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. 

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.

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. 

Unsustainable

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. 

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. 

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. 

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. 

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.

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!
___________________

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. 

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.