2015: A Year of Transition

The market is delivering a surprising back to back selloff to end the year, and the VIX is trading at 17.5.  This is quite a resilient VIX index despite sitting just 1% below all time highs on SPX.  This market is resembling the late stage of a bull market that is transitioning to a bear market.  This transition is usually marked by higher volatility along with all time highs.  This happened in 2000 and 2007.

Despite this, the market shook out quite a few bulls on that December dip, and based on the V bottom template, January should be a strong month for stocks, or at least pullback proof for the first half of the month.  In the late stages of a bull market, you have a VIX that trades more often above 15 than below 15.  Also, you get drops out of the blue without warning, like we had in December and even October, which didn't give warning signs such as increasing volatility ahead of the fall.

It is going to be a treacherous market, a market where you will have to be positioned short or in cash before there is any warning of a drop.

Crude oil looks like it is near a bottom here, and with seasonality getting much more positive as February and March arrive, the start of the refiners pumping out gasoline for the driving season.

Overall, expecting a stronger 1st half of the year, with increasing volatility as the valuations are overvalued and we are nearing saturation in equity ownership.  This should lead to a transition during the middle of the year, just as the Fed prepares for rate hikes, and the market will likely be weak and dare the Fed to hike rates in the face of stock market weakness.  And once again, I predict that the Fed will placate the market and not hike rates next year.  We'll see.  Forecasts are often wrong, I will take advantage of opportunities as they arrive, and not force the issue like I did sometimes this year.

Happy New Year, and hoping for a whopper in 2015.

Grecian Formula

We got another Greek special.  Talk about bringing out your dead horses with bat in hand.  All of Greece could fall into the Mediterranean and I doubt the S&P futures would be down more than a few handles!  We got the rejection of the establishment candidate in Greece and now there are fears of an anti-bailout party coming in at the next election.  Greece needs the EU much more than the EU needs Greece.  It still amazes me how much fear was brought up over Grexit, quickly forgetting that there is no growth in Europe, which is the main problem, not Greece exiting the EU.  A bazooka QE by Draghi will make any screams from the Greeks totally irrelevant and fruitless.

We got the gap down on Greece, as the chicken littles are in control today.  It may last for a day or two but I expect another surge higher as the calendar turns to 2015.  Overseas, Hong Kong H-shares had a huge rally, as the recent A-share strength is spilling over into the H-shares.

Slow Trade Till January 2nd

We are now in the holiday trading season.  The Monday after December options expiration is usually the beginning of low volume slow trade, lasting until the first trading day of January when volume explodes higher.  I will trade accordingly, expecting much less volatility and will be making few trades given the few opportunities on hand.  If you are long, stay long.  Those who are in cash should buy any dips down to ES 1960, or SPX 1967.  There should be an upward bias during this slow period, but nothing like what we saw the last 3 days.

This is a benign period, both seasonally, and due to recent history of strength for up to 2 months after a V bottom.  We had that V bottom last Tuesday.  So we should be pullback-proof till at least middle of January.

Ridiculously Bullish

The bull market is entering warp speed.  We are entering the bubble phase here, higher volatility, more abrupt fast moves, up and down, and VIX that is trading closer to 20 than 10.  We are at all time highs and the VIX, which would normally be trading around 12 or 13 in previous instances last year and this year, is now trading above 16, right in front of Christmas.  Ridiculous.  A bit 2007-esque.  Remember, the low in VIX during the bull run from 2003 to 2007 was from 2005 to early 2007, not summer or fall of 2007 when the S&P hit its peak.  Long term tops are marked by higher VIX readings, not lower.

The VIX has been quite sticky here, maintaining higher levels despite the rally.
I believe we are now entering a new phase of this bull market, more volatile, more rapid moves up and down with very few warning signs.  This 110 point pullback really showed no symptoms of weakness before the drop.  It just happened.  It will be a more vicious and treacherous market out there.  I have finally seen the first signs of a long term top of this bull market.  This bull market is on the clock.  I give it 9 months max from here.  Next year  should be similar to 2000 and 2007.  2015 will be quite the show.

Pure Strength and VIX Remains Bid

Wow.  That was a show of power that I haven't seen in a while.  Back to back 2% up days right near all time highs.  Extremely rare.

The VIX futures were barely down today even though SPX went up 52 points.  And that is right before a slow 2 weeks of trading before Christmas and New Year's.  That is almost unheard of.   I don't want to read too much into two days of trading, and perhaps this is a short squeeze ahead of triple witching tomorrow.  But, it is quite possible that we are entering a new volatility regime.  And that is what happened to volatility in the late 1990s as we entered the blow off phase of that 90s bull market.  Something to think about as we head into what should be an epic 2015.

Another V?

We are well on our way to another V bottom.  I am surprised that we are seeing such a big gap up after a 2% up day yesterday on "good" Fed news.  Europe seems to have found a bottom, and in a weird change of circumstances, Europe is helping to drag the US higher.  Of course, higher crude oil prices is satiating the commodity bear is bad for stocks crowd, however irrational they are.

In any case, looking at the volume and the VIX this week, it smells like a bottom and feels like a bottom.  It probably is a bottom.  That plus you get positive seasonality for the next two and a half weeks and you have all the ingredients for a move higher from here.  It may seem a bit painful to pay up so much from earlier in the week, but if recent history is a guide, you have to be a buyer.  And hang on.  Buy the dip and ride it, for at least 1 to 2 months.  That is the story of this bull market.

The time to ride it higher is here.  Expecting new S&P highs by January.

Russia and Oil Fears

Who cares about the ruble?  Liquidation doesn't care.  Margin clerks just liquidate based on price, not reason.  Russia is getting crushed, along with the ruble, and now there are fears that it will crumble the S&P.  We are in a time period where liquidity is starting to thin out ahead of the holiday, and traders want to reduce risk before Christmas and year end.
The much touted Santa Rally will have to wait, at least for a bit longer.  I am liking these levels to get long, and will be buying the fear at the open.  It is almost standard now.  Gap down big on exogenous events and squeeze higher at the open when the US traders come into battle.

Europe has been getting crushed lately, perhaps due to those Russian fears, but if the fears are irrational, which I believe them to be, this is a time to buy.  There will be volatility today, and there is no real solid support now till you get to SPX 1960 to 1965, 1980 was support but we're trading below that in pre market as the futures are getting whacked.  ES 1953 to 1958 are your absolute puke out levels to watch for today.

Treasuries are doing a October 15 rehash as the market volatility goes to a higher level.  Treasuries look toppy to me, and this could be the capitulation.

I am a buyer of stocks today.  It is buy and just hang on tight.  This roller coaster ride is almost coming to an end.

Closing in on a Bottom

Starting to see divergences between an S&P that keeps going lower and a VIX that is not making higher highs as we go lower.  Plus you have bonds finally selling off here, which means the fear bid is slowly dissipating and oil is getting closer to a short term bottom.  Even though it is irrational, lower oil has scared equity investors who fear some junk bond contagion coming from the oil sector.  But lower oil helps just about every other sector, although on a small scale, so net net, it is a positive, not a negative.  But the forces of liquidation can control short term price movements. Those in energy names are bleeding, and they are being forced to dump their shares as prices go lower.

I am constructive on ES around 1995, so if there is any intraday weakness today off this gap up, I will be looking to scoop up some equities on the dip.  IMO, worst case scenario, ES gets to 1975 to form a short term bottom, and bounce 3%.  Best case scenario, it bottoms on a dip today to 1995 and runs back to all time highs by beginning of January.

I do not want to be short here at all.  It is just be long, or wait for the right long entry.  Being short is out of the question for me.

Watch the VIX

The VIX was a clue yesterday that the market was not going to be able to sustain the rally.  VIX was not down that much even though the SPX was up over 1%.  Of course when SPX sold off, you had a monster volatility squeeze as those short VIX scrambled to cover.  It is pretty amazing to me that the VIX went over 20 yesterday even though we are only about 2.5% below all time highs.  It seems like there is very little risk tolerance at these moment in time, in front of the holiday season and end of year.  Those short VIX or too long equities are cutting back exposure before the liquidity dries out.

Right now, we are close to a buyable level, around 2020 on SPX, and I will start to nibble n the long side today.  I think today will look like a good buying opportunity when we look back in a week.

5 day Pullback

I underestimated the pullback and thought we would get a quick dip and rip higher, which did not happen.  Probably the biggest clue yesterday that we would close weak was the lack of volume on a down day by lunch time.  Usually on a down day, you want to see a lot of volume to clear out the weak hands and get the job done.  Low volume means you have to stretch out the pullback over more days.

After the quick one to two day dip, the next stage of pullback severity is the 5 day pullback, which is fairly standard after a big up move.  As I have mentioned in a previous blog post about pullback cycles, the 3 most common lengths of pullbacks are the 5 day, 13 day, and 22 day.  Since we are nearing Christmas and the slow trading season, a five day pullback seems most likely here, especially considering the lack of volatility previous to this down move.  The first dip is usually to be bought, and this is the first significant dip we've had since October.  The next dip will be trickier.

So that gives us today and Friday as the most likely window for any more equity market weakness.  After that, you start getting more positive seasonality as we approach December options expiration and then Christmas.  Most of those looking to lighten up before the Fed next week, Christmas and New Years are doing it this week.  I view this week and these price levels as a buying opportunity of course.  It doesn't mean that we can't go a little bit lower.  We could probably get down to around 2015 on this leg lower, or we could have made the lows yesterday.  Not totally sure, it is nitpicking price points, in either case, the upside from here is greater than the downside for the rest of the month.  Keeping the swing long.  Perhaps till we reach Christmas.

