Thursday, October 31, 2013

Europe is On Fire

We are making another dramatic comeback upwards from a healthy selloff overnight after the FB AH pump and dump and the FOMC sell the news reaction spooked short term traders.  Right now, European equities are the hottest financial asset in the world.  It was massively underweight in global portfolios for years and years, and finally this summer, fund managers started to accumulate.  Experienced traders who trade the overnight market realize that the ES makes its overnight move usually during the European trading hours.  Asia really has little effect on the ES.  With a strong Europe, like the strength shown today, you usually end up with a gap up in the U.S.  You may sometimes get a flat open, but difficult to get any sizeable gap down with the kind of strength exhibited in Europe.

This European trend of equity accumulation before the US market opens makes it tough to go short overnight.  Like any other hot money trend, it will run out of steam, but European equity outperformance should last for the rest of the year.  As for FB, I think it is untouchable from the long side for at least another week.  I would look into getting long the tech momos again after TSLA earnings probably disappoint daytraders.

Wednesday, October 30, 2013

Fed Will Not Stop QE

The Fed with Bernanke has never disappointed the market.  Never.  So you know they will do nothing now, and the Street has finally caught on after the surprise no taper move last meeting.  Everyone is on to the dovish games, and they don't want to look like idiots expecting anything but more prime pumping.  But there comes a point where the market fully expects the Fed to always pump more money if you have even a slight slowdown, which is reflected in equity overvaluation.  We are in a structural high unemployment economy, there is an excess of labor, and that will give the Fed all the excuses it needs to keep QE going forever and finance the US budget deficit.

We have a setup of a near parabolic move higher since October 17, and the Fed doing nothing could be the final blowoff top which could be shortable for a one day pullback.  You don't expect two, because you have a class of investors who refuse to buy stocks on an up day who are woefully underinvested and will pile in on the first down day.  Thus making it hard for the market to go down for more than a day.

I am still a believer that you will see a huge piling into tech momentum plays after the earnings dust settles, after the fast money players playing the earnings pop get out.  It should be by the end of next week.

Monday, October 28, 2013

Stocks Accused of Fraud

One of the first lessons of stock trading that I had engrained in my head was to never buy a stock accused of fraud.  No matter where the source is coming from, it puts a huge dark cloud over the stock.  Usually the accusers are right.  In almost all cases, investors/journalists are loathe to accuse any stock of fraud.  Short sellers are some of the most analytical and rigorous investors out there, and do some of the best work in finding fraud among smaller speculative companies in the OTCBB and Pink sheets, many of them shells used to profit from selling stock, not running a business.

NQ was accused of fraud by Muddy Waters and they are probably fraudulent.  I read the Muddy Waters accusations and wasn't too surprised that NQ wasn't able to specifically deny the most fundamental accusations of the company.  The conference call was quite vague, it sounded like a script rather than a factual response to the claims made against them.  Anyway, I see no reason why any fund would want to buy these Chinese companies when you can't trust the financials.  China is one of the most corrupt countries in the world, their stock market is a glorified casino, and embezzlement is rampant.  How can a country like China, that has grown as much as it has, have a stock market that has gone basically nowhere for the past 15 years?  If hedge funds and managed futures accounts are ways for shrewd Americans to suck money from investors, public companies are a similar avenue for insiders to cash in while providing nothing of use for the investors.

Friday, October 25, 2013

Bidders Underneath

After the earnings beats and gap up from MSFT and AMZN, I expected the market to gap up higher than it did.  I was looking for a selloff at the open based on previous experiences with overbought markets that gap up based on bellweather earnings beats.  The market hasn't given an inch.  No selloff.  It just goes to show you the strength in this market, with bidders underneath, waiting to get on even the slightest of pullbacks.  We got that pullback on Wednesday, and it was eaten alive and disappeared within hours.

I see the sentiment polls. There are a lot of bulls and shrinking numbers of bears.  But I also know that when the VIX spikes like it did on October 9, you don't top out two weeks later when there is no catalyst.  That is why despite the high bullish sentiment, I don't see a top anytime soon.  At the earliest, I think we top out by November 15.  At the latest, early January.  I still think the Nasdaq will outperform the S&P, as the market flattens out and fund managers look to outperform by buying momentum stocks.  Tech also tends to be one of the strongest sectors in Q4.

Wednesday, October 23, 2013

Momo Earnings

NFLX gave a huge reality check to the momo fever.  After days like yesterday, when the overall market was going up but the momentum stocks were going down, flashing red lights came up.  After a huge run, you see that the buying has just been exhausted short term.  The earnings expectations are sky high for these momentum names now, after the earnings beats this year in FB, LNKD, TSLA, YELP, and the others.  It is almost taken for granted that these stocks will beat earnings and gap up the next day.  Next week, you will have LNKD, YELP, and FB reporting earnings and I just have a hard time seeing them go much higher after earnings due to high expectations.  I expect these stocks to take a rest for the rest of the month, as profits are taken and earnings are used as a sell the news event.  Then you get in there and buy these stocks up for the monster run into the Twitter IPO on November 15.

