Wednesday, April 30, 2014

Apple Bonds and Unlimited Money

Yesterday, Apple priced a $12B bond offering to the Street.  The demand was extremely strong, and the pricing came in tighter than expectations, with the 30 year Apple bonds just 98 bps over Treasuries.  The 5 year Apple bonds priced just 37.5 bps over Treasuries!  Those are very tight credit spreads for a tech company, where the future is much less predictable than say Johnson & Johnson.  It shows the excess amounts of cash that bond managers want to put to work in this environment.  They are still getting $55B of newly printed dollars every month, and they need to put it somewhere, if they don't want to hold cash collecting zero percent.

This reluctance to hold cash has even forced money into the currently out of favor Treasury market.  Instead of buying any Treasuries, the fund managers are piling into the long end of the curve, making the 10-30 yr part of the curve the flattest I've seen it since ZIRP.  They were scared of duration last year, and this year, they are chasing duration like a heat seeking missile.

For someone who holds a bearish view of the economy, it makes no sense.  With the amount of fiscal tightening and the spent wealth effect (S&P up 30% last year), I see very little catalyst to drive a consensus view of a strengthening economy for the rest of 2014.  It doesn't help that tapering is happening.  But the main thing is tightening fiscal policy.  In 2013, you got rid of the payroll tax cut and Bush tax cuts for the rich, along with adding Obamacare taxes.  Plus, mortgage rates are higher over the past year which is  crimping housing.  A booming stock market in 2013 masked those fiscal tightening effects.  But now the stock market is flattening, and it can't go up 30% a year forever.  Without another big up S&P year, the bare economy will be revealed.  I didn't even bother mentioning the secular demographic headwind where the age 25-54 population is not growing in the US.

Do you think Janet Yellen is going to raise rates with GDP growth at 1%, a stalling stock market, and inflation at 1.3%?  There is no way that is happening.  The Street is jumping the gun again, eager to see normal Fed policy.  If it took them this long after the stock market went from 1420 to 1870 in 16 months to just reduce bond purchases by half, there is no way they will raise rates when the S&P stalls out from the overvaluation and lack of QE.

The flattener is the latest en vogue trade on the fixed income desks, and it is emboldened by the outperformance of the long bond in Q1.  The curve cannot flatten much more.  I expect the belly of the curve, the 5-7 yr bonds to outperform the rest of the curve as the Street reprices the probability of higher rates, to lower odds.

As for stocks, the range trade continues.  The market looks tired, but remember, its still a bull market and stock buybacks and M&A are still pumping along.

Tuesday, April 29, 2014

Bullish for this Week Only

Bulls still have the advantage, but its no longer a lopsided contest.  Bears are starting to put up a fight, and longer term, bears have the advantage.  Yesterday was a violent puke down to deep oversold levels in the Nasdaq, until you got dip buyers going bananas.  It shows the underlying weakness in growth stocks, while displaying the strength that limitless liquidity unleashed can have on the favored sectors, which now includes AAPL with their hedge fund happy package of more stock buybacks and 7 for 1 split to get into the Dow.

I don't recommend to try to pick dimes in front a bulldozer, because going long at these levels sort of feels like that.  Dancing between the raindrops.  Threading the needle.   But it beats the alternative of shorting just because its seems right.  To me, the big move is down, not up.  But until the nonfarm payrolls on Friday, longs will be reluctant to sell.  And bears will be even more reluctant to be short of what is expected to be a big jobs number.  After the Russia Ukraine non-event over the weekend, risk is being put back on the sheets at the hedge funds.

Not expecting anything different from the FOMC tomorrow, and then it will be all about the nonfarm payrolls number.  Plus before that, you have the usually bullish first day of month.

The Nasdaq is clearly in a topping pattern, and without Nasdaq leadership, I don't see how you get a big move higher based on just defensive sectors leading.  It almost never happens.  You need high beta leading the charge. That is why being long is picking up dimes in front of a bulldozer, but usually the bulldozer waits till after the jobs report.  So long is still the play, until Friday 8:29 AM.

