Friday, January 31, 2014


BTFD meets BOTBB.  Bring out the body bags.  The long equity, short bond bus had a lot of passengers on board, and it is approaching the edge of the cliff.  The bus was cruising right along since the 2nd half of 2013, and then we hit a bump in the road.  That bump is fundamentals.  Despite all the hope and talk about growth reaching escape velocity, without fiscal stimulus, the economy doesn't have the fuel.  There is no secular growth.  It can only be boosted by artificial means, monetary or fiscal.  Unless the Fed wants to make a mockery of the Treasury and MBS market by cornering it, they can't buy much more.

Yesterday, the big gap up was a warning sign that staying short throughout yesterday was going to be painful, so I waited till the afternoon to put on shorts.  I have lightened up into the red futures but I will probably put the shorts right back on after the first hour of trading.  The margined out bulls will be seriously tested today, and I don't think too many want to hold long over the weekend.  Expecting the typical morning buying on the big gap down, which should provide a chance to reestablish shorts.

Thursday, January 30, 2014

Bounce will Have to Wait

Unless one has been trading intensively intraday, it has been hard to make money going long this week.  Most of the big up moves have been happening in the overnight market.  

Yesterday's weakness after the FOMC meeting makes it tougher now.  I had a scenario where a small rebound yesterday would have provided a short opportunity before we went back down.  Well, the market didn't give the sellers any time to sell, except overnight.  If we can keep this gap up, ES 1779 is a good spot to sell short and I would be a buyer if we got down closer to ES 1765.  

I do not expect a trend down day, so we should be able to catch a decent bounce intraday if we get down low enough.  The first two hours of the day should see strong selling if we open around here, 1777.

Wednesday, January 29, 2014

Overnight Fakeout

It was mind boggling to see the ES up 12 handles on a Turkey rate hike, so I figured there were some shorts trapped, but I see that reality is setting in again, as the Turkish ETF, TUR, is back down after the AH spike up.  I have never seen a sustained up move in a market where a country needed to raise its interest rates to 12% in order to keep the hounds at bay.

But that is besides the point, the market wants to go lower, because we are topping out here, the bounce yesterday was not convincing, and a 25 point down move from high to low overnight smells of extreme weakness.  Any rallies are being used as selling opportunities now.

Despite the big gap down today, I don't expect much damage because its FOMC day.  But Thursday and Friday should be total bloodbaths.  Staying in cash and waiting for panic to set it before I buy any dips.  Or better yet, if the market can rally from the open today, I will be shorting anywhere close to ES 1787.

Tuesday, January 28, 2014

VIP Market

It's a VIP market.  A Volatility Increases Predictability market.  During a bad trading market, back in early May 2013, I made this post about making hay when the sun shines.  It reminds me of the importance of knowing when to get greedy and when to relax and play small ball.

My foot was off the gas, at that time, because it was a poor trading market.  Now, with this increase in volatility, I am pushing the accelerator, because I am seeing more predictable intraday and overnight moves.  Volatility not only increases the speed of moves, but it also increases their predictability.  Patterns from the past repeat, because when you inject fear into the picture, the trading becomes less random.  Oddly enough, counter trend trading becomes more effective in a panicky market.  But risk management becomes more important because moves will go beyond where they normally do because of increased volatility.

For example, Intraday reversals like yesterday off deep oversold levels is one such pattern that only happens in a nervous market.  And you will only get those gut wrenching closing selloffs into the 4:15 PM ET futures close (Friday AND Monday) in a nervous market.

As for today, even with a bad AAPL earnings miss, the futures are up solidly.  Ahead of the FOMC tomorrow, expect a grind higher after making a mini panic low yesterday.

Monday, January 27, 2014

Look for Spots to Buy

Last week removed a lot of the froth from the market, and investors are no longer complacent.  Fast Money team were all bearish for Monday.  So we gap up, the market's way of saying FU to market timers.

I scooped up some stock futures into the close Friday, and will unload them Tuesday or Wednesday.  It is just a quick trade, I do expect another down move after the bounce early this week.  The next down move will be the one where we can target a bigger bounce, perhaps 60 points.

Also looking for a possible reversal play by getting short NG, only if we see $5.80 to $6.00.  Right now, we're trading $5.27.

Friday, January 24, 2014

To BTFD or Not to BTFD

The market is in a topping process.  During the topping process, the increase in volatility while chopping is a sign of an imminent trend change.  We are almost at that point.  All the cockroaches are coming out.  The biggest one, China, will remain for the year.  Just as Europe was a monkey on the market's back for 2010 and 2011, China will be that monkey.  It will weigh down on markets if they get too exuberant.  I expect China to crash this year.

Then there are the unknown cockroaches that are brought out of nowhere, like the devaluation of Argentina peso.  And of course, the lack of earnings growth which is in the background, only brought into the forefront when investors get bearish.

When they start bringing out weird and new cockroaches, usually that is a sign of trend exhaustion, but we've only started this downleg yesterday!  So that confuses me, the market seems a bit nervous over a one day decline.  And now that we have the big gap down, we should see the end of this decline today.  Question is, do you BTFD at the open, or at the close?  I am not sure, but I know I still want to BTFD, until proven that it doesn't work.  I have my fingers ready over the buy button, we should bounce by next Monday.

