Blog Break

See very little compelling with this market, long or short.  Likely more grind higher action with remote chance of a 1% whack out of the blue.  Nothing new.

I will be taking a blog break for the week, and will not make any more posts barring something breathtaking happening in the markets.  I will continue to make a few tweets on Twitter.

Sellers in Europe

Despite 20 straight weeks of inflows into European equities, they are lagging the world indices.  Even the ECB rate cut and negative interest rate jawboning didn't provide a lift.  Europe has no growth, and no QE, so there is no endless flow of money to buy up all risk assets in euros.  So you are getting this lagging performance even with relative undervaluation.

It has been a while since we've gotten a true scare in this market.  We are vulnerable to a sharp one day move lower because of the excessive complacency.  Yesterday saw some heavy call activity in the equity and index options.  Even though buy the dip will still work, it will be more like 75% probability of it working rather than 90%.  The percentages will keep going down for that strategy as the market gets more saturated with weak hands.

This 1800 level is significant, and with so many already on board, we won't be able to just blast through to new highs so easily anymore.

Picking Tops in a Strong Market

We are in the super bull phase of this 5 year long bull market.  During this phase, it is tempting from a valuation and overbought perspective to short the market when it looks shaky.  But it is actually dangerous to short a strong market like this after it has already gone down 1%.  Because these are the type of markets that can slowly grind higher, not giving investors a chance to cover on a bigger dip, forcing you to either hope for a drop or get tortured with a 1000 cuts as we go higher bit by bit.  These kind of grind it up bull markets drop quickly out of the blue, but the drops don't last for long.  So you will have many more up days than down days even when the market is mostly flat.

The best approach for this type of market is to either wait for the market to flatten out for a few months, and then strike on the short side, or just buy the dips.  It is still the best strategy, even though it is well known.  Because right now, so many are still looking for dips to buy stocks, and the market just hasn't offered many to investors over the past month.

The market feels toppy, but I won't fall for the trap to short it here.  I will wait to buy the dips.  And will only short rallies when they get overbought to a truly extreme level.

The 1999 Rules

Another day, another new all time high.  ICLD is gapping up 40% after already going up over 200% on Friday.  A move from 2.55 at Thursday's close to 13.50 at today's open.  Over 500% in less than 2 trading days.  Animal spirits are out.  Gaps up are the norm.  The more daytraders that trade the stock, the higher the gap up. This was what happened in 1999, when there was nothing "bad" on the horizon.  Daytraders get bold, and drive up momentum pump and dumps to extreme levels.  

1. If you feel the urge the short, wait a few hours and short when it's 10% higher.  

2. Buy the close on the flavor of the month daytrader stock.  Sell the gap up open.  

3. Forget the sentiment polls, put-call ratios, and overbought levels. Only short when stocks seem like they will never go down. 

4. Don't think this has to end soon.  It won't.  

5. Fundamentals will not matter, investor psychology trumps everything from now on.  

We have reached escape velocity on the stock market.  Normal rules do not apply, you have to pretend like you are in outer space, because the movements will be abnormal.  The bubble is now pumping full throttle, embrace it, because it won't end soon.

Year of Misdirection

What we are seeing is money funneling from the financial assets which are bonds and commodities into equities.  I believe we have seen 90% of the move, and we'll soon see investors shunning equities again.  There will be no great rotation from bonds to equities, because the countries with the most financial assets: U.S., Europe, and Japan are aging.  What you are seeing in 2013 is a  huge fakeout in the financial world.  Because of fears of Fed taper, and a strong bull market in stocks, investors are getting out of bonds and going into equities.  That is a huge mistake.

I don't look at day to day economic numbers to determine my view of the market.  I look at the big picture. I see a "recovery" that is 5 years old and we've yet to have any meaningful economic growth that wasn't a reversion to the mean (i.e., 2009 and 2010).  Now that we've had the bounce back from the financial crisis, you have no economic acceleration.  Logically, how can the economy grow when there is little job growth, little wage growth, and all the money is going to the rich?  The rich don't need to spend more money, they have everything they need, isn't one Tesla enough?  Isn't one yacht enough?

There is an aging, slow growing population in developed economies, there is not any sound economic growth in the emerging markets (China is a real estate disaster waiting to happen), and financial assets have risen substantially for 5 years.  There is no pent up demand.  You have used up the low interest rate/refi bullets.  There is no appetite for government stimulus.  It is all up to the central banks, and they have manipulated interest rates to near maximum potential.  Unless the Fed goes into QE overdrive and drives long term rates to a Japan like 1%, you have taken up all the benefit from lower interest rates.  Corporations have issued a huge number of bonds to lever up their balance sheet to buyback their own stock.  They are not investing in the future, they are just managing their balance sheets.  You have a slight uptick in economic activity due to the wealth effect from a surging stock market, which is not sustainable long term.  That is a not a recipe for economic growth.  It is a recipe for a boom that will soon turn into bust.

Yet, in this kind of environment, investors are piling into stocks because of the huge outperformance and don't want to be in bonds because of the potential Fed taper.  Well, Fed taper is probably 90% priced in, and the equity market will have a taper tantrum when it does arrive, which will limit the taper from $85B to around $75B and remain there for a long time.  That to me is still very bullish for bonds.  And with little economic growth, despite the remaining QE, equities become extremely vulnerable to a potential recession, which I don't see many people predicting.  At these valuations, a recession takes the S&P to 1500 easily.  I am bearish for 2014, but given the uptrend, we will need to chop around for a few months before the trend changes.  Thus, I am predicting a flat and choppy 3-4 months and then the beginning of a new bear market.