Monday, April 28, 2014

Still a BTFD Market

After all these years, it is still a BTFD market.  It is always more forgiving on the long side.  If you are an early short, you are going to get gored, and it will be a long goring before the market goes back in your desired direction.  Look what happened after the June, August, October 2013 and February and April 2014 bottoms.  It was a one way ticket from the bottom to the top, where it plateaued.  If you were short on the way up off of those bottoms, you were underwater as it went up, and stayed underwater as it plateaued.

Imagine how you would feel diving to the depths of the ocean, and just staying there, for weeks at the bottom.  No air.  That is how you have felt like as a bear after shorting the V bottoms since last year.  

For the bulls, its the opposite, an early long can go underwater, but like a beach ball, it wants to go up, and you need a lot of force to keep it down.  In the end, the market pops back up,  sooner or later, and with vigor.  And the underwater long eventually ends up being a profitable trade.
In this market, after you make a bottom, the bulls have little to worry about for at least a month.  We are still in that grace period off the bottom, where bulls are reallocating back into stocks, after the shakeout, well after the bears scramble to cover.  The bear scramble period ended in the middle of last week.  Now we are in the "bull reallocation back into stocks after scary moment" phase.   

We made a mini-climactic(the Nasdaq was climactic, lots of pessimism) bottom on April 14, after just a six trading day downtrend from top to bottom.  It would make sense to pullback and back and fill, but that's your father's market.  Not this one.   I have altered my trading approach to fit in with the excess trillions of liquidity and the hedge fund herd mentality.  When stocks bounce back from a bottom in this market, it goes on for several weeks.  During that period, every minor dip, of 20 points (~1%) is a raging buy.  That is why I bought the dip on Friday ahead of the possible Russian invasion of Ukraine over the weekend.  If you don't buy when there is added risk premium in the market, then you have to pay up.  

Staying long at least into bullish Tuesday, followed Wednesday with FOMC day, which is also bullish!

Wednesday, April 23, 2014

Trillions Coming out Ears

The Fed has gone to overkill with the bond buying.  They did the unlimited QE3 in September of 2012 and they should have stopped it, not tapered it after the debt ceiling and government shutdown was over in the fall of last year.  Now you have too much liquidity just going wherever the hedge funds deem worthy.  It is a bubblicious market.

Corporations can raise money issuing bonds whenever they want to, because the demand is insatiable.  And why so?  Because there is so much money out there, looking for a home.  Money that came from the $85B/month of Fed buying of MBS and Treasuries.

Look at what has happened to lean hogs, or coffee.  Those kind of overshoots don't happen unless you have billions coming out of the ears of asset managers.  They have more money than they know what to do with.

That is why I think it is much better to make a bearish bet by buying bonds rather than by shorting stocks.  Sure, in a panic, shorting stocks will pay off bigger than a long bond position.  But I don't think there will be a panic, there is just too much liquidity out there for that to happen.  Remember, panics usually happen either due to 1) an unforseen catastrophe (9/11, Fukushima) or 2) a financial meltdown/credit deflation.  There is very little chance of the 2nd option, and who bets on there being an unknown catastrophe?  That is sheer chance.

In a flat environment or a slowly weakening market, buying bonds are a much better bet to make money than shorting stocks.  At least with bonds, you are getting a positive carry while you wait, while shorting stocks, there is a slight negative carry with the dividends paid out and interest rates at zero.

Dennis Gartman got "pleasantly bullish" again on Monday afternoon.  Despite that, I still see this rally having more room to run into the nonfarm payrolls report next Friday, May 2.  There will be initial resistance here as we close in on the closing highs from a few weeks ago.  But other than that, there is nothing stopping it from getting above 1900.

Unless something dramatic happens, I will not be making any more blog posts this week.  I will probably make a few tweets if I see something interesting.  Otherwise, I'll be back next week.

Monday, April 21, 2014

Mini Storm Over

It ended up being a 6 day pullback.  A tempest in a teapot.  Starting from Friday April 4, and ending Friday April 11.  We got a little dip last Monday and Tuesday, only to ramp higher off V bottoms intraday.  The seasonal weakness ahead of the tax deadline is over.  It should be free sailing till the end of the month, and stocks should grind higher, but at a slow place.  I don't expect anything like what we saw after the February bottom.

