Last Man Standing

It is like it has always been.  S&P is the one immune to the global weakness.  China is weak, so is Europe, and the S&P is ignoring it all.  Dips are bought without fear.  The outperformance of the S&P is notable, and everyone notices.  But it's still the same game.  Corporate buybacks, reducing supply, with demand steady, leads to higher prices. 

The only way this game ends is if the economy goes into the tank, and corporate profits get hit, which will make the corporate bond window less available.  You need to see junk bond yields jump.  I don't expect much excitement over the coming weeks, S&P will ignore everything until the above happens.  

Now a Two Way Market

Yesterday's Fed release was a nonevent, but it did squeeze some bears who were hoping for stronger Fed exit language.  

It is no longer just a dip buyer's market.  You can also reasonably sell short rallies.  I still put higher risk reward for buying dips than selling rallies, but this market will be rangebound, with a slight upward bias.  Cyprus is a convenient excuse for an overbought, post expiration market to pullback a bit.  Even still, we're still less than 10 points from 52 week highs.  That shows you the strength of this market.  But right above, there is strong psychological resistance so bears have some protection when they short at 1550 and above. 

No Sub 1500 for a While

I heard about a really big SPX 1550 June options straddle position being placed late last week.  This brings me to a view which is very different from the person who put on that position.  I believe he will lose most of his money on that trade.

I am going to go out on a limb here.  We will not go below 1500 for the next 3 months of ES trading.  Yes, 3 months.  Through any possible Cyprus contagion (joke), Q1 earnings, through the "Sell in May and go away", through the debt ceiling deadline, and through any potential black swans.  Things can change, but unless something dramatic happens, I am sticking to this view.  I expect volatility to remain subdued, staying below 15 for most of the time.

The reason I am confident about this is because I don't see us making a triple top of 2000, 2007, 2013.  And if we aren't making a top, then we won't have much volatility as we consolidate near the highs.  That being said, I also don't expect a continuation of this uptrend like we have seen since the start of the year.  The enthusiasm and retail fund flows are just not going to come in to provide the fuel for the next leg higher.  This rally is being driven by a reduction of equity supply from corporate stock buybacks, M&A, and LBOs, not by an increase in investor demand.  Thus, the market will be strongly supported by the aforementioned activities, as well as dip buyers.

The next 3 months will be a good time to sell volatility and put options.  But I would not be a buyer of call options, because I don't expect us to gain much ground during this time period.  The all time highs will be massive resistance. 

Now back to your regularly scheduled Bore market. 

Cyprus Hill

The selling here is Insane in the Membrane.  The post options expiration forces at work are greater than the inconsequential news out of Cyprus.  You had a rally that was overextended going into options expiration, the following Monday had better than 50-50 odds of a gap down. As I stated last week, 1560-1570 zone will be a bear to get through, as there is a lot of psychological resistance at the S&P all time highs. 

If we open down over 1% from Friday's close, it will be gobbled up at the open by funds looking to get long exposure into a down tape. 

Inflation Ignored

We got a big boost in ES because of a big retail sales beat.  Most of these government statistics have huge error readings so you can't take the numbers too seriously.  Also, inflation is being largely ignored here in the sales numbers.  Gasoline prices have gone up steadily over the past several months, and rents are increasing steadily. 

Since 2007, crude oil and corn have gone up over 50%, gold up over 100%, and rents are definitely higher.  Yet inflation is controlled.  The CPI numbers are a joke, which makes the CPI-based TIPs bonds a joke. 

If I was forced to make a trade where I had to hold for 5 years, I would choose gold or crude oil over stocks or bonds.  It would be an easy choice.

The low vol grind higher continues, opex week provides protection for bulls since we're near all time highs.  Don't fight this bull. 

Deep Inside the Bore

We are in the Bore.   The 5 point range.  VIX below 13.  It is the new manipulated normal.  Thank you Bernanke, the Dow is at a new all time high, so we are all prosperous.  Expect the Bore to continue until the FOMC meeting next Wednesday.  Feel free to take a trading vacation if you have to, this is probably the ideal time to do it.  You won't miss a thing for the rest of the week.

Demand from Stock Buybacks

This year's stock market emphasizes the importance of supply and demand in the stock market.  Sure, earnings are important, in the very long run, but in the short and intermediate term, supply and demand dictates price movement. 

There is a lot of demand coming from this low interest rate environment and Fed liquidity.  Corporations are leveraging up, selling as much corporate bonds as they can, because they can.  The demand for bonds is insatiable, even with the big rally in stocks, retail has stayed with bonds because of the desire for safe returns.  With this demand, corporations have been able to issue corporate bonds at low interest rates, and in size, allowing them to use that cash for whatever they desire.  Since insiders receive stock options, the best way to boost their own personal wealth is to use their balance sheet cash to goose the stock price via stock buybacks.  That has been a big driver for equity demand. 

With the low number of IPOs and lack of big secondaries, and leveraged buyouts and companies going private, supply hasn't been able to keep up with this demand.  So despite retail not embracing this stock market, companies have been using the proceeds from the sale of bonds to buy back stock. 

So despite flat year on year earnings growth, you have had stocks up over 20% since the beginning of 2012.  It is a bubble that is being blown, but I don't see it popping anytime soon until the corporations can no longer access the corporate bond window at favorable rates, or there is too much stock issuance.

It is a buyer's market, we are back to the gentle uptrend which doesn't dip.  We should finish near the highs today. 

Nothing Like 2000 and 2007

Tuesday was an impressive thrust higher into new recovery highs.  We had the classic dip that shook out the weak hands last week and now it is back to the power bull move.  The Dennis Gartmans of the world are now on the sidelines after last week's move so the train can now move higher at greater speed without the weight of the weak bulls. We should hit 1560 within a week.

I don't think this thrust higher will be "the top" that many investors and traders are looking to sell.  The top that will make that triple top from 2000, 2007, and now.

But it will be no picnic breaking that 1560-1570 zone.  A lot of supply should come out at that level, and the first visit of that price zone should be an easy short for a short term down move, based merely on the fear of a repeat of the past two times we hit that high.

This time, it feels nothing like those past two tops, there isn't any euphoria about stocks, the public is not embracing this stock market, and I don't think it will for many years.  And the economy is much worse. 

I don't know how high we will go because there really is no precedent for a Fed manipulated market like this one.  The law of supply and demand has been turned on its head by the big elephant that's sitting on all the bears.  This bull will last longer than most think. 

Bubble Ben has put on a clinic in asset price manipulation, something a renowned stock manipulator like Jesse Livermore would envy.  It's interesting to note that traders thought 1420 was too high last summer, but now 1420 is viewed as a great dip buying opportunity, even though earnings are basically flat year over year.  That is just how a stock manipulator manipulates the psychology of the crowd. 

The Bore is Coming

We have gotten through the correction, it is now time for the grind.  The grind higher, the return of the 5 point range, and general nonexistent intraday opportunities.  It will be time to get back to trading individual stocks, and away from index futures trading.  The bears failed miserably again, and it will take time for the market to set up for another dip.

For now, I will be preparing for the return of ultra low volatility trading.  It will be boring, I am just hoping there will be some opportunities in individual stock names while I wait for the hibernating bear to awaken.

Another Dip to Buy

It looks like the bears are going to run over the bulls today, and I would wait for the final hour to look for a long entry.  After 3 up days, the market is vulnerable to a one day selloff.