1540, which should happen sometime in July. 

Tuesday, May 21, 2013


We are near the end of the road for this burst higher.  There is a point where you get too far above the 50 day and 200 day moving average that the rally just feeds on itself, and eventually, you flatten out.  We are right at that point, as you can see in the intraday reversals yesterday, and in the previous few trading days.  Also, a lot of investors are now heavily buying into calls over puts, as the put/call ratio gets extremely low.  So with fewer investors buying protection, you are setting this market up for consolidation and a sharp pullback.

On to more interesting topics, the solar stocks are now everyone's favorite trading toys.  Yesterday it really got manic, as I saw almost all the stocks in the big up moves list being solar stocks.  After doing a bit more research into this solar phenomena, the fundamentals just don't back it up.  They will not be like internet stocks in the late 90s, the growth and excitement just isn't there.  So I am looking to fade some of these solar stock moves real soon. 

Friday, May 17, 2013

Musk Stocks

Yesterday it was TSLA.  Today it is SCTY.  The Musk stocks, TSLA and SCTY, are the neo-version of the internet stocks in the late 90s.  You have a freak in Elon Musk, a guy who is willing to double down on TSLA by buying shares in a secondary instead of trying to dump as much stock as possible like a Peter Thiel, his partner at Paypal.  Elon Musk is looking to hit it big, not just cash in.  He's looking to make the #1 carmaker, a guy who obviously is very adept at the stock market PR game, knowing that he can cash out a lot more later when the buzz is even greater, rather than when the buzz just gets started. 

It is a 1998 market, where you have to look to get long positions in these stocks despite the nosebleed valuations, because the potential is there for something great, a potential 5 bagger.  You can't say that about an AAPL or a CSCO.  You have to pay a premium in order to get into these stocks, because of the growth and the potential.  Stocks that can go parabolic are about potential, not current earnings.  TSLA went nowhere for years.  Even though it looks like one is chasing here, just realize that before this month, most people weren't even paying attention to TSLA.  Now its the center of the stock market universe.

Over the next several months, I will be aggressively look to enter long positions in TSLA and SCTY on any pullbacks.  Hedging with a short AAPL position.  We should enter a short basing period before the next explosion higher, which I expect to happen within 3 months.  That next explosion could take TSLA to 150 and SCTY to 75. 

Wednesday, May 15, 2013

Shades of 1998

Last week we saw the birth of the momentum stock.  Before last week, the strongest stocks were in the high dividend paying, safety, defensive names.  Utilities were trading like tech stocks.  Now, we've turned the corner into an infatuation with high growth, high potential, and low profit companies.  The monster short squeeze in NFLX in January was an omen of this new momentum craze that is infecting this market.  When stocks just keep going higher and higher, eventually you get a rush into speculative names.  It was just surprising that it too so long. 

The double barrel earning releases of highly shorted TSLA and GMCR has been the fuel to ignite this run towards the momo stocks, most with high short interest.  TSLA is the leader, as it is driving the biggest buzz and trading the most dollar volume.  You have the solar power contingent led by SPWR and SCTY.  You have the internet contigent led by NFLX.  And you have the 3D printing group led by DDD.  And then there a bunch in the miscellaneous category, those with high growth such as SODA and GMCR.  This market reminds me of the one that we saw in the middle of 1998, when the internet stocks suddenly caught fire.  This time, it isn't just one theme, but a group of high flyers from various industries that is attracting the momentum money. 

The question is how long does this momo fever last?  The longer it lasts, the higher these stocks go.  Since it really only started in earnest last week, I expect it to last for quite some time. 

Monday, May 13, 2013

Kill Shorty

The stocks up the strongest today are the ones with the highest short interest.  It started last week as TSLA and GMCR beat earnings estimates and kicked off a round of short squeezes.  It has ignited stocks like DDD, NFLX, SPWR, THRX, and JCP.  This is your 2013 market.  Funds are hand picking highly shorted stocks to start short squeezes and relentlessly bidding up the stock to put the shorts under extreme pressure.