I jumped the gun on the bonds.  The strength in bonds was not inherently from within itself, but from outside sources, such as Ukraine and a dropping stock market.  As soon as those 2 things were ameliorated, Treasuries took a big hit.  I am staying away for now, but will be interested in getting long if we get to 2.9% 10 year yields.

I will not be very active this week.  The market has slowed down considerably, and I don't want to waste mental capital fighting for scraps in this low volatility period. While still observing the market action every day, the plan is to mostly keep hands off the trigger and think about the big picture.  There should be a good short chance in the beginning of May.  In the meantime, just watch and wait.

Thursday, April 17, 2014

Quiet Day

Pre-holiday trading will set in, although you will have the options expiration related chop in the first hour.  GOOG took a little hit in after hours but its already starting to come back from that.  The earnings expectations have been lowered quite a bit, and will be easy to beat.

One explanation for a drop in continuing claims recently is the drop in unemployment benefits for the long term unemployed.  There is no need to continue to make jobless claims if you can't get any money for it.

Barring any extreme moves, will wait for next week to put on any new positions.

Wednesday, April 16, 2014

Good Feel Friday

We got a monster V bottom yesterday and suddenly many fast money traders think the short term worries are gone.  While I don't believe, we should have the usual drift higher ahead of a holiday, especially after the washout that we had the past few days.  The market is broken and toppy, but it always worries me when I am on the same side as Dennis Gartman.

I won't try to short the bounce here, because with options expiration tomorrow, as well as the holiday, the risk reward isn't there, even though shorting at these levels should payoff within two weeks.

It also looks like we got a temporary top in Treasuries, with the 10 yr yields tagging 2.60% yesterday, and then selling off hard from there.  I am still long Treasuries, and will remain long.  It is a longer term play for me, and my target is 2.50% on the 10 year.

The emerging markets and China fast money trade appears to be over.  China was weak again yesterday, despite a GDP beat.  The trend is still firmly down in that space.

Tuesday, April 15, 2014

China Weak Again

The recent outperformance of China appears to be over.  Despite the rally yesterday in the US, Shanghai was down 1.4%, and the H-shares were down even more.  All signs point to eventual monetary easing in China, as interbank rates have been low, and it seems like PBOC will try to solve popping of the credit bubble by printing money.  Under this scenario, the Chinese yuan will be devalued.  With the devaluation of the yuan, there goes the theory of rebalancing from investment to consumption.

We got the bounce yesterday, and there is possible upside to ES 1834, but that is only 6 points away as I am writing.  Don't want to play any shorts too aggressively here, because there is not that much downside.  Also, I don't want to be short ahead of the long weekend.  So if I do enter a short this morning, it will be small, with the intention of covering within 2 days.

Monday, April 14, 2014

Just Tax Selling?

With the April 15 tax deadline, and monster capital gains for stock investors in 2013, was April just tax selling to pay for all those gains?  Some of it is tax related selling, but most of it is hedge funds that had too many momentum stocks in their portfolios and sold in order to stop the bleeding.  Having been burned so bad, they will not jump back in the same names for a few weeks.

The emerging markets performed quite well over the past sever trading sessions, despite the intense selling.  Without a weakening emerging markets, I don't see this American led selloff with much legs.  It could take us down to the SPX 1800 area, but I don't see this selloff taking us to the February lows.  Or even in that vicinity.  I would be quite surprised if the SPX went below 1780 in April.  At the same time, I don't expect a sharp rally anytime this week.

Staying neutral in stocks, staying long Treasuries, and keeping power dry for a potential short or potential long.  I will play short at ES 1834 and long at ES 1780.  Rallies will not have staying power, probably last at most 2 days.

Friday, April 11, 2014

Equity Inflows Keep Coming

Despite the big drop since April 4, we've had net inflows into equity ETFs for the week as shown below.  Its a rotation out of "unsafe" tech and small cap ETFs and into "safer" S&P 500 and emerging market ETFs.  You would figure there would be some inflows into bonds with the equity weakness, but instead, it has been just more BTFD crowd thinking they will get paid again like they have been numerous times in the past, with a quick rally off a brief pullback.  Somehow, the script doesn't seem the same this time.  Just a gut feel.  Expecting this selloff to extend to post opex week, which is April 21 to 25.

