Don't Push It

This is not a market for those that want to make fast money.  With very low volatility in all asset classes, you cannot chase moves.  You just end up paying the bid ask spread, as well as commissions, trying to catch small moves that are just not worth it.  With a dearth of opportunities, I am mostly sitting on my hands.  I see no good long term opportunities, long or short.  In the short term, that is over the next 2 weeks, I favor short stocks and long bonds.  Over the rest of the year, I favor long stocks, and neutral on bonds.

The level of conviction is low.  Sorry bears, but I just can't have much conviction on the short side.  There is no catalyst, because the market is ignoring a weakening economy and is riding the supply shrinkage rally from stock buybacks and Fed bond buying.  What had previously been effective indicators of a top, like extremely low put-call ratios and high bullish sentiment are less effective when the liquidity favors higher stock prices, not lower.

In the end, fundamentals are the driver of prices.  I can't bet heavy short just because I see low put-call ratios and lots of bulls, when I know that corporations are blindly piling all their cash into stock buybacks, regardless of price.

For those looking for a long term top, you will have to wait for a confluence of factors.  The one key factor will be corporations having to pay higher interest rates to sell their bonds.  That happens from either the Fed tightening, or the economy getting bad enough that corporate spreads widen significantly.  I actually see the second case of a weak economy as being much more likely than the first case of Fed tightening that many are expecting.

Short term, there will be a slew of data coming out, and I have no strong opinion on any of it.  Perhaps the NFP will come out weaker than expected on Thursday.  That's about it.

Short Term Top

I was going to take a weeklong blog break but the trading action just got interesting just as I took the break!  The battle lines have been drawn, with the bulls providing initial support at ES 1937, and the bears providing strong resistance at ES 1953 and 1959 areas.  It is no longer a one sided market, and with all the good news catalysts used up, there is not much fuel for the bulls in the near term.

That being said, I am not in a rush to try to catch a big down move by shorting.  Because I just don't see a big down move happening.  If it does, then I miss it, and move on to the next trade.  But I still am not thrilled with the odds for shorting this market.  Because I still believe in the big picture blowoff move to 2100 later this year.  

The bond bull train left me in the dust as I microtraded myself into sand pounding regret.  Now I believe that the next stop for 10 year yields is 2.40%.  Earlier this week, the 5 year bond was so hard to find short that it was a special, meaning that shorts had to pay a carry of 3% to short the 5 year, which is a sign of extreme short interest, and a lack of borrowable supply at the banks.  The Fed has bought up so much Treasury supply that it has distorted the market and caused a shortage of bonds at the big banks.

As I am writing, ES is taking a hard move lower.  This only happens when you have a lot of saturation in the stock market.  All the buyers have been satiated at these levels, in order to attract value buyers, this market has to go lower in the short term.  But longer term, supply and demand favors the bulls, as there is a continuous reduction of equity supply by stock buybacks among the large cap companies.

China Weak Again

Overnight, despite a good PMI number from China, the China H-shares market rallied early and then plummeted in the final two hours of trading to finish down 2.5% on the day.  Shanghai was weak last week.  H-shares weak this week.  We haven't seen that kind of action coming from China in a long time.  It is something to pay attention to in the coming weeks.  Europe and US markets are very benign, like watching paint dry.

It is hard to find good trading ideas.  I find many more worthy bearish ideas than bullish ones now.  But that is dangerous in a roaring bull market.  This week seems like a good week to just take a long break.  Probably will not miss much, and in a low volatility environment, it's important to not overtrade.  There are always opportunities in the market, but in my sphere of knowledge, there are almost none.  Good times will come again, I just don't know when.

As I said a couple weeks ago, it feels like November of 2006, when the markets were making new highs, coming off a interest rate scare, volatility was low, sentiment was bullish, and commodities were strong.  If you follow that analog, we have about another 6 months of upward action before we hit turbulence.  That agrees with what I am seeing in the stock and bond markets.  We will have small pullbacks, but they will be gobbled up by ravenous dip buyers.  It is too early to play for a big picture short and a correction.  That time will come in 2015.

I don't want to repeat myself, and with nothing going on, I will be taking a blog break for the rest of the week.  I will make some tweets if I see anything worth mentioning.