Greece, Crude Oil, and a Bit of China

The three worries for investors.  Greece is going to have snap elections and the fear is that Syriza, the left wing who are anti-euro bailout will win.  This tanked the Greek stock market 13% yesterday, and more today.  Do the Greek politicians trade Eurostoxx futures and options?  They sure do a good job of manipulating the market in the short term.  Long term, they will keep pumping bailouts to Greece, always have, always will.

Crude oil tanking worrying stock investors is puzzling.  The US is the biggest oil importer in the world.  The effects on oil producers is a drop in the bucket to the stimulus that lower oil provides the US economy.  A supply driven drop in oil prices is always a positive for the US stock market.  And lower oil will help to keep the Fed more dovish due to lower inflation expectations.

China dropped huge yesterday and rebounded big today.  The money is going from real estate to the stock market.  The Chinese are stuck with few good investing options.  They can't take their money overseas because of capital controls so they either have to go with Chinese stocks, Chinese real estate, bonds, or savings.  It seems like they are going for stocks in a frenzy lately, that is unrelated to any kind of real fundamentals.  The liquidity is overflowing there as well, so you can get huge moves in stocks.  So China dropping big is rarely a driver for US equities.  They have been dropping since 2010 and that hasn't done anything to deter a US equity bull market.

Staying long, the irrational fear of lower oil will soon pass.

Buying this Dip

We got China plunging after surging for the past several days, on tighter liquidity conditions.  The Chinese officials have no idea what to do.  They cut rates one day, and tighten liquidity by imposing stricter rules on loans.  I guess if the market is up, they will tighten.  If market is weak, they will ease.  This is on a day to day basis!  The central bankers are just stock jockeys now.  They are slaves to the market.  If the market is down, it's time to ease.  If the market enters bubble territory, talk it down but don't do anything (don't dare tighten) until the bubble gets out of control.

Anyway, this S&P is quite weak today, and Europe is weak as it usually is.  I have bought the dip in premarket, although a bit higher than current levels.  It is a swing trade.  The forces for stock prices are up.  You need much higher rates or another crisis/recession to bring this market down for good.  We have neither.  The Chinese have shown us their cards, and they are going to be leaning towards the easing camp.  The ECB QE is inevitable.  The Fed will be late raising rates, like they always are.   Positive for risk assets for the next 2 months, till we reach true bubble territory.

We are beyond the up thrust stage, so there will be short term down days mixed in with up days, it will no longer be 90% up days like before.  But the market environment is benign.  In these markets, you have to lean long.

Bonds look like they are reaching for a climax top here.  My view is for a higher stock market, under that scenario, bonds are likely lower and sustainably so for the next two months.  We have reached the near limits for Bunds to push Treasuries lower, and I doubt Treasuries have the inherent strength to go higher on its own with rising equities.  Bearish Treasuries here.

First Dip Always Bought

Monday was the first closing dip we had since October 22.  What I mean is that we've had a couple of intraday dips, but they ended up coming up by the close.  Well guess what, the first dip was voraciously bought, as we went straight up off the opening bell yesterday.  I don't see any catalysts to take this market lower, lower oil prices is not going to do it.  The anticipation of ECB QE will keep a bid under the European indices.  If you keep Europe under control, then really there is no boogie man out there except China, and they are on the monetary easing path with that surprise interest rate cut.  And more to come for sure.  So no negative global catalysts.  None.

So all the monetary spigots are open, and the Fed will not do anything to disrupt the party until we get a full blown bubble.  We have a long ways to go to get that full blown bubble.

You need to see interest rates going higher in order to even get a small hint that the rally is in the late innings.  Rates are not going higher yet.  So rally still has much more to go.  Same old, same old.  Game plan is to look to short crude oil between $69 and $70, and buy any 1% dips in S&P.    On bonds, just play the 10 yr range, from 2.20% to 2.40% for the rest of the year.  In the middle right now, so wait for 2.38-2.40 area to get long bonds, or wait for 2.20 to get short bonds.

It's the Crude Oil Show

Crude oil is in the news, everywhere, all the time.  The market is now obsessed with crude oil and how it will affect everything from other commodities, to stocks and bonds and currencies.  This is not a demand driven selloff, but a slow building up of excess supply with a strengthening dollar pushing prices lower.  The stronger dollar was the catalyst for a market that was vulnerable to the downside because of the strong oil production coming out of US shale oil plays.

I have never seen a supply driven drop in crude oil prices leading to long term weakness in the stock market.  The US is a net importer of crude oil, lower crude oil prices is a net benefit to the US economy.  If this drop was demand related, it would be something I would be more concerned about for stocks, but it is not.  The lower oil prices will act like a mini stimulus for consumers and it also helps to keep bond yields lower, both benefits to the stock market.  Whatever negative you get from the energy sector is vastly outweighed by the benefits elsewhere.

Watching crude oil, it doesn't look like it is ready to bottom yet.  Crude oil is not like the S&P, it is more like gold, it usually doesn't V bottom.  You will be stuck at this lower range in crude oil, between $60 and $70, for at least another few weeks.  I am much more comfortable selling short than getting long crude oil.  Only extreme dips in crude oil are buyable.  But a few dollar bounce is a raging shorting opportunity.  A bounce to $69 this week would be a good short entry point.

As for stocks, I would be buying dips here, this is a buyable dip because it is based on collateral effects of lower crude oil hurting energy and creating some instability, but it will pass quickly like most dips do.

Crude Oil Panic

This is turning into an all out panic in crude oil.  As I write, WTI  is trading at 66.30, down $10 on the week.  Brent crude is nearing $70/barrel.  There is all out liquidation among longs right here in front of the weekend.  It is a Black Friday for crude oil longs.
I was tempted to do a dip buy today but I held off because I was already underwater in my short bond position.  I will hold the short bond position, and perhaps look to buy crude oil on a further selloff early next week.  But I have a feeling we will have a gap up after the all out dump that just took place at the pit close in the NYMEX crude oil futures.  Despite that, I am not willing to take a long position here just because of the potential for even more liquidation come Monday if we break $70 for good on Brent crude oil.

We may get a tradeable bounce in crude oil near these levels but I would only look for a $3-4 bounce.  There is too much overhead now above $70 for it to breakthrough meaningfully.

Treasury Market Euphoria

The current time period is about as close as you get to euphoria in the Treasury market.  You had stocks flat to slightly higher, yet Treasuries soared, especially the long bond.  You get bond bulls most bullish when bonds go up despite new all time highs in S&P.  This coinciding with month-end, ahead of the Thanksgiving holiday, and with the Treasury futures roll is adding to one perfect storm that is squeezing bond shorts and getting longs excited.

The bond market move yesterday and today looks exhaustive and there seemed to be a fair amount of capitulation after a very strong 5 year Treasury auction.  I will be looking to put on a short position in the long bond, looking for a move lower over the next two weeks.  The seasonally strong period for bonds is now over, and we are entering a historically weaker period for bonds, and a strong period for stocks.  I am sure the chartists will say we have a bullish breakout in the TLT, or the long bond, but I will take the other side.  The bond market is like a super tanker, it turns slowly, and reacts slowly to equities.  Believe me, if equities keep going higher, as I think they will, bonds will not be able to continue to rally.  The European sovereign bonds have massively outperformed Treasuries since the October 15 capitulation.  Believe it or not, Treasuries have been lagging almost all the global bond markets.

Stocks still have a long ways to go higher.  Europe is just now joining in the equity party, and when the Europeans start partying, that is when you get the blowoff move higher.  I would be long stocks, short bonds from now till the first week of January.

Seasonally Strong

We are now entering the heart of the seasonally strongest period for stocks, from Thanksgiving week to the first week of January.  With all the central bank goodies thrown at this market, I cannot fathom anything upsetting this bull run.  If there is something bad that happens, the dip buyers will be there to make sure the dip doesn't last for more than a couple of days.

Yet I cannot get myself to get long after such a huge run higher, and with all the good news out.  Even the massive amount of secondaries and IPOs on the calendar failed to put a dent into this market.  We had to get overextended on Tuesday to even get a slight dip the following day.  I thought the equity supply would at least slow down this train, but it hasn't.  Perhaps post opex hangover will do something, but I wouldn't hold my breath for a dip.  We probably just go sideways to work off the overbought charts and then grind higher again.  Expecting a strong week for stocks and Treasuries, as Treasuries usually are strong going into month end, especially on a holiday week.

China Rate Cut, Draghi Dove Talk

We got a double whammy today.  It is another feel good Friday with central banks on center stage.  This time its the ECB and PBOC.  These bankers must feel like superstars, able to leap tall buildings in a single bound.  China is now joining the act, which was a matter of when, not if.  You know these central bankers have only one switch.  The on switch.  The off switch doesn't exist unless you have gigantic bubbles.  Big bubbles are left alone.  You need historic bubbles to get these central bankers to act.