Leaning towards a small gap up for Monday, but I don't see a big snapback rally like we did this week off oversold levels.  Unless you get Yellen panicking again over a 3% pullback in the Spoos, talking dovish to support markets.


Fully Invested Bears.  This market is epitomized by bullishness being a mile wide and an inch deep.  I do think there are more bears than there are bulls now.  That doesn't mean that we're done going down.  Because many of those bears are fully invested.  Of course, bears would never be long momentum stocks, they are prudent folks, that look at P/E ratios and cash flows.  So they are long value stocks, the ones that have no growth but have low P/E ratios.

So while it hasn't really paid to sell on weakness for the past 2 years, I think we are going to have longer pullbacks now.  The high day to day volatility we've seen while the market hasn't really gone anywhere near the top is a symptom of a trend change.  Treasury strength is another indicator.  We've gotten so-called good economic data in NFPs, jobless claims, and today's PPI coming in a little high, but that is looking in the rearview mirror.

The financial economy has been so distorted by QE that it is a reflection of itself.  If you see a weak stock market, that signals a weak economy.  A strong stock market, a strong economy.  The people in the market are mostly immune to small ebbs and flows in the real economy, they depend on how the Nasdaq, S&P, and interest rates are trading.  Economic data doesn't matter as much, because we all know that a 10% drop in the S&P, or a spike in 5 year yields is much more significant to the Fed than a couple of bad job reports in a row (Jan and Feb).

Remain in my bearish stance, long Treasuries.  We might get a bounce early next week, but not interested in playing that unless we see some blood on the Streets today.

Thursday, April 10, 2014

Pullback Cycles Redux

I put up a post in the beginning of February about pullback cycles.  The most common cycles were the 5 day, the 13 day, and the 22 day cycle, all +/- 1 day.  Unfortunately, the last pullback lasted 10 days, so it didn't fit into any of the common pullback cycles.

I believe we are either in a 13 day or 22 day pullback here.  Right now, with selloff beginning on Friday, April 4, the selloff is now 5 trading days old.  If we are to have made a bottom today or tomorrow, that will put it in the 5 day pullback group and we could keep going higher for weeks.

I don't believe this is a 5 day pullback, because of how this market sold off after getting two doses of good news, one big one in the dovish Fed, and the second small one in the low jobless claims number.  We'll soon find out, because we'll have to rally either tomorrow or Monday above SPX 1850 to validate that the pullback is over.

If we are to embark on a 13 day pullback, which I view as most likely, that would put the end of the pullback on Wednesday, April 23, +/- 1 day.  This is what I am preparing for.

Sea Change in Bonds

We have come full circle in the equity/bond relationship.  Last year was bonds leading equities, with fears of an interest rate spike causing equity weakness.  So when bonds were weak, so were equities.  This year, bonds have been strong while equities have been weak, regaining that inverse relationship.  Now, we are starting to get more equity up, and bonds up situations.  For example, yesterday, a huge rally on the Fed ignited both bonds (all except really long term bonds) and stocks.  And today, we have a flat open and bonds gapping up.

All the reduction in Treasuries and duration in bond portfolios seems complete.  Despite stocks being up on the year, bonds have been doing very well.  

Now I don't think this can continue for long.  There is a lot of liquidity out there, but it is being slowly reduced and stocks and bonds have to eventually go in opposite directions.  Wall Street seems to be quite bullish on the economy for Q2, but I disagree.  The economic data in Q1 smells like the beginning of an economic slowdown, I don't believe weather was that big a factor.  Thus, I am betting on bonds continuing their outperformance over stocks.  

As for equities here, it feels like its too early to short 'em, and too late to buy 'em.  Just watching for now.

Wednesday, April 9, 2014

What a Squeeze

Squeezes everywhere.  Nasdaq momo names like FB, YELP, PCLN, and biotechs were on fire after the Fed said the market misinterpreted their hawkishness.  In bond land, 2, 3, and 5 year Treasuries getting monster short squeezes on the Fed minutes.

