Monday, March 31, 2014

Heavy Put Activity

Usually you get high put/call ratios during down days, but today we're up more than 1/2 percent and there is high put/call ratios on the CBOE, hitting 1.06 put/call, while over at the ISE, the ISE opening put/call ratio is at 1.92, which is about an extreme a reading as you will get.  It seems like the shorts are selling the bounce and portfolio managers are hedging heavily here.  It sets up a possible short squeeze higher into the nonfarm payrolls number with the positive seasonality at the beginning of April.

These high put/call ratios on an up day only make me more bullish for this week.

Friday, March 28, 2014

High Flyers Bottoming

The strong Asian and European markets have buoyed the S&P futures all week in the overnight session.  Everyday we come in greeted with a healthy gap up, only to see the US traders hammer the market lower on distribution in tech and small cap stocks.  With end of quarter on Monday, the liquidation should be about complete.  I noticed that the initial bottom made Thursday morning held up quite well for the high flyers, like FB, NFLX, SCTY, YELP, and IBB.  Even with the afternoon weakness, the high flyers didn't go down, and outperformed.

It is the high flyers that took this market down, as the hot momentum money fled the market, dragging the S&P down with it.  Now that looks played out based on the price action on Thursday, as high flyers look like they have bottomed.  This should help lift the rest of the market into the beginning of Q2.  With rumors of an imminent ECB QE, and nonfarm payrolls expected to be a big number, there should be a bit of front run buying ahead of those events.

I am bullish for the next 3 trading days.

Thursday, March 27, 2014

Waiting at 1840

As the market is weakening at the top, it is getting more dangerous to play countertrend by playing the range.  Especially on the long side.  The market rolled over again yesterday, and it is happening despite a strengthening China and resilient Europe.  It seems like a lot of end of quarter shenanigans because I don't see the long emerging markets trade having much legs at all.  In fact, if I had to make a long short trade, it is about time to get long US vs. emerging markets at these levels.  

While it seems like we went from juggling bottles to juggling knives by playing the range, I still see another surge higher next week.  It may be the last one for a while.

SPX 1840 is still an interesting risk reward buy point, especially with a new quarter almost upon us.  China trading more firm tells me a big drop is very unlikely, so I will look to buy ES 1834, which equates to SPX 1840.  

Wednesday, March 26, 2014

Narrowing Breadth and Increasing Volatility

The market is getting toppy.  I have been reluctant to short the S&P, but we are getting closer to the top of this market.  Tops are processes, so it will not be one quick moment, but a series of tests at the top before this market rolls over.  

We are getting the signs of a topping market, with the Nasdaq and Russell 2000 underperforming the S&P 500.  We are also getting sharp intraday moves, which has happened for 3 straight days, despite the S&P mostly going sideways.  and VIX has been very sticky here above 15, when usually it lingers between 12 and 13 when near all time highs.  Higher volatility while trading sideways is one of the signs of a top, such as in April 2010, May 2011, and April of 2012.  

It looks like we could have one last gasp rally into the beginning of April, where I will look to put on shorts in both S&P and emerging markets, and also get long bonds.  Till then, its just a waiting game.

Monday, March 24, 2014

China Temporary Stabilization

The biggest weakness for this market is China, and over the past two trading sessions, China has stabilized, the USDCNY exchange range has gone back from 6.2258 Friday to close at 6.1943 today.  I view this stabilization as only being temporary, because the fundamental cracks remain, but traders are clinging to stimulus hopes and that should last till the beginning of April.  

With China out of the picture for the next week or two, the S&P should remain buoyant, and test the upper end of last week's range, which is the all time highs.  The weakness in Treasuries this morning backs up this thesis.  

I don't want to make any aggressive moves here, as I view this market as being very close to the top, but not quite at the top.  So I will wait to make a move, when the price is right.  

Friday, March 21, 2014

What Me Worry?

Alfred E. Newman market.  Interest rates going higher, on more hawkish than expected Fed. China ready to crash at any moment.  U.S. economic data coming in worse than last year, with much richer equity valuations.  The consensus view is that the market is fairly valued, with moderate upside, but almost no downside.  And EVERYONE believes a 7-10% correction is a buying opportunity.  A 7% correction takes you to 1750.  That is higher than any period before October 2013.  A 10% corrections you to 1700, higher than any period before August 2013.