Of course you have the ES on fire again, and now Europe is joining the act, which finally happened.  Draghi will lengthen the US equity bubble by a few months all by himself.  This is the blowoff stage.  You are in the middle of it.  No where even close to the end.  You still have bonds acting strong, you need them to weaken in order for you to have even a hint of a top.  There is absolutely no hint of a top yet.  We are still on full blast bull mode.  This bubble will be epic, with China joining the war front against bears.  Get long, or stand aside.

Don't Fight It

For those of you who have the contrarian tendencies and want to short this stock market.  Just stop.  You are fighting an uphill battle.  There are times when you have to step aside from certain sides of the trade.  When you have a V bottom, and persistent strength, it usually doesn't go away for quite a while.  It is a psychological thing.  After the V bottom, you scare out the weak hands and those who want to add exposure wait till they get the all clear sign.  What is that all clear sign?  The market volatility going lower and time.  Time makes the skittishness go away.

We got a blastoff yesterday off a bunch of narrow range days.  It is bullish.  You have quite a bit of equity supply coming in the later part of the week, so I don't expect follow through, but at the same time, I don't expect this market to pullback much at all. You will be lucky to get a one percent pullback, and that will be eaten up quickly by ravenous dip buyers and underinvested fund managers, that have been waiting for a bite of equity for about a month now.

The FOMC minutes should be a non-event, I don't expect much either dovish or hawkish, but Treasuries seem vulnerable to further selloffs here as equities remain resilient and we have run a long way from the beginning of the year.  Also I have noticed Treasuries performance lagging even UK Gilts, not to mention obviously German Bunds since the October 15 top in bond prices.  There is a growing divergence of monetary policy that should drag European rates higher, especially now that Draghi is getting louder about full blown QE to save the European economy.

No Movement

This is about as bullish a price action as you can get after a monster V bottom.  Very little volatility as we grind higher, I still see those that can't believe why we go up every day or don't pullback.  This is not your old fashioned market.  The liquidity is overflowing and you don't get pullbacks in those liquidity driven rallies until you hit the top, wiggle around, and then plunge.  It doesn't feel natural, but these are the new rules of the game.  We will keep going higher and higher until we reach nosebleed territory, and then suck in the dip buyers with a few little 1% dips at the top, and then we go down in earnest.

Amazed to see that the VIX futures is still trading at 14.35 with this little volatility.  We are back to the 0.4% daily range.  It is either balls to the wall volatility, or nothing.  We are in the nothing phase, and it should last till year end.

Treasury market looks deadly, every rally is being sold, had a big gap up in the works due to weak Japan GDP but it was straight downhill from Asian trading hours.  Everyone is looking to lighten up ahead of expected hawkish FOMC minutes.

On Treasuries and the Superman S&P

It has been a quiet week in the markets, but there are a couple of things that I have taken away from this week's trading.  The first thing is that the Treasury market is much weaker than I thought, and that many are actually now made a 180 degree turn from the beginning of the year when many were looking for higher rates.  I see more people now confident that rates will remain low.  That despite the furious rise in interest rates from the October 15 bottom.  I have been wrong on Treasuries and taken a hit but I don't believe being long Treasuries for more than just a short term trade is a good bet.  Seasonally the Treasury market gets weaker from the beginning of December till the next spring.

As for the S&P, it remains resilient and it seems like many are dumbfounded at its persistent strength.  It is a recurring pattern of stubborn strength for several weeks after a V bottom.  Now we are in the beginning of the seasonally strongest period for stocks, especially on an up year, and with expected strong holiday retail season, there will be a lot more bullishness building up into Christmas as we grind higher.  Even Greece worries in the EU and a weakening Eurostoxx hardly put a dent into the S&P freight train.  We are headed higher, and I do expect a break of 2100 by the end of the year.

Finally, I do see crude oil close to the bottom, price-wise, but from a time perspective, I don't expect much of a rally till we get to January.

Back to the Bore

VIX with a 14 handle, little intraday vol, welcome back to the Bore.  The 0.4% intraday range, the slow grind higher, the talk about TINA, overrating the economy because stocks are higher, etc.  It is repetitive, and all too predictable.  This is about as good a time for a stock market vacation as any during a non-holiday.

I will be on a semi-vacation, that is I will be watching the market but my mind will be elsewhere.  I don't have the energy to try to pick up dimes in front of a crawling bulldozer.   Don't expect anything exciting, just a steady grind higher as the vol gets lower and lower.  I'm sure we'll get a pullback eventually, but I definitely won't be looking for one.  Waiting for a pullback in this market after a V bottom is like waiting for Godot.  

Relentless Buying

I look at other equity markets, including Europe, China, Japan, etc.  And none of them have the lift or the sustainable buying of the S&P.  Even yesterday, with Draghi hinting about more bazookas down the road, the European market couldn't sustain a rally, but as soon as Europe closed, the S&P hit another gear and just grinded higher and higher.  And of course overnight, you get the drift higher on no volume, regardless of how world markets do.  Divergence between US and European equities just grows and grows.

Today we got an in forecast nonfarm payrolls number and the reaction is muted, both in Treasuries and in stocks.  Expecting another boring grind higher up day, what's new.  You can't fight the money flows, they are all going to one place:  US equities.

Another Good News Gap Up and Fade

That is two in a row.  Good news in the form of Republican takeover of the Senate, in the midterm elections, after the BOJ QE Blast from the Past on Friday.  Gap up, and crap down in the morning.  Seems like we've saturated the fast money buy drive into the S&P, and we'll need to settle down and trade sideways for a couple of weeks.

These good news events are quickly changing investor sentiment from bearish to neutral to very bullish.  Usually you need a fair amount of time to change investor sentiment, but the lessons from the past 2 years is those that wait to feel comfortable have been buying near short term tops, not in the middle of the move.  So everyone knows the game plan now.  After the V bottom, buy before the other fool does, and sell it to him a few weeks later when he feels comfortable buying.

So you are getting these rapid changes in investor sentiment and positioning happening over 2 weeks instead of 4 weeks.  That makes it trickier planning the future market direction.  It makes past historical price action less useful as a guide for future moves.   It is almost like we are on overdrive, moving in one week what normally would take two weeks to happen.  I don't know if that means we reach a top sooner, or if we chop away in a range near the top for longer than usual.  Either case, the top for this bull run is on the clock.  I give this market 6 months, at the most, of further upside, and there will be hell to pay for TINA and other viral, but misconceived notions out there, on the other side of the hill.  There is no growth to back it up.  It is just all the equity allocations worldwide going towards US equities, because they are the most loved and trusted.  This can go on for a while, but you will reach a breaking point when investors finally realize that it is risky to pay such high prices for equities when there is no global growth.

Ok, that being said, I expect the S&P to keep grinding higher for the next 3 months, LOL.  My short-term view and long-term view are not the same.  But I will not play the S&P bubble on the long side, except for very short term trades, even though I expect it to go higher.  And I have given up on the short side ages ago.

New All Time Highs

Yesterday we hit new all time closing highs in the S&P 500.  This after falling nearly 10 percent less than 3 weeks ago.  I don't think that has ever happened in the history of the stock market.  We are living in unprecedented times.  The liquidity is overflowing.  There is literally too much money out there sloshing around.  That is the only way you drop 10%, and go up 10% to new all time highs in less than 3 weeks.  

Excessive liquidity has a way of exacerbating moves on the upside and the downside, but mostly on the upside.  Because that money has to go somewhere.  Either stocks, bonds, commodities, or real estate.  Yes, it can go to cash, but with ZIRP, money will flow to one of those 4 asset classes.  

Now that we are at all time highs, the bloggers are backing to being very bullish, after being very bearish in October.  Same old, same old.  I don't believe that just because they are back to bullish, we are going to go back down.  However, it does mean that the upside is fairly limited for the next few weeks.  After that, we can probably keep going higher because TINA.  There is no alternative.  Until of course the market cracks, and then there is an alternative, which has been ignored: cash, or cash equivalents, i.e., short term bonds.  

Short term, it will be fairly quiet, so not much to say.  The lower the volatility, the less there is to discuss.  I am down a fair amount on my Treasury position, but it is a medium term holding.  Looking to hold for most of November.  Not much to do in the equity space right now.  I missed the move, unfortunately, and I see little opportunity there at the moment.

BOJ Yen Printing on Overdrive

If 50 trillion yen isn't enough, then try 80 trillion yen.  And triple those ETF buys.  The BOJ has gotten backed into a corner, Abe and the BOJ have taken a page out of the Fed playbook and resorted to manipulation of their asset markets and currency to prosperity.  It will work, if your vision of prosperity are higher stocks and higher bonds, with a weaker currency.  If your vision of prosperity is actual increase in the quality of life for the average citizen, then it is a massive fail.

While this is great for the Nikkei, I don't see much benefit to massive BOJ printing except for those short the yen.  The market is at a point where you have shorts under extreme duress and any bit of supposedly good news brings out a lot of short covering.  This is a lot of short covering driving this gap up.  I don't believe it is much new long buying here.  With short covering, usually it happens before the market opens, and once the opening bell rings, you get the cash guys coming into take profits on this kind of news.  I am short the S&P here in the pre-market.  Looking for a selloff in the morning.

Post FOMC Selloff

We are getting the FOMC hangover selloff thanks to renewed worries in Europe, as Greek bond yields shoot up and Italian banks are getting sold heavily.  Everything is fine in the US, of course, it is just those PIIGS in Europe that are getting in the way.

