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.