So what was considered expensive at all-time highs just 5 months ago, is now considered a lifetime buying opportunity.  Just because there is a lot of liquidity, doesn't guarantee that it all goes to the stock market.  With this much dollar liquidity, and an imminent QE from Bernanke Lite, aka Draghi, I don't see how you don't get a monster rally in bonds when the hot money in stocks flows to bonds.

The logic of the end of QE reducing demand for Treasuries forgets the fact that without QE, stocks ain't going up either.  And if stocks don't go up, the Fed will NOT raise rates.  There is no wage pressure with the excess of labor.  Real unemployment rate is around 15%, not 6.7%. With zero percent interest rates, how do you maintain 10 yr yields at 3% or higher?  That kind of steepness in the yield curve is not in equilibrium, but one based on temporary irrational fears of Fed tightening.  And those Fed tightening assumptions are all based on a stregthening economy.  The only part of the economy that looks strong to me is one that benefits from a bloated stock market.

I jumped the gun on the emerging markets short, and will reduce the position today.  And wait for an opportunity to buy Treasuries if 10 yr yield goes over 2.9%.  Assuming stocks don't go down, the first week of April should be an interesting time period to enter a long bonds and short emerging markets trade.

Thursday, March 20, 2014

Bonds Speak Loudly

While the stock market had a quick drop on the FOMC announcement and Yellen press conference, the belly of the curve in Treasuries got sucker punched hard by Janet "Tyson" Yellen.  It is a bruise that won't go away in a day.  It is a mini-version of June 2013 when you had both stocks, and especially bonds get hammered on the Fed announcement.  

Perhaps it was unintentional, but Yellen sounded optimistic about the economy and therefore her 6 mo. after QE ends rate hike statement was taken to be a hawkish one.  Even if in the long term, the market has it wrong, fast money moves the market, and it wants out of bonds.  The economy is slowing, and there are contagion risks from China, but Yellen still has a rosy view of the future and the market is in the process of reflecting that view.  

I am expecting bonds to selloff to perhaps 2.95% on the 10 year yield, over the next couple of weeks.  However, longer term I am bullish on bonds.

S&P is untradeable here, right in the middle of the range, and its teflon status remains.  

Wednesday, March 19, 2014

Bonds and Stocks Routed

Yellen has given a surprise to the market.  Her reputation as a booster for stocks AND bonds has been completely turned around.  Expectations were just too high.  The concurrent weakness in stocks, bonds, and strength of the dollar makes me the most bearish I have been all year.  The Chinese yuan looks like it has entered a death spiral, and emerging markets will probably take the brunt of this Fed pain.

Game plan has been revised.  Dips down to SPX 1840 are no longer attractive to me, will lower my buy cover and dip buy target to SPX 1810 - 1820 area.  And keep the same sell the rips at 1870 plan, via emerging markets/China short as the proxy.

China M2 Supply

The M2 money supply in China from 2003 to now.  
As of February 2014, 113,180 Billion CNY = 18,250 Billion USD.

U.S. M2 money supply from 2003 to now.  
As of January 2014, 11,010 Billion USD.  

So you have a US economy, measured at 15,680 Billion USD GDP for 2012, compared to China's economy with 8,230 Billion USD GDP for 2012.  Yet, there is almost twice as much CNY M2 supply as there is USD M2 supply in the world.  And the dollar is the reserve currency!  And US is almost twice as big GDP-wise!

Chinese yuan is massively overvalued at the moment.  There is just too much yuan in circulation.  It is no coincidence that the yuan spiked lower in value, it was a fundamental move.  Before the drop, the CNY trading in Hong Kong was trading much lower in value than the CNY trading in the mainland.  

If the Chinese government wants to bail out the mountains of bad debt, and also lower interest rates, it will lead to a dramatically weaker yuan going forward.  If they let the credit bubble pop on its own, while reducing credit, the property and stock market will get pounded.  In either case, in dollar terms, Chinese assets will go down in value.  

We are at a neutral phase of the SPX market.  There are some bullish aspects and bearish ones at the moment.  The bullish factors are 1. continued ravenous buying on dips and quick rebounds, 2. No real exuberance despite being near the all-time highs, 3. Interest rates being contained at manageable levels.