The shorts are really feeling the heat right now and I can see that they are being forced to liquidate positions in order to survive.  Fundamentals don't matter at this point, its all a shooting parlor, trying to attack the weakest hands. 

Friday, May 10, 2013

Easily Spooked Market

We went down all of 12 ES points yesterday from peak to trough, which for all practical purposes means that for most ES trades, the biggest drawdown was probably around 0.6%.  That's nothing.  That is back to prices we were at the day before.  Yet we get the negative nabobs screaming intraday reversal and top.  Traders haven't bought into this market, because we are going up on multiple expansion as the economy slows.  Brian Kelly of Fast Money is still bearish.

That does not mean from a contrarian prospective that we go up forever until the public buys in.  It just means you need the economy to become weaker to see this market go down.  The economy has to enter recession, something that most are not forecasting,  before you get the big correction.  I don't see this market topping out on good news like most markets because I don't see any good news coming.   

Expecting us to grind higher into early June as bears slowly throw in the towel and give up on the Sell in May and Go Away theme.

Monday, May 6, 2013

Feast or Famine

"It was the best of times, it was the worst of times" - Tale of Two Cities

I am sure you can guess what time it is for trading.  And I am sure you can guess what time it is(was?) for investing.  Every trader has there own style, and it can be hard to change.  I have had to make changes over my trading career.  I have been forced to adapt away by necessity (lack of retail traders, public disinterest in equities, more HFTs and hedge funds, Reg SHO)  from easy money and very high percentage win rates and confidence levels, to more difficult money and lower win rates and confidence levels.

It usually goes along a spectrum of liquidity, the more illiquid and smaller the market, the bigger the edge.  The more liquid and big markets with the smaller edges.  Sometimes, you get a tidal wave of opportunity where the big markets have big edges as well, but they are usually fleeting.  Right now, I see almost no opportunity in individual stocks or equity indexes, bonds, commodities, or currencies.  This is the worst trading market I have ever seen.

At least in January and February, buy the dip to these eyes seemed like an obvious trade, but as we got into March and April, it just didn't seem to me like a great risk reward to buy OR sell the market.  In hindsight, I was wrong to be neutral, but I would probably think the same way if I saw another market in the same situation.

A market where I can't take a confident buy or sell position is a bad trading market.  I have felt like this since the middle of March.

It in times like these where I am reminded of the importance of making hay when the sun shines.  You absolutely have to kill it and be greedy when the opportunities are there because once they are gone, it will be hard to make anything when markets turn bad/dull/unpredictable.  A good post on Elite Trader made in August 2007 (a GREAT trading market) that still sticks in my memory:

jdeeZERO05: can't ask for more volatility than this. I crushed my profit target already, i'm going to the bar. this fucking rules.

RM: Quitting early after a big gain is the second worst trait a trader can have. No offense, but you'll never be rich.

jdeezero05: have fun giving back your profits, not my game.
to me it makes sense to learn to crawl before you even attempt to fly. 20 YM points a day is my goal. When I've hit that I'm done. If i got a hundred on the week I've been done. 15 point stop, if I get down 40 points on the day i'm done. 120 points down for the week, i'm done for the week. Haven't had that happen yet with this style management yet though. 5k account, 1 car. This morning though, I rode the trend, tried to jog for the first time. Could be done for the week if I want. The remainder of this week has no emotion at all. Market is going to have to entice me with the highest probability setups I can get to risk what I made today, all the pressure is off now on the week.

To me this is exactly why most traders fail. Good look getting "to the moon" when you can't even crawl without falling on your face. Not saying thats your situation, but giving me that advice is just shit advice, no disrespect.

RM: A surefire recipe for permanent piker status if I ever saw one.

For some reason I'm in the mood to do you a favor and take the time to explain what you're doing here:

My job is to collect strands of beads off the streets of New Orleans. I need to collect 500 strands every year to make a living, so I figure I just need to collect 10 strands every week.

