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!

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. 

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. 

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.

Boom!

The S&P busted out with a huge breakout of the all time highs of 1576.  It is puzzling to see the lack of enthusiasm with these new all time highs.  It is quite unlike a lot of big breakouts you see in the stock market.  The main reason for this lack of enthusiasm is the weak economy, traders just can't get too bullish when they see earnings growth so weak and the data coming in poor.  I cannot step in front of this train, not without seeing more capitulation from bears.  Brian Kelly is still bearish, and said he was still short.  And he is very representative of the average trader out there.  I will not take a stand on the short side until I see more bears cover. 

Central Bank Orgy

This is Bernanke's world, we are just pawns in it.  Well at least the Western world, Kuroda wants to own the Far East! 

The world is Uncle Ben's oyster, he can do whatever he wants, there are no checks and balances.  He is treated like a hero for levitating the stock market.  If the jobs number comes in terrible, he is viewed as prescient and it justifies his infinite QE.  If the jobs number comes in good, he is credited with reviving the economy.  Heads Ben wins, tails Ben wins.  Bazooka Ben knows that his job performance is like that of a mutual fund manager, if the S&P goes up, he is praised.  If it goes down, he is blamed.  So of course he will do anything it takes to get the S&P up.  Isn't that what Greenspan showed during his time in office?  

BOJ chief Kuroda is playing the same game.  I recently saw a video on a business channel reviewing Kuroda's performance after the past BOJ shock and awe announcement.  Remember, this guy has been on the job for all of two weeks.  And they all gave him As or B+s.  The more money you print, the more you beat market expectations for money printing, the higher the grade.  Simple game, print more, get better performance marks. 

There is a simple playbook for playing the short and the long side of risk assets.  First of all, you don't play short.  This is the most important rule.  With an ever increasing amount of money supply, pumping up asset markets, you pick your assets to go long.

If you are bullish on risk assets, you go long the S&P 500 and USDJPY.   Those are the two alpha markets which go up with the most certainty when risk assets are rising.  They are the strongest of the equity and currency markets, respectively.  

If you are bearish on risk assets, you DO NOT short the S&P 500.  It seems like the logical play, but in a central bank manipulated market, you DO NOT go short.  Instead, you go long what they are going long, Treasury bonds and JGBs.  10 year and 30 year Treasuries are the assets to buy if you are bearish on the S&P, not shorting S&P!  JGBs are the assets to buy if you are bearish on the Nikkei.  Look what has happened since March, the S&P has been range bound, with slight upward bias, but Treasuries have been very strong.  If you had gotten short ES, you would be frustrated.  If you had gotten long 10 year and 30 year Treasuries, you would be sitting pretty.

One thing you should absolutely avoid is shorting Treasuries.  This is the worst play when you are bullish on risk assets.  I do hear my fair share of the pundits declaring bonds to be in a bubble, and overpriced.  But most of them aren't speaking with their wallets.  They are just pontificating on the thesis of, rates are historically low, governments are bankrupt, negative real interest rates, the Fed will have to exit, blah blah blah. 

The problem with their thesis is that the central banks are loathe to exit their QE programs.  Only if there is a big boom in the economy will you see tightening.  That is not going to happen.  IMHO, one of the most certain things in this environment is that the economy is weak, and will remain weak.   Now this doesn't make me want to go short the S&P, it just makes me a Treasury bull.

Bad Nonfarm Payrolls

This just reinforces the Fed QE forever program.  It is a net positive for stocks.  Of course we will dip on the news, but this a flushing out of weak hands as we chop chop higher.  Unless you get Europe falling apart, you will not see a weaker S&P.  The S&P by itself will not go down, it will need external catalysts to take it down.  Perhaps they can bring up another European scare story to spook the longs, but that story has been played out so many times, it might not get much of a reaction.  Short of North Korea dropping bombs, I don't see this thing going lower than 1530.  A golden dip buying opportunity AGAIN. 

Still a BTFD Market

As long as we've been going up, it is still a BTFD market.  The S&P is the best game in town, if you don't count the Nikkei, which is more of a gunslinger's market, with 500 point daily moves being common now.  I have tried to resist the temptation to trade the smaller moves in this market, but I fell to the temptation and took some losses here and there.  Best thing to do here is just buy dips, it ALWAYS comes back to make new highs.  I don't see enough excitement out there for this to be a top.  At the same time, there just aren't the huge inflows that are required to make us blast higher.  So I expect a slow grind higher market, with temporary dips, nothing more than 2%. 

The BOJ has jumped the shark.  50% monetary base growth target is unprecedented, and completely insane.  I don't expect this USDJPY to be able to stay under 100 for long.  It continues to be an alpha market.  Nikkei should get to 14000 if USDJPY gets to 100.  One of those uncommon situations where the retail investors will be hitting it big. 

Not Noteworthy

This market has really been repetitive, so I don't find much to write about these days, thus the erratic posts.  I have some quick little thoughts about the market which I am putting out there on Twitter, but they aren't really worthy of making a post about.  In summary, not much opportunity from my trading stance.  Just trying not to lose money making 50-50 trades out of boredom.