It is amazing to see this US and European equity divergence just get bigger and bigger.  It is almost as if all the money devoted to equities is being hoarded into the S&P, at the expense of every other equity index in the world.  Eventually you would expect the US equities to get dragged down by the weakness abroad, but it isn't happening, except for a day here, a day there.

And Draghi's promises and actions still haven't satisfied the European investors.  Otherwise, you wouldn't be getting these big selloffs in Europe out of the blue, something you rarely see in the S&P.

S&P has nearly doubled in 5 years while the Eurostoxx 50 is up less than 10% over that time period.  It truly is remarkable how much the divergence is.  And most of the emerging markets are just as drastic a divergence.  It is the S&P 500 standing alone at the top, with very few able to follow.

The Fed surprised with the hawkish statement, and I was definitely surprised that they didn't mention any of the global growth weakness, but I guess they felt like S&P 500 had rallied enough and there was no need to use up bullets when S&P is almost at 2000.  I am only half kidding.  I would expect any selloff to be well supported around 1947 ES, or 1952 S&P.  Next week should be bullish for the market until at least Thursday.

Stronger than All Expectations

The S&P has done it again.  It has just made a mockery of any resistance levels and the rocket fueled rally continues.  You figure that the market would take a rest after such an explosive rally over the past few days, and it doesn't.  It just keeps powering higher.  Now the next hurdle is the July highs at SPX 1990 set before we took a sharp dip in August.  But that is only a few points away, so not much more to go.  And then the psychological 2000 barrier again.  Beyond that, it is new all time highs.

With the favorable seasonal factors and especially the strength of this V bounce, I would lean towards another break of the all time highs before the end of the year.  With lower oil prices and the stronger dollar, the consumer should be pumped up for Christmas, and that should help fuel the end of year rally.

It is definitely frustrating time for bears, and not easy to make money unless you are a bull in this market, except for the very brief moments of selling that don't last more than a couple weeks anyway.

With the FOMC meeting upon us, I do believe we have finally reached a level that will pause this market for a few days.  Plus, the market is way overbought short term, and will have trouble blasting through more resistance levels without a pause.  But you can never say never to this bull market.  It has made skeptics look like idiots over and over again.

1970 Resistance

There is a fair amount of resistance at the SPX 1970 level, where we rallied to and failed in early October.  It is a good risk reward to take a short term short at those levels, shorting the Eurostoxx as a proxy for shorting the S&P.  I would be loathe to outright short the S&P, because there are other markets that fall much more during weakness.  Or better yet, just go long Treasuries.  I am still long Treasuries from higher levels but with my view on the current equity market, I will hold on to them until we get to lower levels on S&P, around 1920.

With the eagerness to buy dips by the investor community, you have front run a lot of the snapback rally from the dip.  For the next few days, with the FOMC coming up, it could set up a disappointment if QE is not extended, even though QE ending is consensus.  Hopefully the Ebola excuses for selloffs will dissipate and we can focus on real reasons for strength and weakness.  Mass hysteria knows no bounds, as everyone seems to be like cattle fed GMO corn, but this time, it is news force fed to induce fear or relief that Ebola is not a crisis.

Anyway, short term bearish on the market for the next few days.

Another V Bottom

The market continues its past V bottom tendencies.  This is quite the rip higher over a week.  We've gone up 140 S&P points from bottom to top over 6 trading sessions.   That is 7%.  Market continues to confound bears, including me, with its relentless bounces off oversold conditions.  We've gone through most of the resistance barriers, such as SPX 1880, 1905, and 1935.  Now the next area of resistance is 1960 to 1970, which is an extremely strong area of resistance, as that is where we last rallied on the Fed dovish minutes before starting to plummet.

One thing that is different about this V bottom was that many retail traders were actually bullish while buying this dip, which is a bit unusual.  Usually retail gets scared by these dips, but they've seen these V bottoms so many times that they felt like this was going to be just another one.  And they were right.  To me, retail feeling confident buying dips is a warning sign that the market is complacent.  The AAII sentiment numbers were quite bullish for this week, which syncs with the anecdotal evidence I see among investors.  I know that sounds crazy when you see the VIX spike to over 30, but it was hedge funds that were caught off guard and reducing risk all at the same time that caused that, not a general sense of panic and fear.

The FOMC meeting is next Wednesday, and the market should be well protected from any meaningful downside till then.  It is rare to see the market fall apart right before a FOMC meeting where Yellen is expected to be dovish because the S&P went down.  Yes, I am being serious.  The Fed are stock jockeys, and take their biggest economic cues from the stock market.

Probably grind higher into SPX 1960-1970 area by the time FOMC Wednesday comes around.  Any minor downdrafts on Ebola news is a buying opportunity.

Blog Break

Last week was exhausting, and I expect muted volatility over the next few days.  I am long Treasuries for a swing trade.  Be back later in the week.

Big Gap Ups and Gap Downs

Looking at past historical data for S&P futures, the times when you have two straight gap downs of over 1% followed by a gap up of over 1%, you see a list of time periods populated by bear markets.  In particular, many of these instances occurred in 2008, 2009, and 2011.  This market has totally changed regimes from a benign aging bull market to a market entering a transition from up market to down market.  This is no ordinary pullback, like you had in 2012, 2013, and earlier this year.  I don't remember any of those corrections with this kind of intraday volatility.  The VIX proves that point, as we haven't seen these kind of VIX readings since 2011.  We never got over a 22 on the VIX since the beginning of 2013.  Even during the taper tantrum in June 2013, VIX could only get up to a 22, and that was a spike reading.  We spiked above 30 on the VIX this time around.

Something is quite different about this pullback.  I was shocked to find out that the AAII sentiment readings showed more bulls than last week even though the market has plummeted over that time period.  It seems retail investors view this as a buying opportunity.  I keep seeing that in the Twitter streams.  The market has done its job of fooling the majority most of the time.  It went much higher than anyone expected, and kept teasing bears with quick pullbacks, which only led to quick rebounds.  US equities have gotten so high that even a dip of 8 percent leaves the market overvalued, but looking like a bargain to the retail investor.

How is it that when the market first reached 1880, it was considered overextended earlier this year, but now that the market went over 2000, and pulled back to 1880, it is considered a bargain.  Over those 6 months, there has been no earnings growth.

This market feels like a 2007 and 2011 mixed together.  2007 in that it is an overvalued aging bull market that is several years old.  2011 in that we're seeing a huge drop in bond yields along with the end of QE.  I have a hard time picturing this pullback resolving itself by going straight up in V like fashion like you saw in 2013 and earlier this year.  I see more of a mild version of a 2011 scenario, where you get choppy trading in a range, for several weeks.

The basic game plan is to sell the rips for the rest of the month.  Range should be around SPX 1800 to 1890.  We are getting close to the top of the range here.  We may have a bit more upside but I wouldn't try to play long for those last 10 points.

Market Waits for No One

There goes my 2015 playbook.  The bond bus has left the station.  I had it all mapped out in my head.  We were going to get one last final blowoff top in US stocks and it would be the most exquisite opportunity to get long bonds and short stocks since 2007.  Well, that didn't quite pan out.  What I was thinking was an early 2015 story has been pushed forward into now.  There is no turning back.  The genie is out of the bottle.

The charade of higher prices begetting higher prices, performance chasing, TINA, and desperate corporations trying to pump up their stock to maintain earnings growth is over.  I hear the usual explanations about there being an absence of enthusiasm at the top last month, and in July, about people hating this stock market.  Well, I was there in 2007, there wasn't a lot of enthusiasm for stocks as we were hitting the top in the early summer.  In fact, back then, everyone was into housing, not the stock market.   It doesn't require enthusiasm like a 1929 or 2000 to get a big bear market.  We got one in 2007-2008 without enthusiasm at the top.

I've learned a few lessons in my time trading.  One of the most important ones is that you can't predict both timing and price for entry, so you better choose one or the other.  I used to believe that price was everything, that if you get in at a good price, it covers for a lot of bad timing and some near term drawdowns.  I've changed my view on that, because holding through a near term drawdown wears down the psyche, which can cause bad trading.  Now I am more flexible in terms of exchanging a better price entry for a higher degree of certainty of a move happening within a shorter term time frame.

It is in that view that I believe that this bond rally will have serious legs over the next few months.  I can imagine a 1.40% 10 year yield in 2015, or perhaps even lower.  The reason I have such a high degree of conviction on this play is because we've already been to those levels before, when the recovery was less mature, and we were still in an upward trajectory.  Now when you are facing a potential recession, near the end of an economic recovery, you can get explosive moves lower in yields, something like you are seeing with the German Bund, where 10 year yields are at 0.77%.  This is because the central banks are willing to take drastic measures to support the economy, and their best way to do that is to buy bonds and lower yields.  QE4 is not so far away.  ZIRP forever.

The flash crash up in bond prices yesterday was historic.  Too many historic moves are happening over the past few years.  We had a flash crash down in stocks just 4 years.  We've had various flash crash type moves in gold and copper in the past couple of years.  The algos are relentless, and it exacerbates volatility, but usually towards the pain trade side, the side where most speculators get killed.  That is obviously an up move in bonds.

I missed much of the move lower in yields this year, in the 2nd half, although I nailed a big portion in the spring time.  I kept thinking that bond holders would panic as we got into 2015, thinking a rate hike was imminent.  I was completely wrong on that.  However, if there is money to be made, I will make the trade, even if its not at the best possible price I could have entered at.  That trade is to get long Treasuries.