The past few months have been tough- I've had to work pretty hard to collect my 10 strands/week. However, this week is Mardi Gras, so there are currently beads all over the place for the taking. The streets are flowing with a massive bounty- beads are literally everywhere! I've already managed to collect my 10 strands within the first five minutes of Mardi Gras week. This is great! I've already made my weekly quota, so naturally I'll now be taking off the rest of the week. Beads crunch under my shoes during my walk home, but I don't bother to pick them up. Why should I bother? After all, I already have my weekly quota in hand, so the pressure is off. Time to hit the bar!


Friday, May 3, 2013

Hoping for Excitement

We got the big hurdle out of the way, now it is downfield running towards the endzone.  With the ADP numbers coming in weak, most were looking for another weak nonfarm payrolls number.  Now that we got a beat, it should set up a run for the roses making new all time highs with excitement.  At least I hope.  That would be the only situation where I will short.  If we get the same muted reaction to higher prices as we've seen all year, then its not going to be so easy. 

At least for today, I think this nonfarm payrolls beat has caught traders off guard and the sell in May theme will be forgotten and the squeeze will be on.  Usually these pops on nonfarm payroll numbers are good shorts but it doesn't feel like a good short here.   I expect us to test 1620 by next week so I am waiting for bulls to overextend themselves. 

Thursday, May 2, 2013

Central Bank Fatigue

The market got what it wanted, an ECB rate cut and after a quick lift on the announcement, we have given back the whole gain in premarket.  Even yesterday, with the FOMC announcing they are willing to increase QE if the data comes in weaker, didn't move the needle.

The market has priced in the central banks doing whatever it takes.  The expectations are now through the roof!  Now it requires super easy monetary policies with tons of asset purchases just to maintain the status quo.  The market has run up so much on central bank hopes, that you will no longer get big pops on central bank news.  Traders are now realizing that central bank easing and QEs don't raise corporate earnings.  And in the end, corporate earnings are what matters for the stock market.

Still, its a tough market to short, because the sentiment is not at the right place considering the strong price action.  I just don't feel comfortable shorting this market because of the refusal to go down on bad news. 

Friday, April 26, 2013

One Resilient Market

It is a tough market to trade, because the market is going up from multiple expansion, not earnings expansion.  The fundamentals aren't great, but we keep going higher.  For a rational fundamental trader, it is hard to figure out why we're so strong.  The only explanation is demand for US equities from overseas, and the shrinking supply due to M&A and share buyback programs. 

This is not a classic uptrend in the sense that the economy is weak, earnings are stagnant, and there is no positive economic data.  These kind of uptrends are not that common, especially with these fundamentals four years into a bull market.  So without history as a guide, one has to instinctively project future prices.  And my instincts tell me that we're going to go higher into the fall, with probably one scary shakeout between now and June.  I expect us to be between 1650 and 1700 by the fall.   I have no fundamental basis for this view other than a continuation of float reduction with share buybacks and limited IPOs and secondaries. 

I am not interested in playing for the last leg of this rally, even though I see it coming.  But I sure won't be playing the short side much either as that is counter to my instincts.  So not much to do.  Tough market!

Wednesday, April 24, 2013

AAPL Capitulation to Come

AAPL has revealed its cards.  It has given in to investor demands for increased dividend and is giving back cash to shareholders through a big stock buyback.  At the same time, they revealed no new releases till fall.  It sets up a period where investors have no positive catalyst, the only one being the increased dividend and stock buyback already being used up.  Now the investors realize there is nothing to look forward to.  Earnings are deteriorating, and still a ton of bagholders in the stock.  I expect a coming AAPL capitulation in the coming weeks, down to 350-360 area, where it is buyable.  Because the stock buyback will provide a floor for the stock at a certain point.  It is not worth the risk to short for the last capitulation move, AAPL will now support their stock with their buybacks, and there is still the bigger screen IPhone catalyst out there.  So I am looking for a long entry point lower from here for a strong dead cat bounce, back to 450, even though within a couple of years, I feel like AAPL will be a dinosaur and below 250. 