Permabull Market

Another new all time high hit this morning in the S&P.  Another day, another ATH.  It isn't easy to make money for us non-permabulls.  I have tried to grind out some gains with Treasuries but that hasn't really been working.  And thankfully, I have not tried to short this beast.

The new scare now is inflation, especially the bond market.  With CPI coming in at above 2% annual, all of a sudden, we have to fear inflation.  Philly Fed price component was also up strong.  When inflation is a concern, the CPI becomes like the release of the NFP report.  Now the market will be anxious about the CPI, more so than the NFP.

That is why you are seeing a huge rally in gold, because of these inflation fears, with an easy Fed, not Iraq.  Gold is still in a bear market and I don't see any sustained uptrend here.

At some point in the next couple of weeks, we'll top out, but timing it is difficult.  With no easy setups and low volatility, you have a really tough trading market.

Once Bitten Twice Shy

Yesterday, Fed blew away the hawkish expectations to smithereens.  Yellen acted like she just came out of a deep cave, and totally blew off any inflation fears that the Street had.  Obviously she doesn't want the Street to jump the gun and she gave no ammo for the bond vigilantes to move rates higher.  I am sure she didn't want to green light speculation in stocks as well, but that is one of the consequences of her desire to keep interest rates low.  And we got another all time high as a result.

It is a mug's game calling tops in a raging bull market.  But I will.  I am now calling for a short term top.  It doesn't mean I am shorting though.  I've gotten beaten up too many times going short ES.  Once bitten twice shy.  I am looking for a S&P proxy short, and the best I can come up with is shorting FXI, or China in general.  Yesterday, Shanghai got pummeled despite new all time highs in US indices.

Over the last couple of weeks, we have had a heavy dose of good news.  From Draghi's QE threats and negative deposit rates, and now with Yellen blind to inflation and denying there is a stock market bubble.  The green light has been given to speculate in stocks.  This has emboldened some traders to call out for big price targets, like 2000, 2050, 2100, etc over the coming months.  Although I do believe we will break 2000, I don't think it will be during the summer.

The low equity put/call ratios are flashing warning signs to me.  Yesterday, we got a CBOE put/call of 0.38.  That is historically one of the lowest daily readings.  Same low put/call ratio at the ISE.  I usually don't care about put/call ratios unless they are at true extremes.  Now we have finally gotten to a true extreme.

Inflation Boogeyman and the Fed

After that CPI report came out and bonds got dumped, I am seeing a growing chorus of hawks.  They believe that the economy is strong and that inflation is a growing problem.  They view QE as having unintended consequences.  Maybe one of them was sour grapes from being left behind the S&P choo choo train.

But in investing, what I do isn't important, it is what others do that is important.  And that big other is the Fed.  The Fed has a history of ignoring inflation and following their own timeline on when to raise and reduce rates.  What we're seeing in the CPI is nothing compared to 2007 and 2008 commodity surge.  During that surge, the Fed cut rates, not raise rates.  The Fed has always ignored food and energy inflation in their policy decisions.  In fact, in their warped views, they see it in the opposite way, fearing high food/energy inflation as being deflationary for discretionary spending.

It doesn't matter if I think their policies are asinine or just serving their masters, the Treasury and big banks.  I am here to try and predict what they will do, not what I think they should do.  And the Street is still underestimating the dovishness of the Fed.  How can any sane central bank but the Fed add to their balance sheet under these type of bubbly asset market conditions with an economy that is stable?  The Fed is insane, and nothing surprises me anymore with their easiness.

On Fast Money, I saw concern about higher rates that I haven't seen since last December.  Bonds are back in the doghouse among fast money traders.  And ahead of the FOMC meeting, traders are quite anxious and well aware of Yellen's last gaffe that crushed the short end of the yield curve.  I see yesterday's bond market selloff as front running possible hawkish talk from the Fed, and I am seeing speculation about a possible $15B taper.  I am obviously taking the other side with my long bonds.

FOMC Nerves

The trade today will be about positioning ahead of tomorrow's FOMC meeting.  You got some hot CPI numbers and the bonds are getting whacked on that.  But also a lot of bond managers are hedging here ahead of a possible tape bomb coming from Yellen's lips.  I can feel the anxiousness in the bond price action this morning.