The stock market is topped out, but I will still try to play for bounces, because other people are.  That means they will be willing to buy for a trade, but not for an investment.  Which leads to short 1 day bounces that can't even last into the next morning, like you have from yesterday to today.  Those looking for those common V shaped 10 days straight up rallies will be disappointed.

It is a different market now, one where bonds are now getting respect, since they've been the Rodney Dangerfield of the financial community for over a year now.  Stocks are not a STFR, not yet, but bonds are definitely a BTFD, without a doubt.  BTFD has left the building.  The NYSE building.  It has moved over to the Treasury pits.

Looking for reflexive buying in the morning on the big gap down near strong support levels, around the April lows.  After that, we may get a weak 2nd half of the day, as opex forces kick in on lower prices.

V Bottom?

So now we got the monster V bottom intraday today, is it the all clear to get long and strong for the move back to all time highs?  As I have mentioned earlier, this Ebola scare is a big time red herring, making those contrarians feel comfortable buying here because of course, market shouldn't be down so big on such news.

But what is making me cautious is that we went down in a straight line 150 SPX points in a week, if you count the intraday high after the Fed minutes last Wednesday at ES 1964, and the low intraday today at ES 1813.  And really there was no significant reason for it.  I heard global growth scare, bad European data, end of QE, and Ebola.  But perhaps most concerning is that with high yield bonds acting very weak this month, and corporate yield spreads rising, the borrow to spend on stock buyback plans will be more difficult and expensive to execute.  That has been a lynch pin for this stock market rally.

And really, the Fed is on the sideline here for a while, because they look like complete market slaves if they suddenly panic and restart QE because the stock market is going down.  So no emergency Fed plans until things get even worse.  And this market has been reliant on the Fed to bail it out for every stock market swoon since Greenspan panic lowered interest rates in October 1998.

BTW, in the post cash close trading in futures, ES went down 11 points in 15 minutes, and VIX futures went up from 21.8 to 23.9 in the same 15 minutes, from 4:00 PM ET to 4:15 PM ET.  That is an insane move, and not a sign of a bottom.  We are on day 18 of the pullback.  Remember, many of these long pullbacks last 22 trading days, or about 1 full month of trading.  We still have another few days to go.

Ebola Fears

This is now turning into an Ebola selloff.  The fear of uncertainty over Ebola and how it is expanding, although only 2 people infected so far, is driving the selling.  It is a bit irrational, but when the selling avalanche arrives, it rolls on until all the sell stops are hit, panic sellers taken out, and we reach a level where buyers are willing to step in for value.
We are getting very close to that value buyer stepping in, as the market is coming up on SPX 1850 support.  Yesterday, even as the market was rallying, it felt more like eager bottom pickers stepping in rather than motivated buyers will to take long term positions.  Thus, you have the daily afternoon selloff which spoiled the bottom pickers' plans.  After the carnage over the past few days, a gap down on Ebola fears is a gap down to buy.  You have the Ebola theme stocks, LAKE, APT, etc. gapping up on the Ebola news.

It is a big red herring, but it is convenient for the headlines to blame the selling on Ebola.  But the real factors are options expiration related, as the delta hedgers, and the short put crowd have to scramble to reduce risk and sell futures to hedge.  That makes it difficult for a sustained rally this week, due to opex.  Once we get past Friday, you will see a market that is no longer burdened by put sellers capitulating and we should embark on a healthy rebound.  Until then, sell the rallies, and only buy big dips.  Sell ES 1880, buy ES 1860 for the day.

Bloodsport

This market is drawing blood.  You are not getting the little moves that were painless before.  Now you are taking out big chunks in a matter of an hour.  These aren't paper cuts.  They are shotgun wounds to the leg, forearm, and if we break 1850, to the heart.  Yesterday, we dropped 20 points in a hour.  Same thing happened on Friday.  You are taking out some aggressive longs in the process.  This is turning into a different beast.  It must be respected.  For the next few days, it will not be your good old BTFD market.  It will be a hyper version of a STFR market, with bounces dying out quickly.

After looking at the price action, reading the news, feeling the market, we need more downside action before we can get a sustained bounce.  The selling is so sustained and pernicious that you have to wonder how this could happen just because of Ebola.  Of course, that is a red herring.  A market that goes down on no significant news is a market that is very weak.

I am not calling for an end to the bull market.  I don't believe QE has as much of an effect on the stock market anymore.  It is a convenient excuse for the hard to explain strength of the market since 2009.  When you take out supply like corporations have done for the last several years, with M&A thrown in, you have a shortage of stocks relative to the demand.

But this pullback cycle looks like a 22 day whopper, not the 13 day one that is more common.  You don't get 3 cascade down days without some serious motivated sellers.  A bit panicky, but there is a lot behind this down move.  We are on day 17 of the pullback, so I expect this to be over in a week.  However, during the next few days, with options expiration and the delta hedging selling forces at work as the market heads lower, you can get a move down to monster support at SPX 1850.  That is just gigantic support that the bulls will fight to the death to hold.  I expect it to.

I sold ES on the pop in premarket, looking to get back in lower.  Need to microtrade this beast to stay alive on the long side.  Once we get to close to ES 1850, no more microtrading, I will be playing long for keeps and looking for the big move back higher.

Liquidation

That was a complete wipe out in the final hour.  Back to back to back panic days in the closing hour.  You don't see that too often.  It is now turning into risk management mode for the funds, and with the increased volatility, they are reducing long positions.  That is how you get these tidal waves of selling.  We are very close to what I view as extremely strong support in SPX 1855-1860 area, which is around ES 1850-1855.  There is not much downside left unless we have an outright stock market crash.  Reduced some of the long position in ES to manage risk, but still long.

Ebola Crisis

Is an Ebola outbreak taking down this stock market?  If you read the news headlines, you would think that Ebola is taking down the stock market.  Well, Europe had other ideas, as we rallied huge off the European open to current levels in the futures.  In the overnight session, you had true panic and fear as hedgers and those long took down exposure, hedged, or just shorted into the hole hoping not to lose more money.  Often times the scariest moments occur in the overnight session, when there is limited liquidity, and futures are falling through the floor.

I am still long ES, and will hold it into at least Tuesday.  The strong recover in Europe, and the panicky Ebola headlines makes me feel like we put in a short term bottom overnight.  However, I don't think we are out of the woods.  We should have one last liquidation sale later in the week.

Scary

This is turning scary.  The market feels like it has no bottom.  The VIX is shooting through the roof, blasting through 20 with ease, closing at 21.24.  That is the highest VIX close since February 3, when we closed at 21.44.  That happened to be the bottom of that selloff.  In 2013, we got as high as 21.91 on the VIX during the taper tantrum.

I have a long ES position, underwater.  Today's action feels capitulatory, but we'll have to see how traders react to these levels on Monday.  Around SPX 1900, we are near the August lows, so there will be some natural dip buyers in that area.  We also have strong support in the SPX 1880-1890 area.

After the cash close, we got a further dump in the S&P futures, which strongly indicates panic hedging into the weekend after a nasty down day.  Close to a bottom, but I may be off by 20 points.  Definitely not a time to get too aggressive, either long or short.

Europe Weakness

Europe is spoiling the Fed party.  Just as Janet Yellen is refilling the punch bowl, Draghi is MIA as Europe goes into recession.  Yesterday was a massive move on a dovish Fed.  I cannot say its a game changer, because I expected that from this Fed, and it didn't surprise me, but so many were leaning in one direction, the slightest bit of good news was like rocket fuel, squeezing the shorts and causing underinvested fund managers to add long exposure.  

This morning, we are greeted with a massive selloff from the open in Europe, as all the Fed minutes gains for the Eurostoxx has been erased, and then some.  I am still a believer in this bull market, but how much we bounce will depend on how we trade over the next few days.  If we can keep going up despite Europe, that bodes well for the remainder of the year.  If we struggle to blast through SPX 1970-1980, that will be a worrisome sign.

Will Get Long

The market is offering another buy the dip opportunity, which I somewhat expected but wasn't sure it would come.  Look at these price levels as a gift to get long US equities.  I am extremely bullish at these levels, and will look to get long ES between 1925 and 1928, near the lows of the overnight session.

We are on day 13 of the selloff, that began on Monday September 22.  For those that remember, I wrote a piece about pullback cycles, where I found that 13 days is a common length for many pullbacks.  There is a full moon and lunar eclipse.  The bears are growling.  The BTFD moment is here.  Ignore the doubters, they have been wrong for 5 years, and counting.  When they change their tune, and become BTFD specialists, I will worry.  We are definitely not there yet.  We keep getting these minor pullbacks, that last 2 or so weeks, and the bears come out of the woods and try to scare everyone out of their stocks.

Looking for a possible V bottom today as we get a little panicky trade ahead of the FOMC minutes, where I will look to scoop up stocks.

Almost Time for BTFD

We are getting to a strong support area around ES 1933, which is SPX 1940.  We could have one last flush out to the lows that we saw last week around ES 1920.  But either way, we are very late in the selloff and we can liftoff higher any day now.  So you have to get ready to BTFD when the opportunity presents itself.

There were some fairly scary headlines from Europe, with German Industrial Production plunging, much of it was likely due to Russia.  The European stock indices got slaughtered, and that index is also nearing very strong support areas from the summer.