The bearish factors: 1. China contagion risk, 2.  Overextended charts on various timeframes.  3. Lack of earnings growth and fundamental overvaluation.  4. Growing IPO supply and subsequent lockup expirations. 5. Slowing economy despite record-high stock prices.

I am in the bear camp, by being short China and emerging markets.  I plan on holding this position for the next few days.  Although I am not very bearish on SPX, I am very bearish on emerging markets, and in particular, China and Brazil.  

Monday, March 17, 2014

Rerisking Monday

Wall Street derisked before the weekend, and now that no tape bombs hit over the weekend, we are getting the relief rally.  This rally should not last long, probably 3 days maximum.  Traders don't want to be short ahead of Yellen's first FOMC press conference.  If we rally up to ES (June contract) 1860 over the next couple of days, I will look to sell and get short.  I will not short US equities, I will short FXI, EEM, or something similar to those ETFs.  

The truce till March 21 seems quite short to me, does that mean the firing lines will be back on duty on March 22?  The EU and the U.S. starting a cold war with Russia over Crimea seems a bit overboard.

Bottom line is we're no longer in a shorts get blasted at anytime market.  It is a two sided market now, and it should be this way for at least another week.

Friday, March 14, 2014

Crimea Fear

We got a spike down in the market after news came out that Putin is rumored to be planning an attack on eastern Ukraine.  I wonder if it is short sellers who plant these news bits, they always seem to happen at critical moments.  Anyway, the ES March contract bounced strongly off 1840, which is SPX 1840, an area of very strong support.  With the FOMC meeting coming up next Wednesday, I don't see this market making much headway going south.  This is risk off Friday, and the derisking is happening in the premarket.  That is usually the case, the sellers who are nervous about the weekend sell in the morning, not in the afternoon.

I got long ES into this morning dip with plans to hold into Monday or Tuesday.

Thursday, March 13, 2014

Emerging Markets Vs. S&P 500

Here is a 2 year chart of the EEM, emerging markets ETF vs. S&P 500.  The divergence is getting out of hand.  But I still believe EEM lags for most of the year just like Europe did in 2011.  Europe only started to outperform the U.S. after a gigantic slow motion crash in August.  Something similar should happen with emerging markets which should trigger a similar drop close to magnitude of 2011.

With today's weakness, my approach will be different going forward.  I will be more aggressive on the short side on one to two day rallies.  Look to play a range from 1870 to 1840, until options expiration on March 21.  I will buy dips at 1840, and sell rips at 1870, not in S&P, but a proxy, like EEM or FXI.  After that, I expect a down move in earnest later this month or in the beginning of April.

The Choppy Phase

We have exited the thrust off the bottom stage and now entered the chop zone.  Yesterday is typical for the beginning of the chop phase, where morning dips are voraciously bought.

Considering how global equities are trading, with the US massive outperformance, US equities should be weaker.  But it really hasn't paid well to be a bear of the S&P.  And if the S&P goes down, there are much easier prey that will go down with it just as well.

Even though it is a popular short, I agree that emerging markets is a short and will stay that way for quite a while.  My baseline case is still for emerging markets to lag the US, until it gets to a breaking point and everything goes down together.  We are not at that point yet, but with China getting weaker and weaker, I imagine something will crack within a month.  So I remain bullish bonds, and neutral to slightly bearish on the S&P, and bearish emerging markets.

Wednesday, March 12, 2014

Will Look to BTFD

After yesterday's moderate selloff, we are over 20 points below the all time highs in SPX.  There was no news item to trigger yesterday's down move, it is an uptrend that has matured, and no longer has the rocket fuel like it did in February.  The recent action only emphasizes the relative strength of US equities.  The DAX wasn't even able to make a new high on this surge in February, and is down over 5% from its February peak, while SPX is only down 1.5% from the peak set on Friday.

With Europe getting closer to Ukraine bottom support levels, and heavy SPX support in the 1850-1860 zone, a buy sets up on a morning dip to sell at the open on Thursday.  I will be in dip buy mode this morning, because of the lack of dips since the rally off the Feb. bottom, there will be buyers waiting to buy this dip who missed out on the last one.