I think the Street is jumping the gun here, trying to extrapolate the BOE's hawkish talk to the Fed.  The UK has a totally different problem than the US.  They have a growing housing bubble, and they are trying to contain that by raising interest rates.  The US situation is completely different, and has much bigger ramifications for the global economy.  The Fed is well aware that being hawkish will automatically raise yields in an instant, which would be similar to what we saw last June.  Yellen will likely be much more careful with her words this time around, no more "6 months or so" like comments.

What is surprising how the stock market also got hit hard on that CPI number.  I can't remember the last time we had a drop like that on a hot CPI.  The S&P does look tired up here, and with the heavy call volume lately, we probably see sideways to down action over the coming weeks.  Also, you are coming up on some seasonally weak periods in equities.

I remain long Treasuries, which is a longer term hold for me.  That is enough risk exposure setting up for downside equity price action.  I am still not brave enough to venture into the short side.

Iraq Scare

The news headlines are all about Iraq.  The armchair daytrader/ geopolitics specialists are out in full force preaching doom and gloom.  CNBC is of course all over it.  What else is there to talk about?  I am not going to be like the other daytrader cum military experts and forecast what will happen in Iraq, or predict that oil prices will skyrocket.  I just go back to past geopolitical events that ended with a whimper and higher equity markets, and that is the base case scenario for these things.  Anything can happen, but to bet on these events cutting off oil production is betting on snake eyes.

For a bull, one has to be more concerned about the newly minted bulls after the ECB meeting and Draghi's QE promises.  The action is toppy, but the more I see the price action, the more I get the feel that we will go higher than most expect.  2100 is not out of the question by year end.  The only thing that could hold back this bulldozer of a bull market is Yellen going hawkish.  I see that about as likely as the Earth getting hit by a monster meteor.

I was thinking perhaps a blowoff top this week or next, but with Iraq lowering prices, that muddies the picture.  I am neutral and waiting to get a better read on the market.

Missed Dip Buying Opportunity

We got that brief dip down to ES 1920 (September contract) and it was gobbled up by buyers. With these relentless strong uptrends, the first decent pullback is always bought.  I was waiting for a bit lower to get in, and missed the BTFD opportunity.

Shorting is still not worth it, even though I believe we are topping.  My conviction level on the topping process is not that high, because of the relentlessness of the equity uptrend.  We may yet make another 52 week high soon.  I am not ruling that out.

You still have to be cautious on the short side.  And on the long side, you can buy and wait, and eventually the market will go above your buy price.

Considering how much noise a little thing like Iraq has made in this market, it still seems like longs are not optimistic enough to give me confidence in going short.

Overnight, there was a lethal move in the short term Treasuries, on Carney barking hawkish.  For such a tangential piece of news, was surprised to see 5 yr and 10 yr notes getting crushed, especially as S&P futures were a bit weak.  This doesn't shake my long bond thesis, but it seems like bond investors are a little nervous after the run up in rates recently, plus with the FOMC meeting next week.

It seems like the old, wall of worry over geopolitics weekend, if Iraq doesn't blow up off the face of the earth, we should see a big gap up.  If Iraq is blown to smithereens, we'll probably just have a flat S&P open on Monday, as everything was priced in beforehand!

Topping Process Starting

We have entered the topping phase in earnest.  One of the unusual things I've noticed this week is that unlike previous down days, the down days this week have all occurred on very low volume.  Today's volume is also below average, despite almost a 1% down day.  This is actually bearish, not bullish.  When you have a lack of buyers on a dip like this, it tells you that there aren't many willing buyers at these levels.  The market needs to go lower to attract value buyers.

With all the optimism last week, with Tepper screaming buy, and Draghi's QE threats and LTROs, you had most of the ingredients for a good news top.  This week's action confirms that we are indeed topping out here.  How do I play it?  Since the rally has been so relentless, there will be choppiness here, near the top, with rallies off of short term oversold levels.  In fact, I am looking to buy the dip tomorrow to play a short term bounce into early next week.

But bigger picture, you don't want to be a long term buyer of S&P here.  But I also want to be patient looking for things to short.  China is at the top of my list.  Today, we had a furious bond rally off a bullish 30 year auction.  Remember, usually you get a selloff ahead of the 10 and 30 yr auctions, and then a rally when the auctions are over.  There are still too many shorts in the bond space.  It amazes me that fast money traders are still stubbornly clinging on the short side in bonds, it has been even worse than shorting S&P this year.