I am waiting for one last push lower, hopefully to time it better than the last dip buy, which was profitable, but I got in too early and had to take some heat on the trade.

By the end of the week, the storm should be over and we should be back to our normally scheduled programming of slow grind higher with low volatility.

S&P Foils Doubters Again

S&P 500 is the most bullish market in the world.  You cannot underestimate the strength of this index.  It is the UPOD of the financial markets.  Underpromise, Overdeliver.  That is why I went long ES last week, and even with a bad long entry last week, in just a few days, the position is well in the green, and I closed it out this morning.

It is almost like a video recorder, this market.  You can replay February, April, August, and now October and you pretty much get the same show.  The market dips, people get fearful thinking we've broken important technical levels, only to see the market do a V bottom and leave behind the doubters in the dust.

Last week was the Ebola bottom, and it amazes me how those in the financial markets get into a frenzy repeatedly over meaningless news.  In fact, I was glad to see those Ebola headlines, because I knew the selling was irrational.  Also anytime you have paper napkins chartists on CNBC espouse about broken technical levels, you know a bottom is almost at hand.

I am begging for a pullback now that I have sold, hoping to buy again, around ES 1935, and if I have the good fortune of being given that opportunity, I plan on riding it to ES 1992.

Scary Moment

Yesterday, for the first time in quite a while, I had flashes of that last scary moment.  Yes, the flash crash.  It was a day I remember vividly, because I was long ES as the market was plunging the depths.  I took a hit that day, and that experience was seered into my brain.  Yesterday, in the middle of the day, after a weak day previously, it was normal to expect some chop and a bounce, but we got a chop and a plunge.  It was quite the vicious plunge because we went down about 10 straight points on ES within a few minutes.

I am sure there were a bunch of stop orders set off and risk management departments reducing risk exposure.  Oddly enough, the VIX didn't spike much.  In fact, the VIX has actually been lagging the last two days.  Previously it was acting quite strong, now, its acting quite weak relative to the S&P movements.  It does tell me that those who want put protection have mostly bought it, and aren't willing to pay up much for it any longer.  As I stated before, volatility has been overpriced for quite some time, and only recently has it actually paid off.

Nonfarm payrolls should be a non-issue, it hasn't really mattered for stocks for the past year or so.  ECB did what I expected of them, yet for some reason, a bunch of hopeful longs in Europe thought they would launch full blown QE.  That is not going to happen for a while.

We got the V bottom flush out that I was looking for, unfortunately it was a day later than expected.  However, the long side seems to always be forgiving to dip buyers.  I am waiting for higher prices to unload my long inventory, perhaps on Monday.

Middle of the Storm

You cannot expect to get the perfect entry.  There will be times when you have to accept that there will be some heat taken on the trade if the timing is a bit off.  But with the long side, even if you are a bit early, it is much more forgiving for those that can take a small drawdown.

This bull market has been marked by its resilience, and the skepticism that it draws.  I have never seen a more hated bull market.  It doesn't mean we won't go down, but it tells me that stocks are in the hands of strong believers, and we've shaken out the weak hands over the past 2 weeks.

The bears are out in droves as we broke the 100 day moving average.  All of a sudden, everyone is a technician.  And of course there is the Ebola crisis, just for the extra kick of fear.  Everyone wants to buy the dip until it arrives.  The dip is here.

In Too Early

Well, I was a bit of an eager beaver there buying in the 1953-1955 area on ES.  Definitely taking heat on the position but like the risk/reward at these levels.  Like even more the bearish sentiment that I am hearing on CNBC, with Ebola crisis and all.  Could face a bit of turbulence for the next few days, for those in cash, I would use the volatility to find entry points to get long on those dips.  The blue light special shouldn't last for more than a few days.

Long ES

Got long a bit early this morning on the ES, buying in the 1953-1955 area, but overall, feel like a good enough entry point to weather any further storms before the move back higher.  Noticed the VIX is acting fairly weak for such a move down this morning, looks like capitulation in the Treasury market, with a huge short squeeze higher.

We may get a couple more tests of ES 1945-1950 area, and a bit more volatility, but the key will be to just hang on until the storm passes.

Ebola Bottom?

The bears are throwing everything they can at this market.  They brought out another card yesterday, the Ebola card.  I thought I had seen every odd reason to sell, but now the latest scare is Ebola in the US.  It helped to drop the futures overnight after the US cash close.  The market has been quite resilient, but the bounces are getting weaker, and we are hanging around closer to strong support at SPX 1960.

One of the relative indicators I like to see is how VIX is performing relatively to the S&P.  If the VIX doesn't drop much while the S&P bounces, it tells you there is still demand for protection and people are still adding hedges.  That tells me we still have more selling pressure to come, because until the put buyers go away, we aren't going to see a big bounce.

Today is the first day of the month, which usually brings in some automatic stock allocation money coming in during the day.  Once this buying is satiated, I expect continuation of the downtrend.  We may break 1960 marginally, but that will be a good risk/reward buy area.

One More Push Lower

There were quite a few aggressive dip buying and short covering Friday afternoon.  Short sellers are once bitten twice shy.  They have been run over so many times, and dip buyers have been rewarded buying down days so many times, that you thought the V bottom had started again.  No way.  The gap down out of the blue (don't blame Hong Kong, the futures were actually green last evening) is usually a gap and go scenario.  We gap down and just grind lower all day to finish near the lows.

That is how I am setting up for today, in cash, and waiting with both hands to pick up ES at 1953 or lower.  I want to wait till at least 2:00 PM to begin buys.  If we are at 1953 or lower after 2:00 PM, I will start layering into a long ES position.

I am having second thoughts about this being another V bottom, we may get once of those classic old style sloppy U bottoms.  Either way, SPX 1960 is a good buy area.

Trading is a Long Term Business

As I look at my trading P&L for the month, I am down.  Actually, my trading equity hit its peak in June, so from that perspective I have been losing money for 3 months now.  Imagine working for 3 months and having your boss tell you that you owe them money for your shoddy work, and they debited your bank account.

I changed my mindset rather early in my trading career about making money every day.  I don't try to do it.  If I see a good opportunity, I will trade it.  If not, I am going to do nothing.  It is nice to make money everyday, but it doesn't drive me.  I am looking for the big score.  Isn't this the real reason why most people trade?  The last thing I want to do is turn trading into a chore, a job where I must do this, must do that.  If the opportunities are not that good, I rather do nothing than try to force the issue so I can try to make money that day.  You can beat a horse race, but not the horse races.

I don't need to make money every day, or every month.  Or even this year.  It would be horrible if I didn't make money over a year, but it is not a need.  I have money set aside for living expenses.  Trading is not a business where you decide success on a day to day basis.  Or even a month to month basis.  You decide it over a lifetime.

I have a bit of a gambler's mentality when it comes to trading.  What I mean by this is that when I have a losing day, or losing month, I want to make back those losses quickly.  Yes, it is that dreaded psychology of wanting to get back to even, on the day, on the week, on the month, on the year, etc.  It makes me want to put on positions impulsively even though they are not that good an opportunity just to try to make back my losses quickly.  It has cost me money in the past, and it is something that I try to control at all times.

That is the mental game in trading.  Overcoming those human urges to trade to try to get your money back.  I am a discretionary trader, so I have to control these human urges.  I don't believe in system trading, although one of the system trading benefits is the elimination of much, but not all of human emotion.  Behind every system is a human manning the controls.

A trader is a bit like a poker player who sits down at a casino and plays, waiting for a bunch of fish (bad players) to come into the game so he can make money.  While he is waiting for the fish to come, he plays in a mediocre game where he makes a little, or maybe just breaks even.  But he stays in that game to stay sharp, and also because he wants to have a seat when the fish come in.  In 1999 and 2000, there were a lot of fish at the trading casino.  In 2007 and 2008, there were a lot of fish at the trading casino.  In 2014, there aren't so many trading fish.  But the fish will come back again.  I have a strong feeling that there are enough excesses building up that 2015 should be a whopper for the bears.  That is when I will try to make a big score.  In the meantime, I want to preserve my capital, play short term, small ball, and stay sharp.

Beyond the Trees

Sometimes when you are staring at the trees, you forget about the forest.  If you are staring at a dead tree in a vibrant forest of healthy trees, then you are missing the point.  Shorting the market is like looking for the dead trees, hoping for a drought, hoping for a random fire.  The market is down less than 2.5% from the top.  Not from the closing high, just the intraday high.  From a closing high, its less than 2%.  We are in the middle of a raging bull market with low volatility.  Low volatility is more a sign of supply-demand balance than complacency.  From what I hear on CNBC, I see many more looking for a correction than a straight up move.

The fact that there are willing buyers of US equities (corporations, funds, etc) means that we don't get big dips.

Right now, we are passing through a little storm, the branches are shaking in the wind.  If I had to buy or short at the current price and hold for 1 week, I would buy.  Had to hold for 1 month, I would buy.  Had to hold for 3 months, I would buy.  Had to hold for 1 year, then maybe I would short.

I am just looking for a good entry point, so I am waiting, but this sucker is going to go flying back up.  That's what ALWAYS happens.  Just a matter of how it does it, and whether its today, Monday, or Tuesday.  I am betting that we still have one more push lower before the BTFD moment.  I could be wrong, and we could go straight up from here.  But the severity of yesterday's selloff and the calendar tells me we have 1, maybe up to 3 more trading days where volatility will be elevated.  Once October comes, you have to already be long.  Got 3 trading days left to buy the dip.  Before the next blastoff to new highs.