Tuesday, March 11, 2014

Pump and Dumps in Vogue

Daytraders are now excited.  In most cases, chasing momentum in OTCBB, pink sheets, and small cap speculative stocks usually lead to losses.  Without any fundamental backing, without a bigger sucker bidding the stock higher, you don't get parabolic moves that sustain for a long time.  But in certain special periods of time, where speculation is rife, and daytraders eager and bold, you can get big bubbles in these pump and dumps.  What would usually pump for 2 or 3 days, and die out, go on for 1 to 2 months.

We are in one of those special periods of time.  The apex of the bubble.  2014 has been a miniature version of early 2000.  The daytraders are being rewarded for chasing these pump and dumps.  Daytraders have now been conditioned to buy small cap momentum stocks, expecting it to go higher in the weeks ahead.  And if they are wrong, the consequences are not that severe, because you have a huge group of speculative traders looking to buy dips.  No, this is not like BTFD for the S&P 500, or for big cap legitimate stocks.  They have brought in the pervasive paradigm of risk free dip buying to the small cap space.

In 2000, there was a stock with a huge parabolic run, ticker symbol SCON, which was hyped up by retail traders from 6 to 114 over 2 months.  It took out a lot of professional traders, many who specialized in short selling.  Over a period of two weeks, it went from 13 to 114, where it topped out.  After topping out, it went back to 14 in 5 weeks.

What is going on in the fuel cell space is very reminiscent of the early 2000 internet era.  In fact, PLUG was one of the stocks run up huge in early 2000.

I don't want to extrapolate the activity in the speculative small cap pump and dump space into the overall market.  It doesn't really help in timing market turns.  But it does point out the general speculative fever going on right now, which is a symptom of overexposure and overexuberance towards equities in general.

I am neutral on the market, it looks tired, but doesn't go down.  When it does go down, the trigger will be China.  China is to the stock market as Europe was to the stock market in 2010.  I do think China will crash sometime in the next 6 months.  The weakness in Chinese stocks is remarkable.   It has gotten to a point where investor flows into emerging markets will not come back unless you get a huge rally, which is doubtful.  The fundamentals are horrible in China, and it is not corporate defaults, or the disappearing implicit guarantee for corporate bonds.  It is a gigantic real estate bubble that is on the verge of popping.

Friday, March 7, 2014

Bullish on Bonds

While I was short term bearish on bonds, I am now looking to get into a long term position going long Treasuries, as I am bearish on the economy, and believe we are closing in on a top in the stock market.  I don't buy the weather excuse for the weaker jobs numbers in December and January, as other data supports the thesis of a weakening economy.  One decent jobs number doesn't take away from a trend of weakening economic data, despite a buoyant stock market.  If the last pillar of strength in this economy, which is stocks, falters, then we will get a recession.

So over the next few days, I will be looking for spots to buy bonds, looking for a longer term move.  I prefer to get bearish on stocks by being bullish on bonds.  I am choosing not to fight the ample liquidity out there, where financial assets will remain overpriced.  So I will just choose the one that I feel will receive more of the money flows going forward.

As for today, I will look to short any opening hour rallies in stocks.

Thursday, March 6, 2014

Gaming Nonfarm Payrolls

The past two nonfarm payrolls reports came in below consensus expectations, leading to a big spike in Treasuries both times.  After the ADP employment report came in light of expectations, the numbers for Friday jobs is coming down rapidly.  The consensus was at 165K jobs, but I get the feeling most are expecting around 125-135K jobs.

The jobs numbers recently have had a more dramatic effect on the bond market than the stock market.  This time, I am expecting a big move in both.  Rarely do you get 3 straight below consensus jobs numbers.  The reason being is that after 2 poor jobs numbers, the Street ratchets down expectations and the bar is lowered, making it much more easy to beat.

I have no illusions about a strong job market, but the numbers have been taken down too far, and I get the sense that many bond traders are positioned long ahead of this report.  The reason I say this is because of two things. 1. The past two times, bonds shot up after a bad jobs number. Traders don't want to make that same mistake of missing the move up or being short.  2. The news over the weekend in Ukraine caused a panic bid in Treasuries and that supply overhang above still lingers.  Wednesday saw a muted reaction to both bad ADP and ISM services numbers.  Fast money still seems to be long bonds despite recent weakness.