Strong Stock Markets and Weak Economies

The divergence between the economy and the stock market continues.  Retail sales didn't meet expectations, coming in barely positive.  Second month in a row of subpar retail sales numbers.  I thought there was suppose to be a spring bounce back from the bad winter weather.  The excuses for subpar economic numbers seem endless, but at some point, the economy has to perform.  And not in just creating a bunch of McJobs.

There is a reason the bond yields refuse to go as high as many expected.  The economy just isn't strong enough to support those higher yields.  The wealth effect from a rising stock market is last year's news.  Unless you get another 30% surge in the S&P this year, you're not going to get that big wealth effect.

We have another gap down today, thanks to the retail sales numbers.  I am noticing a paradigm shift in bad economic data.  Last year, bad econ data was hailed as halting the taper, keeping the Fed easy, but now that the taper is almost complete, its just viewed as signs of a weak economy and potential weak earnings, and we are actually going down on bad econ data.

I continue to view Treasuries as a good trade here, with the push up in yields over the past several days, and with the 10 and 30 year bond auctions soon to be in the history books.  The top in stocks will be choppy, for sure, so I am not shorting yet, but perhaps next week after the FOMC, it could present a good shorting opportunity as we get closer to triple witching day.

Gap Down Out of the Blue

This is something we haven't seen in a while.  A healthy gap up out of the blue.  No real reason for it, just spontaneously happening in Europe.  Let's not act like what Draghi did was anything like a QE.  It isn't even close.  He is not buying any bonds here, he is just making vague threats that he could resort to that if Europe stays weak.  Which probably means he'll have to pull out the QE guns later this year, as there is very little potential for any sustainable growth in Europe, QE or no QE.  It is a moribund economy, with too much bank debt, too much social welfare, bad demographics, and not enough corporate efficiency.

It is very likely that this gap down gets bought by the eager dip buyers who can't stand to buy on an up day, but this is the first salvo from the bears, giving a subtle warning that at these prices and levels of optimism, the slightest bit of bad news can take it down.

Yesterday Treasuries got beat up and came down to the 2.63-2.65% range that I was looking for as an entry point.  I started a long position at those levels, for a longer term trade.  With the 10 year and 30 year auctions coming up, the sellers came out ahead of time to front run the auctions.  With the huge spread between Bunds and Treasuries, I expect buying pressure coming from overseas value buyers wanting to get out of European bonds and into Treasuries.

As we hang around these lofty levels, I will be on the lookout for signs of frothiness to time the top.  Getting closer, but not quite there yet.

PBOC RRR 50 bp

We got another bit of bad news for the bears, with the PBOC joining the liquidity party by throwing their hat in the ring with a 50 bp RRR cut.  China clearly wants the yuan to weaken to boost exports, since they no longer seem to care about inflation, and want to keep the good times rolling.

The S&P is in the middle of a blowoff top, the optimism is palpable, something I haven't been able to say since the end of December.  Consequently, you are getting a push up in bond yields.  Ahead of the 10 yr and 30 yr Treasury auctions later this week, looks like they are selling them ahead of time.  It is getting closer to my desired long entry point of 2.63-2.65% 10 yr yields in Treasuries.

I see little upside now that the bull catalysts have all been spilled.  I would like to see a bit of euphoria before I decide to short, but we are getting close.  Tops are tough to time, we could hang around the highs for a few weeks, or it could be just a few days.  Just waiting for the right moment to strike.

Gotta Wear Shades Market

Tepper came out on CNBC to say everything is rosy again at 1940, after he was nervous when the S&P was trading at 1870.  I wonder if he is trying to be like Bill Gross, saying one thing on TV and ordering his traders to do the exact opposite.  For what seems like forever, we got a little bit of euphoria in the air yesterday.  It is about time.  I figured the crowd would get more bullish, more quickly, but this is one skeptical crowd.  They are "too smart" to be bullish.  They are mostly intellectual bears, thinking they have the market outsmarted, when they have been completely wrong.

Now those intellectual bears point to the ECB package, and are singing a bullish tune.  Right on script!

I am now getting a little bit bearish.  Yesterday on CNBC Fast Money, the commentators oozed bullishness, the talk was rosy, like there is nothing wrong, "it's so bright, gotta wear shades" now.  I haven't heard this in a LONG time.  The last time was in late December, after the Fed's first taper, and the market rallied anyway.