Still Waiting for Lower

I am not shorting today, although I feel like we need to test 1960 on the SPX before the all-clear signal to get long.  There is also a strong support zone in the IWM at 109-110, which would mark a double bottom from the August low in the Russell 2000.  The S&P has been much stronger, as you probably know, so a move down to 1960 would equate to about a move down to that 109-110 August bottom area for the IWM.

This selloff reminds me a lot of the early April selloff, when went down from 1888 to 1815 over a span of a week.  It is definitely less volatile than that selloff, but the sentiment and put-call readings are quite similar.  The seasonal characteristics are also similar.  Back in April, there was tax selling to pay for 2013 capital gains in stocks.  This time, it is quarter end fund flows, which often mean selling stocks at the end of September.

Without a lot of big bear catalysts, other than a fairly slow global economy I don't foresee a big drop in stocks.  The Fed is on hold till at least next summer, so that is nothing to fear.  And Draghi will jam down a QE of some kind before the end of the year.  And a strong dollar has never been a catalyst for weakness, but simply a sign of dollar demand.

Bonds look strong here, the 5 year auction is over, and after the 7 year auction today, there are no bear catalysts and of course month end extensions coming up next week.  Would not be surprised to see overall bond strength till the end of the month.

Waiting for the ES ball

The ES 1955 ball.  We have one of those rare gap down after trend down day events.  It is rare these days.  Usually you expect the gap up after a down day.  Even if its not that big of a down day, just because of the demand from ravenous dip buyers.  But Europe won't stand for it.  It wants to remain a laggard, and it is doing a spectacular job, as usual.  They blame it on the bad Eurozone PMIs.  I blame it on a lack of QE.  If Draghi doesn't jam QE down the throat of the Germans, Europe is toast.

There is strong support around SPX 1960, which is roughly ES 1953.  That would be very close to the 50% retracement from the August low, at 1905, and last Friday's high of 2019, which would be 1962.  I am not a Fibonacci fan, but it does match the support level that you see in July where 1960 held numerous times before the dam burst.  

If we can get down to ES 1955 within the next 5 trading days, that would be a exquisite dip buying opportunity.  I am already seeing some bearishness creep in after yesterday's trend down day, with high equity put/call ratios and bearishness on Fast Money.  So the skittish are mostly out.  If I do end up buying that ES 1955, it will be for a long term trade, perhaps into Thanksgiving or early December, targeting new all time highs.  

Emerging Markets Weakening

We have a little post opex hangover, with the down futures.  But it is really minor considering the weakness we have seen from the emerging markets.  China is looking to roll over again, the liquidity injection to the banks didn't move the needle, and we are back to the lagging China, stalwart US trade.

The Chinese property prices are sinking for the past few months, it seems we are on the other side of the mountain, known as the China property bubble.  Unlike in the US, China has a much bigger percentage of its economy tied to construction and housing.  It is the main driver of domestic demand and investment.  If housing crashes in China, you have a headless dragon.

Other than China, I see no bear catalysts.  That is the only bear catalysts out there.  Europe is fine, with QE coming down the pipe.  US is always fine.  And nothing else matters.  Rate hikes are way way out in the horizon, so that will have no effect.  It is clear blue skies, except for China, and even the IPOs are not going to have much of an effect with M&A deals and stock buybacks easily neutralizing the excess supply.

So if you're going to short, short China, otherwise, wait for a dip to buy S&P. I am a bit bearish on bonds, not enough to take a position, though.

Market Refuses to Budge

Those sitting with cash waiting for a pullback to buy are being forced to wait.  I was expecting some kind of pullback this week ahead of the Alibaba IPO, but Yellen leaving "considerable time" in the language and refusing to say anything hawkish keeps the market afloat.  Unusually, the bond market actually sold off on the dovish Fed, which is counter to the price action we've seen for the first 8 months of the year.

It seems those who waited to get bonds finally threw in the towel and got back to their normal allocation and that buying force has dissipated.  Also, the Bund has been a driver for global yields to go lower, and since we've rallied so far and really have limited upside in those German 10 year yields, it has seized to provide that lift.  I still believe there will be a bit more consolidation at these yield levels, before a strong stock market and imminent Fed language changes begin to take a bearish toll on the bond market.

I am left with nothing to do, with stocks refusing to pullback.  I am forced to wait and hope for a pullback to buy.  It will be gobbled up by buyers just like me for sure.  The last 2 weeks of September are weak seasonally, hopefully post-opex can provide a bit of selling in order for me to get in stocks.

Using the Topspin Forehand

It is hard to make money shorting the indices unless you have very good timing.  But is not hard to make money going long the indices even if you have bad timing.  That is the market environment that we are in.  It feels quite repetitive, but you can make money both long and short, its just that the margin for error for going long is much greater than that for going short.

It is like hitting a forehand without topspin, sure if you hit it perfect, it will fall in, but if you use topspin, it is much more likely to fall in bounds.  Going short is like hitting a forehand without topspin, hoping it goes in.  Going long is the topspin forehand.  Why do you think Rafael Nadal makes so few unforced errors?  Its because he uses a ton of topspin and his balls don't go flying out of bounds very often.

Well, I just am very reluctant to short at this stage of the market.  Even if I feel like we will pull back, it is not the high percentage play.  The high percentage play is to wait for the dip and buy.  Well, we are dipping, and I am waiting for just a slightly bigger dip and I will be buying with both hands.  Still waiting for SPX 1950 to 1960 for an exquisite dip buying opportunity.

The FOMC forward guidance language change and the Alibaba IPO have combined to make this market heavy.  It shouldn't last too long.  I give it until the end of the month, at the most.  We should bounce back easily once the uncertainties are gone.

Theory on Market Volatility

I recently read a tweet that stated that the S&P 500 has not had a 3% weekly move, up or down, in 87 weeks.  I can probably remember the last time it happened, it was the first week of January 2013, when we had a huge ramp up from resolving the much worried about fiscal cliff.

It got me to thinking about the reasons why the market volatility remains so low.  I can think of it in terms of trading a long time ago, in stocks, when I was short selling active daytrader stocks.

For those that are familiar with short selling daytrader stocks, a bull market provides much much more opportunity to make money than a bear market.  It is counterintuitive, because many more stocks go down in a bear market than in a bull market.  But most of the best stocks to short have no relevance with the real economy, or even the S&P 500, because they are either scams or have no viable long term business.  In order for there to be a good short selling opportunity, a stock has to go up above and beyond its reasonable value.  That happens much more frequently in a bull market than in a bear market.

One of the reasons short selling was so profitable during the dotcom boom (before the bust), was because there were so many stocks where the price was going way beyond their fair value.  People usually assume that those that made money in the internet bubble did it by going long the internet stocks.  While among the small minority, I know many traders that made their money exclusively shorting pumped up POS during that era, trading short term, with most trades lasting just a few days.

During those internet boom years, the number of traders playing the long side overwhelmed the number of traders playing the short side.  There are always more traders willing to go long than short individual stocks, even in a bear market. That's just how the market is.  The long/short ratio in short term trading was even more highly skewed than normal towards longs during that time period.  What you had was a lack of shorts in speculative stocks, which allowed a pumper that ran up on some news release, to go from 8 to 18, instead of just going from 8 to 15, because of all longs overwhelming the natural sellers, and also the lack of short sellers.  And after the pump was over, because of the lack of shorts covering during the subsequent dump, the stock would actually fall further on the way down, going from 18 to 11, for example, instead of say 15 to 12.  If you had a more normal ratio of shorts to longs, the volatility would have been dampened.

Of course, high volatility is a double edged sword.  If you are too early in entering a position when volatility is high, there is a lot of pain to be endured, even possible margin calls, before the position goes your way.

There is a certain range for the ratio of willing buyers to sellers that needs to be maintained to have low volatility conditions.  Granted, this range is usually maintained in equities, so markets are usually low in volatility.  But when you get a ratio of willing buyers to sellers that is skewed towards too many buyers, you get volatility at the top.  If you get a ratio of willing buyers to sellers that is skewed towards too many sellers, you get volatility at the bottom.  Emphasis on willing, because buyers and sellers always have to be matched.  In order to entice unwilling buyers to buy at the bottom, you have to lower the price.  And vice versa at the top.

Bottom line is that this kind of low market volatility condition is not a symptom of a top, but a symptom of a balanced ratio of willing buyers to sellers.  You don't often see a market top under these conditions.  Remember in the run up from 1991 to 2000 bull run, the lowest VIX years were not when the market was near their highs in the bull run, but in the middle of it, in 1993 and 1995.  And in the bull run from 2003 to 2007, the lowest VIX years were in 2005 and 2006.

Bond Crush

There is something that we haven't seen in quite a while, and that is a long squeeze in the bond market.  As I mentioned previously, I don't believe bonds are a good place to put your money any longer.  We've reached the point where German Bund 10 yr. yields are struggling to go lower, having reached sub 1% there, and with QE almost down to a trickle, there is much less demand coming from the biggest buyer over the past 5 years.

The Treasury market is now on its own, without QE, you will have more of these spastic selloffs that extend for much longer than we're used to in a QE world.  Plus the fear of being long bonds ahead of forecast Fed rate hikes next year is getting more real, as we get closer to launch off on hikes.