Treasuries could not rally much at all and sentiment still seems bullish on bonds, because of Ukraine, although it makes no sense as stocks have already shrugged that off after just one day.

I will be positioning short bonds, and long equities ahead of the nonfarm payrolls number, just playing for a quick move afterwards.  With the low expectations, and the current bond positioning, it could be a explosive move down in bonds/ upmove in stocks if we get a halfway decent number.  If we get another bad number, the move up in bonds should reverse quickly as that is what most are expecting and positioned for.

Tuesday, March 4, 2014

Putin Redo

Putin says nyet to attacking Ukraine.  I underestimated the man's poker skills.  He folded his hand on the flop, didn't even wait for the turn or river.  He doesn't have many chips to play with, and he knows it.  He saw his stock market get crushed and knew he had to act fast.  Yesterday was a golden opportunity because of the uncertainty and fear that I saw out there.  Not the fear of the market tumbling, but the political fear, a more irrational fear which has no lasting effect on the market.

Unfortunately, other than a quick scalp of a move in the opening half hour, I waited for a bigger down move that will not come.  It figures.  Since early February, this market has not given longs a chance to get long on any deep pullbacks, it has been one and done.  One down day and back up again.  Often times, not even one down day, but one down night, as the overnight session dips, only to see it being lifted in the US premarket and then into the stratosphere during US regular trading hours.  

A market that doesn't let in dip buyers unless you have the threat of World War III is a strong market.  The sky is the limit.  I wouldn't go short until you saw euphoria.  And the only way I see euphoria is if we go up for another 2 or 3 weeks.  By that point, we're probably 1900+.  

With this monster gap up, odds are that we keep going higher.  The market was on that course before the brief Putin disruption.  I am on the sidelines, seeing one more opportunity pass by.

Monday, March 3, 2014

Too Early to Make a Stand

I would usually say that you have to buy when you see such scary headlines, but this market just closed at an all time high, and was overbought.  So that leaves room for a 2 to 3 day pullback, which would be sufficient to wring out the weak hands, and springboard the market to new all time highs.  From a time standpoint, tomorrow or Wednesday should be the bottom, that is if we can selloff into the close today.

This ES 1840 level is in the middle of the range, and we should make a scary trip down to 1820 which would be where I would make a stand, and buy aggressively.  Right now, I am not enthusiastic about building positions right at this level.  Sure we could just blast higher from here, considering how strong the market is, but I don't want to make that bet after a 3 week rally.

Saturday, March 1, 2014

Banality of Ukraine

The media force feeds news to the public and it's eaten up like corn at a cow pen.  For some reason, we are supposed to sell stocks when we see headlines about military conflicts in far reaching parts of the world.  Somehow, instability in an economically insignificant region is going to start World War III.  Due to the unusually peaceful times that we live in, the bar for panicky headlines has been lowered to the point that only a midget could limbo under it.  Now movement of Russian troops into an area already with Russian military in a pro-Russian area is the precursor to war.  The imagination of these reporters runs wild.  If it didn't, we would be bored to death.

Egypt, Libya, Syria, and now Ukraine.  If we hadn't had a similar scare so recently, it wouldn't be so banal.  But we just had one last August in Syria.  And a couple in 2011 in the Middle East.  All of a sudden, daytraders become experts in geopolitics, and worry about something that has no bearing on the stocks that they hold.  The stock market goes down for a day or two, and suddenly the bears get really loud on CNBC.  This view that war is bad for the economy forget that the recession ended at the same time the US invaded Iraq in 2003.  That was the start of a huge bull market.  Same thing happened in 1991.  So even if what the traders fear happens, which is war, it's not bearish!  And if it doesn't happen, that's also not bearish!  In other words, it doesn't matter.  

Stocks and bonds are financial assets.  What Janet Yellen says and does is a million times more important than whatever Vladimir Putin does.  But it is boring to talk about the Fed all the time so we have to bring out something new, even if its irrelevant to the global economy.

By the way, we closed at a new all time high.  You would never guess it watching CNBC Fast Money opine about Ukraine.