The amount of micromanaging and sensitivity to daily market movements is getting extreme.  I guess the Fed got scared of seeing the 5 year yields spike higher after their March meeting and went back and revised what their whole meeting was about.  If the stock market ever has a tantrum over QE tapering, and goes down 5 to 10%, the Fed will backtrack and pause the taper.  They are that sensitive to the stock and bond markets.  They give lip service about inflation and the economy, but their eyes are glued to the daily ticker like daytraders.

Wonder if Dennis Gartman is going to get back on the bull side.  If he remains out of equities, this rally will have some serious legs!

Dennis Gartman Got Scared

On CNBC Fast Money, on Monday afternoon, the world renowned Dennis Gartman said he was at the gym on a Friday morning, and then he saw the market go down suddenly, and got scared, and sold all his equities.  I thought fast money trading were for traders who were in front of their computers all day, not newsletter guys who workout at the gym on Friday mornings after the nonfarm payrolls have come out.

Anyway, I digress, as Gartman has a tendency to get bearish when markets have gone down, and are near a bottom.  Him telling me he got scared after a 1.3% down day reflects the retail sentiment on this market.  There is no enthusiasm for stocks despite being in a huge bull market.  Actually, there is no enthusiasm for anything, stocks or bonds.  In fact, I would have to say that the most enthusiasm right now are for commodities.

This doesn't mean we keep going higher along the wall of worry.  It just means that a chance of the much awaited and sought after 7-10% correction isn't coming anytime soon.  Weak earnings aren't really going to move the needle, because the expectations are already low.

This market feels like TINA, there is no alternative.  People allocate assets to stocks, not because they really like them here, but just because yields are low and stocks are considered the best of a bad bunch.  I don't agree, as a weakening economy (weather is a poor excuse) will boost bonds, which should continue to outperform this year. Eventually that will drive asset allocations back towards more bonds away from stocks.

I will sell my trading longs this morning, and look to short ES if it gets back towards Friday closing levels.

Tuesday, April 8, 2014

Turnaround Tuesday

Today is day 3 of the selloff.  Usually after you get two straight days of strong selling and closing near the lows, you get a gap up.  Not today.  It is another gap down, albeit a small one.  But I did notice that intraday yesterday, the Nasdaq was relatively stronger than the S&P.  And overnight, the Nasdaq outperformed the S&P.  This a good sign that the Nasdaq selling has reached temporary exhaustion.  We can now play for an oversold bounce.

There is also strong support at ES 1834, which is also the low from 2 weeks ago, and equates to S&P 1840, which is an important support level.  I expect us to bounce from this area at least for a day.  I don't advise playing for these quick bounces, because the market appears to have just started a choppy downtrend.  Unless you are willing to sit through a potential puke move that takes us to ES 1818, then don't go long here.  The capitulation move is a possibility, but I am leaning heavily towards a V reversal today and a gap up for Wednesday.  I already took a small long yesterday around ES 1843, and will add to my position around 1834.

In other markets, Treasuries look relatively weak, and have struggled to build on Friday and Monday's gains despite a lackluster overnight session for the S&P.  Ahead of the FOMC minutes and 10 yr bond auction on Wednesday, I expect the selling to continue till then.

Monday, April 7, 2014

Gap Down Change of Character

We must have had about 2 weeks before NFP where we only gapped up.  There may have been 9 out of 10 days that gapped up.  And most of those gap ups were not tiny ones.  Most were decent sized non-trivial gap ups.  But during that same time period, it was murder during the regular time trading hours.  Big drops intraday, to only be topped out by the absolute intraday crushing on Friday.

And we get a gap down after a significant down day, a change of character, despite a resilient Asian and European market.  The times are changing.

In the past, gap ups usually signaled that you would get a harmless, non-damage day and you could sleep in.  Not anymore.  The Nasdaq momentum growth names usually don't care so much about what Europe or Asia does.  It is all about what the growth managers and go go hedge funds are doing.  They are already heavily invested in the group.  If they are selling, it doesn't matter if you have a gap up, the names will turn red on the day.