However, I am always very hesitant to be short bonds at anytime, with the drip drip nature of negative carry and my long term view that the US economy will weaken again like the rest of the world.

Stocks are going to feel some of the effects of the higher interest rates, but unless we get a huge bond selloff to 3% on the 10 year, I don't expect that to have much of an effect on stocks.  Stocks are in their own world, with money flows coming from fixed income as TINA (there is no alternative) comes into play.  Plus the bubble aspects of higher prices begetting higher prices are in full motion.  The strongest market in the world, the S&P 500, will likely the be last man standing before a new down cycle begins.

Short term, there is a lot of angst about possible change in Fed language at the upcoming FOMC meeting.  Don't bet on Yellen feeding the bond bears this time, because last month's job numbers probably have them frozen in their tracks for the time being.  But it seems like there will be a change in language in October or December meeting.  Still looking to BTFD a bit lower from here.  Seems like we'll grind higher once all the dust settles after the FOMC meeting and after the Alibaba IPO.

Late Day Reversals

We got another late day reversal to the down side yesterday.  The market has been finishing relatively weak and looks heavy.  It doesn't have much predictive power, but it is noticeable that we are having trouble trading above 2000 for more than a few hours.

That AAPL event was well advertised, and traders seemed to remember being burnt by buying ahead of the event in the past, so we didn't get that big selloff on the event.  Overall, the coming IPO supply is casting a shadow over this market, and fund managers could already be raising cash for the Alibaba IPO.  That is a lot of money to free up, $20B.

Bond market looks worried about the Fed changing the language in their statement, to take away lower for longer language.  Should we also analyze what Yellen is going to eat on FOMC day?  The lack of new news is forcing the traders and media to nitpick for anything out there to move the market.  After the taper tantrum last year, the Fed is going to be extremely careful hinting at tighter policy.  This is meaningless, and last week's NFP number is probably gonna freeze the Fed in its tracks next week.

Looking for a pullback down to 1950 to 1960 after the Alibaba IPO comes out and the supply weighs on the market.  That should be near the end of September.

2015 Gonna Be a Whopper

2014 has been a tame year.  A ho-hum market filled with low volatility periods with very brief bouts of mild worry.  But it is setting up a whopper for 2015.  I believe 2015 will be the year equivalent of the 2007 that people feared last year, and this year.  The economy cannot hold on much longer.  The long term economic weaknesses are being masked by a strong stock market and animal spirits.  There is no escape velocity for this economy.  I am a bigger believer in Harry Dent Jr., and his Demographic Cliff, than I am in economic optimists who believe the job market is strong and economy strengthening.  I am in the minority here, and that only strengthens my belief that when others come around to my view, the repercussions in the market will be vicious.  In 2015, I can envision a move down to 1740 in the S&P 500, a move to 1.80% in the 10 year Treasury.  A move to 0.6% in the 10 year Bund.

The higher the equities goes, the spring just gets more coiled for an explosion.  You are building up potential energy for future volatility.  You don't get volatile periods out of the blue.  It has to be set up by overvalued markets that tip over into less stable entities.  To a certain extent, you need excess to build up in the economy in order to set up a fall.  That excess can be present in the real economy, in the form of overcapacity in the tech sector, or overcapacity in real estate.  Or it could just be excessive supply of stocks or excessive stock prices.

But all this is looking beyond the peak and into the next valley.  Is it not of immediate concern.  It is just in the back of my mind, something to pull out when the time is ripe.  We must first deal with the coming peak, which we are still climbing.

The market should struggle with the current levels, as we are heading into a monster amount of supply in the Alibaba IPO, and other IPOs lined up afterwards.  A lot of free cash will need to be freed up at the funds in order to sop up the new supply.  It is looking like post opex starting the week of September 22 looks the most vulnerable for a decent pullback.

Increasing Intraday Volatility

Yesterday probably surprised a lot of traders.  After having a gap up open and selling off right from the opening bell for Tuesday and Wednesday, yesterday, we had a gap up and there was some follow through buying, but it didn't last long.  While Europe was roaring higher, after Draghi's QE musings, the S&P reluctantly went higher, but the air is quite thin up above 2000, and we sold off viciously intraday, something we haven't seen too much of.

And now for what I haven't seen in what seems like ages, a big gap down heading into the NFP report, on no news.

After the past 3 days of price action, it is becoming more apparent that equity buyers are not eager to pay up at these levels.  We may have to consolidate for a few days and have a little pullback to scare out the skittish bulls, before we grind higher again.  I will not play short to try to catch the pullback.  Instead, I will be waiting with baseball glove in hand waiting to scoop up stocks on the dip.

This is a benign environment, now that Draghi is bringing out the bazookas and the Fed ignores the strengthening economy and refuses to speed up the rate hike schedule.  After 5 years of upward price action, it looks like we have the recipe for a full blown bubble.

Short term, we are looking shaky, due for maybe a 2% pullback soon.  Buy it.

Do Not Be Influenced by AAPL

Some may see the 4% drop in AAPL today and extrapolate that to future equity index weakness.  But I would caution against making that quick assumption.  For most of 2013, AAPL was a laggard while the S&P ripped higher and higher.  I also would ignore the too high, too fast theory.  That may have applied when we hit 1980 in July, but we've had the scary pullback, and the V recovery.  The market has mostly gone sideways for the past 2 months, although with a slight upward bias.

Fundamentally, there is still the QE catalyst from the ECB, probably set for December, and the Fed will not be doing anything for the rest of the year.  There are no bear catalysts right now, and the price action is quite bullish, with bulls preventing any big dips from happening.  Also, there is a healthy skepticism on down days, as even though we barely went down today, put/call ratios were fairly high.  

Seasonally, now till mid October is bearish, but that doesn't guarantee weakness, as we've seen plenty of strong Septembers and Octobers.  I am not going to ride the bubble, but I will be opportunistic in buying dips for quick trades.  Eventually we will top out, and I probably won't be able to catch the top for a short, but I don't want to get squeezed out on a short just because valuations are high.

Surprisingly Weak First Day

Was expecting a bit of bull fireworks this morning after the long weekend and no bad news.  Instead we got a weak little gap up that quickly faded to fill the gap.  The volatility is quite low and not very conducive to trading the indexes.  Now I don't think we'll be able to make much ground above 2000 before we get a little 2-3% correction which will be a raging buying opportunity.

There are some interesting things going on in individual stocks, as I see more pump and dump activity, looking at HGSH and DGLY this morning, both stocks are continuing their pumps, even though the news and theme are quite weak.  Cops having to use cameras is a bit of a kneejerk theme, based on that cop shooting in Ferguson, as daytraders are running out of good ideas.

It looks like the month end pump is being unwound very quickly in bonds, as bonds are getting crushed even though equities are only slightly higher.  I would stay away from bonds on the long side for the coming months.  The up move looks to have exhausted itself.

Immune to Ukraine

The first week of September should be bullish, as the fund managers return from Labor Day weekend and pile on risk ahead of the ECB and nonfarm payrolls report next week.  Ukraine situation is smoldering in the background, but it is something for the Europeans to worry about, the US will not be affected much.

Yesterday, we had a Ukraine scare and it dissipated within hours and those who sold in the hole regretted it a few hours later.  If you look at the charts, you can see the underlying strength of this market, oozing with buyers lurking on every dip, and bear catalysts hardly present.  Yellen ain't going to spoil this party unless every one is smashed out drunk and puking all over the dance floor.  Right now, the bulls have a good buzz going, and have yet to get out of control.  If we do get out of control, you will see it with the momo tech names, which have been very strong during the August pullback.  Stocks like TSLA, FB, TWTR, and even AAPL etc will start to go bonkers to the upside.  We are not there yet.

Bonds look overstretched here, but they move like a supertanker, they will only reverse direction when there is the all-clear and those waiting to buy bonds can't wait anymore and just hit the offer.  We are close to that point, if not there right now.  But shorting bonds is always tough, and you have to have very good timing to pull off a good short trade.

You either ride this US equity bubble or get out of the way.  I am not good at riding bubbles, so I am getting out of the way.

Bunds Getting Extreme

The German Bund 10 year went below 90 bps today and has set an all-time low in yields.  The first 4 years of the German yield curve are in negative territory.  That is unheard of.  Europe is on a speed course towards Japanization of their bond market.  Only 40 more bps to go!  In the face of this kind of move, the Treasuries are naturally bid, but not as well bid as one would expect.  The Bund-Treasury 10 year spread has blown out to 145 bps.  The move higher in Bunds looks like short capitulation.  With Draghi's QE talk, the bears couldn't take it anymore and it's gone parabolic.  But the thing about QE is that it actually ends up being bearish for bonds, not bullish.  Look what happened when QE2 and QE3 started, bond yields grinded higher, not lower.  So I am bearish on Treasuries over the coming weeks.

QE is all but priced in for Europe, and IMO, there is much more room for yields in Germany to go higher than lower, especially if equities keep grinding higher, as I believe will be the case.  Even though we are entering bubble territory, we cleared out the weak hands and had the pullback that refreshes in early August.  The market should be safe for the next several days, and I expect an upward bias.  Longer term, SPX 2100 looks very doable by the end of the year.  I will not play long on this bubble, but will buy dips, because the ECB QE will keep a bid under stocks for the next few months.