So yes, BTFD today.

Wednesday, January 22, 2014

Treasuries and Bunds Diverge

The 10 year German Bund bonds have been much stronger than the 10 year Treasury bonds over the past 3 months.  The outperformance of the Bunds is unusual.  They usually trade together at a high correlation.  Even with tapering supposedly priced in, the divergence continues.

The market is sensing that the ECB is about to pull its final card, which is QE.  The most deflationary part of the world is in Europe.  And with interest rates at 0.25%, the only option is to QE, although supposedly it is against their charter.  If Draghi wants to QE, he will find a way around the rules and do it, like LTRO.  

With the relative weakness of Treasuries to European sovereigns, and Jon Hilsengrath squawking that Fed likely will continue taper despite the weak nonfarm number, there should be one last push higher in yields, sometime in February or March.  I expect another run towards 3-3.10% in the 10 year Treasuries.  That should coincide with a top in the US stock market and would be a good time to get long Treasuries, short ES, or short the USDJPY.

10 Year Treasuries

10 Year Bunds

Tuesday, January 21, 2014

Where the Action Is

If you are a futures trader, or, an FX trader, there is not much out there.  With low volatility, moves take longer.  The holding periods need to be extended to reach the same profit objectives.  That exposes a trader to more risk, as longer holding periods = more variance.

Commodities are in a bear market.  Unlike the equities market, a bear market in commodities brings much less volatility, not more.  Just as equity bull markets are dull and filled with slow steady uptrends with quick and sharp down moves, commodity bear markets are dull and filled with slow and steady downtrends with quick and sharp up moves.  So the worst possible market for futures traders is an equity bull market with a commodities bear market.

The action is in individual stocks.  In particular, biotech stocks.  The move is not driven by any individual fundamentals, but a sector shift to biotech, where an aging demographic worldwide is a positive.  The mania in the daytrader community now is to find the next ICPT, a stock that goes up 400% in two days.  The greed for highly speculative, and mostly suspect biotechs is reaching a level where you can start establishing long term shorts at these levels and sit on them.  Not one, but a basket of speculative, junky names that will eventually go much lower, regardless of what the stock market does.

The only problem is being able to find a borrow on many of these small cap names.  If you can borrow these stocks that pop on insignificant press releases and data points, and just sit on them, like reverse investments, you short and hold, waiting for the weight of the fundamentals to bear on the stock, as the rats jump ship.  I already have a huge boatload of names right now, its just a matter of which ones are the worst.  Just look at the YTD percentage gainers list, at least 1/4 is a speculative pump and dump play.

Wednesday, January 15, 2014

Reaction to Selloffs

You can glean valuable information on the strength of a market by how it reacts to a one day selloff.  The strong markets, like the S&P will shrug it off and use the down day as a spring board to higher prices.  That is exactly what happened.  You didn't even get a gap fill on Tuesday, and today we hit all time highs.  Despite the high bullish sentiment, you can see markets continue to make new highs.  It happened in March and April of 2010, and also January to May 2011.

Of course, the higher this market goes, the more potential downside builds.  At the earliest, I don't see a top till early February.  At the latest, mid March.  That being said, I only see upside of about 30 S&P points, or up to S&P 1875.  And downside much greater, down to 1750.  So still in waiting mode.

Tuesday, January 14, 2014

Whacks Out of the Blue

Well, that certaintly wasn't expected.  I've been saying that with high bullish sentiment, it doesn't increase the odds of a down day, just the magnitude and speed of a down day.  We got that initial strength off the gap down on Monday and plunged with vigor that we haven't seen since early December.  Of course, we get the gap up from the dip buyers eager to buy any dip but the dip doesn't tempt me to buy.  Sure we could go right back up, I never underestimate the strongest market in the world.  But have no confidence being bullish in this market.

I am leaning bearish, but want to express that through either a short USDJPY position or short Nikkei/Hang Seng.  At least in those other markets, when you short, you don't have to fight the stock buybacks.

Friday, January 10, 2014

The Invisible Hand Overnight

7 points is not chump change in the ES these days.  To see that happen overnight has meaning.  And there is an eerie tendency for these creep up moves higher when markets are quiet before an event.  Maybe one of the most understudied and useful phenomena in trading.  The trading before a big event is driven by strong factors that are often predictable.  These creep up moves higher are driven not by a desire to get long ahead of an event, but by the absence of sellers.

By the way, leaning bearish on the market, otherwise, I would have gotten long yesterday afternoon to sell at 8:29 AM ET today.  Also think the number disappoints, solely due to numbers being bumped higher and high expectations, rather than any particular insight.

Thursday, January 9, 2014

Making a Bearish Bet

There are a few different ways to take a bearish position on the stock market.  The most direct way is to short the S&P 500.  I don't want to do this.  The next best thing is to short an international equity market.  This is a good idea, especially when you can choose one that is continuously weaker than the S&P.  China is a prime example of this.
Then you can go short something like the USDJPY which trades with a high correlation to the equity market.  This is also another good idea, and one that I prefer over shorting the S&P.

