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. 

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.

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.

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. 

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. 

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.

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. 

USDJPY Crash

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. 

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.

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. 

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.