In a particular uncommon situation during the 5 year bull market, you have the Nasdaq massively underperforming the emerging markets.  The most bullish market has now become the most bearish one.  That is why I tweeted this as being a game changer, because it is rare.  It is a strong signal of trend exhaustion in the FB, TSLA, SCTY, YELP, NFLX, AMZN type of stocks.

If those stocks have exhausted the uptrend, then this market can only go up if you get new leadership.  I don't see many willing to pay big multiples on top of already rich valuations in low growth names.  So that means that upside is now limited, which automatically makes shorting more attractive because the odds of getting short squeezed is now pretty small.  It makes it relatively safe to short the rallies.  And we are getting closer to May, when the sell in May crowd will be active and seasonality weakens.
It is now time to be more active on the short side.

Friday, April 4, 2014

Lagging Nasdaq

I haven't really had much use for my bear suit for quite some time.  I have been very reluctant to short the S&P, and there has been a fair amount of opportunity cost over the past few weeks, when I could have shorted rallies and been paid.  But I had been burned too many times shorting this market that I got gun shy, probably like a lot of short sellers.
The vast underperformance of Nasdaq and small cap stocks is a warning sign that this 5 year rally is nearing its final legs.  This market reminds me a lot of 2000, when the Nasdaq topped before the S&P did, and continued to underperform until the market bottomed the next year.  Now I don't expect similar Nasdaq underperformance, but it is a sign that fewer stocks are acting strong now.  That is what happened in 2007 also.

Honestly, the only regular short sellers left are the permabears.  Most traders have learned their lesson through many losses, and gave up on shorting the S&P.  

It is very unlikely that we are going to have a 10% correction, or even a 7% correction anytime soon.  This market should chop sideways with a downward bias for the rest of this month.  I can see this market trading between 1825 to 1875 during this time.  After the month is over, I will study the price action and investor sentiment, which will give me a clue as to whether we start May with a new downtrend that takes us to 1740, or make a run higher to new all time highs towards 1920.  

So for the rest of April, I will be an opportunistic buyer of Treasuries and shorter of S&P.  For some reason, the emerging markets have been quite resistant to selling off today, so I will stay away from trading them in the near term.  

Thursday, April 3, 2014

Emerging Markets Toppy

We got the China mini stimulus overnight and the reaction was quite bearish.  The China market gapped up and then sold off for most of the day, finishing near the day's lows.  The stimulus was well telegraphed.  I don't think Chinese officials can do much at this point, they are in a pickle.  The only way they can save it from crashing is printing a ton of money, but will they be willing to do that if it means that the yuan gets pummeled and they build more overcapacity and useless buildings?

As for the S&P, it looks like we are closing in on a top, with new highs lagging, Nasdaq weak, and positive seasonality fading quickly.  The US economy is not strong enough to withstand a QE free environment for long.  We saw the same thing happen in 2010 and 2011 when QE1 and QE2 were nearing an end, the markets started weakening anticipating less liquidity.

I am easing into a long Treasuries, and short China position for a longer term trade.  I would like to build up a full position by early next week.

Wednesday, April 2, 2014

China Stimulus Hopes

We have had a huge short covering, buy the stimulus rumor run up in China, and by extension, most of the emerging markets.  The crowd did get pessimistic on China a couple of weeks ago, but it definitely wasn't panicky or fearful.  And with such an entrenched downtrend, I figured that any bounces would be shortable.  The bounce was a bit stronger than I expected, but it seems to have played itself out.  We got back to the regular scheduled programming and H-Shares in Hong Kong underperformed.

I expect China to continue its relative weakness over the coming weeks.  The debt default news are coming out on a regular basis now.  The cat is out of the bag, there is no way to put it back in until you get a panic bottom.  Sustained inflows will not come back to emerging markets for a long time.

I have not shorted emerging markets yet, because I still believe the US market should rally for a few more days.  It is too dangerous to try to catch the last little bits of this rally, but I also don't want to short too early.  So I am neutral, looking to put on a short China/emerging markets position soon, as well as a long position in Treasuries.  Probably later this week or early next week.