That being said, It is hard to short this market.  Very hard.  I have avoided the short side pretty much all year.  If I have to short anything, it would be China, and then Japan.  But it looks better and less stressful just to have a bearish equity view by going long Treasuries.  Unfortunately, Treasuries have rallied the last two days and it's not quite at a level where I want to buy.

I am in no rush to do anything here, it's looking like a slow day.  Market still feels like it wants to grind higher for a few more days.  VIX futures is 12.30, I haven't seen them this low ever.  Really.  Volatility is dead.

Draghi Delivers But...

Well, Draghi brought out a lot of bullets here, he surpassed expectations, but I'm sure he's not too happy about the euro/usd reaction, initially going down and then back up.  There is inherent strength in the euro, and the only way ECB can weaken euro long term is to do direct monetary interventions, buying dollars and selling euros.  Or do a QE.  These half-baked measures don't get the job done in these times of currency wars by central banks.

A bit surprised by this muted up move on Draghi's announcements, I'm sure there was some sell the news involved here, but it seems more like the market keeping with the theme of low volatility on both the upside and downside.  Market doesn't want to go up in big chunks, it spreads out the rally over many days, and in small bite sized bits.

Still think this thing grinds higher into next week, but the clock is now ticking, now that the bull catalysts are mostly used up.  Still think bonds can go a bit lower, but likely today's 10 yr 2.64% yield high will be hard to break.  The nonfarm payrolls should be a yawner, I don't expect anyone to make any big moves based on the number.  Sold ES and now neutral, waiting to buy Treasuries on any dips going forward.

Bond Bulls Ambushed

Last week, we had the 10 year yield spike down to 2.40%, on really nothing.  It was a scary moment for Treasury shorts.  While we have been lulled to sleep by the low volatility in all asset classes, the recent movement in Treasuries defies the low volatility trend.  Now we are pushing up close to 2.60% on the 10 year, all in less than a week of trading.

When Dennis Gartman came out on CNBC last week giving out the the old saw about there not being enough bonds for the pension funds, about how bonds will go up, I knew my bond short position was safe.  I covered the rest of my short yesterday.  Understandably, the sentiment got lopsided on the way down in yields.  The bond market looked indestructible over the past few weeks, especially last week, when they were strong despite a strong equity market.  When even Gartman becomes a bond bull, and he hardly ever mentions them, the up move is pretty much over.

We should consolidate at these lower levels over the next few days.  A fair amount of the selling in bonds was front running a probable strong nonfarm payrolls report and an unwinding of month end price markups higher in bonds.

Despite the climactic top last week, I am still bullish on bonds over the coming weeks, now that we are flushing out the weak hands here.  The 2.63-2.65% 10 year level is a spot that I will use to target buys in bonds.  With the economy still weaker than most think, and with Europe, Japan, and China all weak, the demand for sovereign debt will remain.  And if we ever can get equities to weaken a bit, that should put in a solid bid for bonds.   I don't want to short bonds again, especially at these levels.  It is like winning money in roulette, you can do it, but the odds are against you.

Europe has traded flat for the past 2 weeks, it is actually lagging the S&P, despite the expectation for an ECB rate cut on Thursday.  The S&P remains king.  I am expecting a very dovish Draghi on Thursday and a subsequent rally in global equities.  Best way to position is to be long ES, although I am not long yet.  Might nibble a bit long on ES before the ECB meeting.

Intermediate Term Thoughts

In the short term, it should be straight forward.  An upward bias with limited volatility in equities.  Bonds will be a bit more difficult to predict, but I expect a downward bias with ordinary volatility.  The ECB meeting and nonfarm payrolls will inject some movement into the sovereign debt space.  I am still short bonds from last week, with a plan to cover sometime this week, hopefully lower than current prices.

Beyond this week, I am looking for an eventual topping of the S&P at slightly higher levels, which should provide a decent short entry, simultaneously proving a good long entry for Treasuries, as they should dip lower on higher equities.  AAPL is acting very strong lately, there is a WWDC event today, don't know much about the details, but usually they don't amount to much.  But AAPL wants to go higher, it is the type of stock that is in high demand on Wall St., these days: the stock buyback with value stock characteristics.

The main event this week is the ECB, seems like Draghi will at least meet expectations which seem to be just for a rate cut.  So limited downside from the ECB meeting, and if Draghi talks QE for the future, it will get the bulls excited for sure.