On the overall market, I am still very constructive, we have had a huge run since bottoming 2 weeks ago.  So we should flatten out here, but I don't expect much of a pullback, maybe 20 SPX points, before we grind higher again.

Sunday, October 20, 2013

Embracing the Bubble

There is no growth in the world.  When you see investors clamoring for Japanese stocks for their growth prospects, you realize there is global growth starvation.  When you see investors viewing moribund Europe as a hot sector, the desperation shows.

In this environment, big growth rates stand out.  The Elon Musk phenomena with TSLA and SCTY soaring in May opened trader's eyes to the profit potential of investing in these overvalued growth stocks.  Why toil away with all the others begging for a few percentage bounce in AAPL, when you can get 20% weekly returns in names like TSLA.

FB just injected nitro into this bubble with their earnings beat in the summer.  It is massively overvalued, but has the growth to fuel the imagination, which gives it 350 horsepower acceleration.  You don't get a 33 to 54 move, a 60% move in 3 months in an AAPL or even a GOOG or AMZN.  A big cap name like FB making that kind of move ignites the animal spirits.

Here is the thing.  The thing about bubbles is that the larger they get, the hardier they become.  Small bubbles fade away easily.  But the big bubbles have staying power.  Think 1998-2000 tech bubble.  Think 2006-2007 China stock bubble.  It is counterintuitive but there is a critical mass which gives bubbles staying power.  There has to be a certain level of acceptance among the institutional  community, otherwise the bubble never gets anywhere.  Retail is not a big enough part of the market these days to drive bubbles for long.  You need institutional support to a certain extent for a big, lasting bubble.  That is what is happening in social media/neo internet, Chinese internet, and the Musk stocks now.  But the institutional support is still not mainstream, which means the bubble is nowhere near saturation.

There just aren't enough institutional sized stocks in these specialized sectors to satiate the demand.  Off the top of my head, it is FB, LNKD, NFLX, YELP, P, BIDU, QIHU, SOHU, YOKU, YY, VIPS, TSLA, and SCTY.  That is 13 stocks, out of perhaps 5000 institutional sized companies worldwide, plus a few that I might have missed.  That is not even 0.3%.  In fact, I will start a portfolio with those 13 stocks and update their performance from October 18 close for the next couple of months.  I expect these stocks to massively outperform both S&P and Nasdaq.

Remember, bubbles usually do not end at the end of the year.  This is a seasonally ripe time for bubbles.  There will be no big dips till year end, the only way you will outperform is to ride the bubble.  Those who embrace it will prosper.  The cautious will just be left in the dust by those "lucky, haphazard, reckless" growth investors.

Friday, October 18, 2013

V Bottoms

If you look at a daily chart of the last 3 years, since QE 2 was launched, a new pattern has emerged.  No longer do you have back and filling, or consolidation, after a bottom.  The market now just goes full bore into a new up trend.  Look at what happened off the bottom in the end of December 2012, the bottom in June, August, and last week.  They were all liftoff moves, lasting weeks, with hardly any down days.  The market is not giving  investors much of a chance to buy low, before moving higher.  It is about as bullish a market as you can get.

Now we are in the next upmove off the bottom, and this time, there are no negative catalysts on the horizon.  After the June bottom, you had the fear of Fed tapering, after the August bottom, the fear of Fed tapering and the debt ceiling.  Now, there is nothing to scare the chicken littles.  With the deal out of the way, expect a grind higher into 1775 as the skeptics slowly melt away.  The momo names will be the vehicles for outperformance by underperforming funds, that have been too cautious this year. The bubble in tech will continue.  Expect FB, TSLA, NFLX, YELP, P, etc. to go into overdrive over the next few weeks.

Monday, October 14, 2013

Pullback Opportunity

There was no deal over the weekend, so you have the gap down on bad news.  This is the opening that the market is presenting for the opportunistic.  Sure, it's not as good an opportunity as the one you saw last week.  But it is clear now that the Republicans don't want to push the nuclear button when they got pressure from business groups to not screw around with the debt ceiling.  Which means they will raise the debt ceiling even if they don't want to do it on a clean bill.

We may get down to ES 1675-1680, intraday, but the pressure to raise the debt ceiling will force a deal together.  And from what I saw on Thursday and Friday, there is a huge pent up demand for stocks after the uncertainty is lifted.  Europe has been quite strong over the past few weeks despite US weakness.

You got the same preview of strength in December 2012 before the fiscal cliff deal got shot down on December 20.  This market looks like it wants to hit 1720 after the deal dust settles, beyond that, it will be a wait and see scenario.