Bears are Endangered Species

We got a monster intraday move off the gap down yesterday and it seems like quite a bit of short covering when we hit new all time highs, ahead of Janet Yellen today.  Eventually it will be a surprise when the Fed doesn't pump the market, but it still seems to catch bears off guard and make bulls bolder.  I am now itching to go short for a swing trade, something I haven't felt like since August.

First there is the psychological barrier of 1800 just above, and the complacency of the crowd.  Second, long term yields are rising, which will keep a lid on interest rate sensitive sectors.  Lastly, I am seeing Europe starting to lag, at the same levels as when the debt ceiling deal was announced, almost 1 month ago.  In the meantime, the S&P is up 50 points.

ES 1790 will be a premium short entry, and one that I will take if it happens by Friday.

Choppy Till March

The amount of issuance of stock is starting to catch up with the market, as investor inflows and stock buybacks are met with supply.  There is a limit to how much corporations can lever up to buy back their own stock.  Who is going to buy corporate bonds from an already levered out company when the economy is slowing down?

Corporate bond market spreads over Treasuries will be a canary in the coal mine.  The worst case scenario for this market is to see corporate bond spreads blow out, financials underperform, and breadth deteriorate.  Right now, the stock market is pricing in something that appears unlikely to these eyes: an economy that can stand on its own without increasing asset prices and/or increased deficit spending.  With investors finally getting positive about stocks and pouring money in, you have already used up a lot of potential buying power from the retail crowd.  Thus, these inflows will buoy the market on dips for a few months, but the increase in stock supply will dampen any rally attempts, leading to flat, but choppy markets.  By the middle of next year, I see the market having the biggest shakeout since 2011, falling from its own weight of overvaluation and optimism.

Topping Process Starts

This is the beginning of the end.  Of the TINA bull market.  There is no alternative.  People are not enthusiastic about stocks, but they also see how it goes up everyday, in a 5 year uptrend, and with a weakening bond market, they are piling in.  The inflows will not last.  There is a secular shift to investing in bonds from stocks.  It is due to an aging population in developed economies, seeking safer assets.  And no, gold is not a safe asset.  That is why you are getting a highly unusual downward reaction to a blowout jobs number.  Traders know that the Fed QE meme is much stronger than the stronger economy meme.  

Yesterday, we saw the momo stocks just get destroyed, with the Musk stocks (TSLA and SCTY) leading the way.  The charts are now damaged, and will need time to repair.  They should be buys in a couple of weeks.  I think you need to buy today, as we are getting the first meaningful down day since the debt ceiling deal.  It will get bought.  As I write this, the futures are already climbing back from the knee jerk selloff on strong numbers.  The next one day selloff is the one to avoid, not this one.

Momo Train Back to Social

With the Twitter IPO tomorrow, and the cleanse that you received after earnings drops in FB, YELP, and TSLA, you have gotten rid of many of the weak hands which clears the way for the next big move higher.  We are still in the basing period, but the next surge higher should be in the social media and cloud stocks.  Solar should also be a player, as its growth is starting to win over the momo crowd and has moved it from fad status which it had in May to momo bellwether.   TSLA is probably left behind because it could just be viewed as a car maker, after yesterday's earnings.

 The Chinese internet names have been sullied by the NQ disaster, so you can't really trust those names.  It really it comes back full circle to what you have to buy.  They are NFLX, FB, LNKD, YELP, P, SPLK, CRM, SCTY, FSLR, SPWR, and add in DDD with it earnings beat and perhaps you have super powered burritos with CMG, but I wouldn't touch that, just because it is not sexy enough.  You need stock that fills the imagination with crazy growth, I just don't see a huge bubble happening in an upscale Taco Bell.  I am sure TWTR will like a fire under YELP, as this stock will be cheaper in comparison, giving justification to pay up.  YELP still has a lot of short interest and has completely shrugged off a subpar earnings report.

I do expect a pullback in the market to start within 2 weeks, so during that pullback, you have to snap up these names and ride the surge higher in December.

Momo Moving to Solar

Just like in 1999 and 2000, the momentum train is fluid, and the leading horses shift every few months.  The momentum train that started off this year with NFLX expanded out to TSLA and the solar names, such as SCTY, FSLR, and SPWR.  Then you had FB blow out the earnings number and that put a huge run into the social media and cloud plays like YELP, SPLK, and CRM.  Somewhere along the way, the Chinese internets joined in the fun, with BIDU, QIHU, etc. getting pumped up.

Now we are working our way back to the solar names, with SCTY and FSLR leading the way.  The hot money got a little scared by the subpar reaction in FB and YELP and want the safety of stocks that are less sensitive to a deteriorating economy.  Based on past bubbles, you will get a return to the FB and YELP group after a short period of basing.  We should probably accelerate higher again sometime this month.  Although there is a fly in the ointment is the toppy action that I am beginning to see in the broad market averages, with small caps and financials beginning to underperform, a bad sign long term for the market.  But I don't see a big pullback that would stall the momo fever, due to the end of year tailwinds in a strong up year.  This gives these momo names a lot of room to run higher as fund managers chase beta in a flattish market.

On the market, I am neutral at the moment, we should trade this tight range from ES 1745 to 1770 for the next several days.