Friday, April 19, 2013

Close to a Low

We are in a consolidation phase, and at the lower end of the range.  It looks like the Chinese market has bottomed, and Europe is very oversold.  Also, we've had disappointing earnings so far in tech, as expected, so the market has discounted much of this weakness.

AAPL under 400 is getting the bulls nervous.  I never believed in AAPL, and I still don't, but it is no longer a sure fire short.  It is getting closer to a tradeable buy around 360.  I expect their earnings to disappoint again, and that should be near the bottom.  AAPL still has a couple of short squeezer catalysts lined up in the coming months.  A probable special cash dividend and the launch of a new IPhone.  I am going to look to enter longs very soon. 

Saturday, April 13, 2013

Longer Term on Commodities

For commodities bulls, it has been a terrible time since QE3.  What was supposed to be a catalyst for an inflationary explosion higher in real assets, has only led to a chase for yield in dividend paying stocks in a slowing economy.  The main culprit for this is the king of commodities:  crude oil.

Everything in the commodity space is based off of crude oil.  It is the driving force for grains and softs, industrial metals, and by inflationary correlation, precious metals.  Oddly enough, its energy cousin natural gas is one of the least correlated to crude oil.  The reason crude oil drives grain prices is corn, which drives the price of other grains and many of the softs.  Corn requires a lot of energy input to produce, and one of its products, ethanol is used as a gasoline substitute. 

The reason I am writing today about commodities is because of gold.  It broke $1500 with a huge surge of liquidation on Friday.  Those financial analysts who talked about $5000 gold like its a foregone conclusion are buffoons.  Even when I was super bullish on gold in 2011, I thought they were idiots. 

Based on the general view of gold, this downtrend is attributed to the rising stock market and the lack of need for a safe haven.  And of course poor performance.  Well, gold isn't a safe haven.  It went down just like the stock market in fall of 2008.  And safe havens don't regularly spike down 2% in minutes based on stop orders being filled. 

Gold is a play on inflation and investor sentiment.  Obviously, investor sentiment is sour on gold right now, and there has been serious liquidation and reduction in the GLD ETF holdings.  But when investor sentiment improves, so will the price.  Fundamentals aren't really important for gold, it is the most sentiment based major asset.

Right now, gold is trapped in oil's bear market.  Oil is such a lynchpin to the inflation level that its fundamental price weakness has major ramifications for gold.  Oil is affecting gold sentiment.  Right now, oil is facing an intermediate term problem of increased shale oil production, which will last for a few years and peter out, but which is causing a problem now for the oil bulls.  The global economy, in particular China, is not strong enough to increase oil demand, there are constant increases in fuel efficiency, and supply from shale oil and increased natural gas liquids more than makes up for declines in older wells.  Thus, you are seeing crude oil struggle for the past 6 months despite central banks QEing and a rising stock market. 

I was in the camp that gold would be a bubble back in 2011 but I didn't expect shale oil to have such an impact on the oil price.  The oil market just isn't tight enough to move much higher.  Without an explosion higher in crude oil prices, you will need a panic to get gold noticeably higher like with the European debt crisis in August 2011, but those panics are long shots, like rolling snake eyes.  Plus, they don't lead to sustainable moves which cause bubbles. 

On a short term basis, the pessimism is too thick right now on gold, and the market is oversold, so I expect a strong bounce, in conjuction with renewed media attention on the debt ceiling over the coming weeks.

On a long term basis, I just don't see gold, and by extension most other commodities extending its bull market with the headwinds for oil.  I expect a long period of sideways trading for gold, with perhaps a range of $1400 to $1800 for the next few years.  But in the very long term, in the next 10 years, I expect another explosive move higher as the oil market gets tighter and the cumulative effect of a steady increase in money supply takes effect.  Then talks of $5000 gold will not be so outrageous.