Friday, October 11, 2013

Pullback Before the Deal

Yesterday showed the pentup demand, the torrents of liquidity waiting to be unleashed on deal uncertainty being lifted.  $85B/month is not child's play, it is still ongoing and lifting all boats when the sentiment shifts towards more bullishness.  If for some reason we get a little pullback because of the deal not getting done over the weekend, I would use that opportunity to get long risk on Monday, around ES 1670.  A 1% pullback would be a total gift set up for a nice little run to ES 1700.  The wiseguys are picking up shares to sell to the squares after the deal is announced.  Just hoping to see one little shakeout before the gap up higher on deal news next week.

Thursday, October 10, 2013

Gaming the Debt Ceiling

My last post was about timing the debt ceiling.  Well, we got the momentary drop below 1650, but it lasted for all of 15 minutes, the 15 minutes of fame that bears are given in this kind of bull market.  It looks like there will be no panic ahead of the debt ceiling because frankly, everyone and their mom knows that a deal is coming before October 17.  So you are going to get the bottom a few days before that date.  No one wants to miss the debt ceiling deal rally.  And it shows in the sentiment numbers.  After the weakness we have seen over the past week, the AAII investors have increased their bearish opinion by 3.5%.  But they have also increased their bullish opinion by 3.5%!  These hardy dip buyers have not budged an inch during the weakness.  Now I see any debt ceiling rally as a potential fakeout before another move lower.

Yesterday's bottom will not be the one that will launch us to new all time highs.  If there is a short-term deal, that kicks the can for 6 weeks, we are back in the same situation all over again, and at that time, it will be the Republicans with all the leverage, because Obama has promised to negotiate once a short-term deal has passed.  So we will repeat this process all over again in 4 or 6 weeks, or whenever the next deadline is.

They finally got to the leaders over the past two days, seeing how FB, TSLA, NFLX, YELP, and company have gotten crushed.  I believe it is the pause that refreshes for this group and a good dip buying opportunity.  We will soon see all time highs for the aforementioned names.

Tuesday, October 8, 2013

Timing the Debt Ceiling

We are now in the middle of debt ceiling politics, before the final phase when negotiations begin.  Right now, both sides are waiting for the other to blink first.  It is a game of chicken, as you get closer and closer, one side will move out of the way.  It is a collision course until someone becomes the chicken little.  Until Monday, it was just assumed that the debt ceiling would be raised without too much disturbance to the markets, an inevitability.  But politicians don't feel the heat until the stock market starts going down, not 1%, but 2-3% at a clip, and fear rises.  We are still in the 1% down stage, but we could have a quick 30 drop lower which would get the politicians attention.

In some ways, you almost need the market to go down before you get action.  If the market just remains sanguine, as it has, then the politicians take their time which only will make investors more nervous the closer we get to October 17.  I believe there is a puke move lower within the next 3 trading days, which should take us below 1650 momentarily.  That will be the moment to buy the dip, not now.  But I don't think we suddenly skyrocket after the debt ceiling deal, I just expect us to go back to range trading the 1680 to 1710 area.  It may just be better to short volatility instead of buying the market, as volatility is quite expensive at these levels, with realized vol not even close to implied vol.

Friday, October 4, 2013

Small Caps and Nasdaq

The Russell 2000 and the Nasdaq have been strong outperformers during this pullback.  Two cases don't make a pattern, but the two tops made in 2000 and 2007 happened when the small caps were underperforming the S&P 500.  So that is not the case here.

It seems everyone is thinking similarly, they will buy dips based on political headlines expecting a resolution by October 17.  Now that is the likely scenario, but I wonder if the dip will be so accomodating.  It is one thing to buy a 1% dip, but then it is another thing to buy a 1% dip and see that dip go to 4-5%.  Most investors are complacent here, and that leaves a lot of room for a big dip when we get closer to that deadline without a deal.  And most likely, it will take a stock market selloff to get politicians willing to make a deal.

With the way this market is trading, and the Boehner promise, if we don't have a deal by early next week, you will start seeing VIX break 20 and S&P will break 1650.  I view it as highly probably that will be the case, but I am not shorting.  With the strength of the small caps, I do think we eventually make new all time highs after the debt ceiling is raised.

Tuesday, October 1, 2013

Shutdown Hyperbole

The government shutdown is at the center of the financial news for the moment.  Well, we finally got the government shutdown, and the market yawned.  Well, not exactly, because we did get a healthy gap down yesterday morning, which was based on expectation of a government shutdown.  Shutdown is an overstatement, when you still have many parts of the government still running.  Congressmen are still getting paid, no?

This market is now going to be dead set on the debt ceiling, and we just aren't oversold enough to have a good long entry point into the teeth of the fear tactics.  There will be a good buying opportunity leading up to the deadline, but I need to see more volatility and angst before I pull the trigger.  Right now, we are setting up for it, but not close.

Too late to short, and too early to buy.