Then another option is to go long Treasuries.  This is something I like to do when I can avoid big economic reports, but the nonfarm payrolls cause huge moves to the Treasury market, so it is something I prefer to bet on when there is no jobs report or Fed meeting on the horizon.  The last option, the one with a moderate level of correlation, is to short commodities, in particular, crude oil.  But crude oil has already dumped huge from the top and I see limited downside near term.  

Right now, if I were to make a bet on the downside for the US equity market, I would choose in order of preference, 1. short USDJPY 2. short China 3. long Treasuries 4. short crude oil 5. short S&P 500

Very resilient market, volatility is very low, I see no big down move until we start seeing more intraday volatility.  Waiting on that bear suit, getting it pressed and dry cleaned at the moment.

Friday, January 3, 2014

Bear Suit Ready

2014 is the year to start being more aggressive on the bear side.  I held off in 2013 because of the tremendous momentum, and we still have that going for this market.  But now, the overvalued levels and complacency are obvious.  The bullish sentiment is extremely high.

Tops are a process, while bottoms are usually short, quick events.  So I am sure that we'll be chopping back and forth around these price levels, but the sign that I am looking for is more extreme dips and rallies.  In other words, more day to day volatility than what I have seen so far.  I want to see the chop like 2000, 2007.  We haven't seen that chop yet, so I can't be too aggressive.  I expect to see some of that chop soon.

I am looking for opportunities now to get long bonds and short stocks when we have those 3 day rallies off a quick pullback.  That was something that I was unwilling to do in 2013.  Now stocks are sufficiently overvalued to where I am more comfortable going short and staying short.

For today, I am bearish and expect a close near the lows of the day.

Wednesday, January 1, 2014

The Higher They Go

The rubber band is stretching.  The valuations are reaching nosebleed levels.  The higher they go, the harder the fall.  The tailwind of lower interest rates has been exhausted.  Increasing budget deficits to fuel economic growth is not politically possible anymore.  Where are the corporate profits going to come from?  We are already seeing S&P 500 profit growth slow to low single digits, with Q4 estimates going down.  There is no catalyst.  Asset price rises have minimal effects on consumer spending behavior, otherwise, you would see retail sales up huge with the surging S&P.

For the developed world, the demographic dividend of a growing population of middle aged, economically active consumers aged 25 to 50 has flatlined.  Look at the table below for the U.S. population, rising from 2000 to 2010, overall, but the 25 to 44 year population growth is negative.  Those over 50 are growing rapidly, but they spend much less money than their younger peers.  The age 25 to 50 population was growing rapidly for most of the past half century, providing an upward drift to the global economy.

Sex & Age Group2000 Population2000 Percent2010 Population2010 Percent2000-10 Change2000-10 %Change
 25 to 44 years85,040,25130.282,134,55426.6-2,905,697-3.4
  45 to 64 years61,952,63622.081,489,44526.419,536,80931.5

The situation is even more dire in Europe, and is in a crisis state in Japan.  That is why Abenomics will fail, because the domestic demand is not there, due to an aging population, and exports do not increase enough to make up for it even with a weak yen.  The Nikkei is in a much more precarious state than the S&P 500.  It has the most potential for a nasty unwinding as there is the double whammy of the long USDJPY trade unwind as the global economy weakens.  Remember, USDJPY was at 120 back in the 2000s because the carry was enormous when Fed funds rates were at 5% and Japanese short term rates were at 0.25%.  There is no carry to holding USDJPY long, it is just hope that JPY weakens more than USD.

The emerging markets are not the answer, they already offer up enough exports for the developed world's now flatlining needs.  So the emerging markets only answer is to grow domestically, to increase consumption, but that happens on the back of better wages, but you only get better real wages if you add more value, otherwise it is just inflation.  Or if you get better wages and don't add value, that just kills corporate profitability.  And the key for the emerging markets, China, is no longer able to grow without unsustainable rates of credit growth, something that new Chinese leaders are finally realizing.

According to Soros's theory of reflexivity, market participants have a bias that affects market prices, and vice versa.  The bias gets reinforced as the trend continues, until the bias is questioned, and then proven false, as the weight of the fundamentals comes to bear on the marketplace.  Right now, the bias is the omnipotence of central banks for providing high returns for equities.   This bias is in an advanced stage, with QE in the US in its 5th year, ECB LTROs used, and Japan trying to massively devalue their way to prosperity.  The fundamentals for equities are dreary, but this has been overshadowed by the current market bias and strong price action.  But with the valuation extremes and overall bullish positioning of the investor community, I see very limited upside, and lots of downside.

Central banks wield the most power in the bond market, not in the stock market.  With limited upside in bonds, traders are chasing stocks.  But I view it in a different way.  Without strong global economic fundamentals, I see limited downside in bonds because tapering will stop, and then eventually lead to increases in asset purchases at the first sign of weakness.

The perception has overwhelmed reality.  2014 will be the year when investors question their bias of buying equities because of central bank support.  This should lead to choppy markets, with risk for a big drop in the 2nd half of the year.