Thursday, July 31, 2014

Bonds and Stocks Both Down

In a flashback to summer of 2013, we have both stocks and bonds down after the blockbuster Q2 GDP number yesterday and fears of an earlier than expected Fed rate hike.  It is interesting to see this happen, as it has not been a common phenomenon this year.  Usually weak stocks have helped bonds.  This looks like positioning ahead of the nonfarm payrolls report, which is expected to be bullish.  I don't have a strong opinion on the number, but this price action in the S&P is awful.  And Europe is lagging badly.  The economy in Europe is moribund, as the German Bund yields clearly show.

I mentioned the bearish bloggers the other day, but those bloggers can be right for a few days, they just usually are wrong over the intermediate term looking out 1 or 2 months.  I would be an interested dip buyer if we can get down to ES 1920-1925 area.  I am still bullish on bonds, and will look to get long soon.

Wednesday, July 30, 2014

Bloggers Bearish

It didn't take much for the bloggers to get bearish.  This poll is a few days old, but it covers last Friday's down move off a 52 week high last Thursday.  Now we are back to blogger sentiment levels seen after dips in mid April and mid May.  You know what happened after that.  We rallied over 100 SPX points to new all time highs. Not saying that we rip higher again off this dip, but quite surprising to see this level of bearish sentiment after a less than 1% dip.  Without any bearish catalysts, either.  And no, the current geopolitics is not a bearish catalyst.  Geopolitics is an excuse for the non-rigorous who want to blame any little news event for a down day in the markets.  

This just clouds the picture for me.  I am looking for a correction, but it seems much less likely to happen when so many are prepared for it.  Also, if we do get a dip, it will probably be shallow, because of this kind of bearish sentiment.  My anecdotal read on sentiment is getting similar vibes, as Dennis Gartman is neutral (he says you can only be really bullish, pleasantly bullish, or neutral in a bull market), which is his way of saying he's bearish without being called out for it when he's wrong.  Also getting similar views on CNBC.  Another positive for bulls is bond yields going lower and lower, providing a favorable environment for interest rate sensitive stocks.

That being said, there are going to be a lot of IPOs coming out this week, and there is a huge Alibaba IPO coming out in September, so there is a lot of supply that will need to be absorbed in the coming weeks.  Overall, any tiny dips of 2-3% will likely be bought up aggressively by institutions as there have been very few dips, or opportunities to get long this market this year.  

For bonds, I will be looking to buy any weakness today and tomorrow ahead of the nonfarm payrolls number.

Monday, July 28, 2014

Topping Out

We are on the 3rd consecutive down day after topping out on Thursday.  The chop till you drop view is still in effect.  We are in the chop phase, and it can last about 2 weeks on average, but sometimes that can extend out for an extra couple of weeks.  Since July 3, when we got that blowout jobs number, we have been chopping sideways to slightly down.  That is almost 4 weeks.  A drop is very ripe to happen at any moment.  Not a 1 or 2 percent BTFD drop, but a 4 to 5 percent correction which shakes the confidence of the bulls.

Treasury bonds have been very strong since this chop period, since the blowout jobs number, going from 2.7% to 2.48% on the 10 year bond.  The 30 year bond is doing even better, as the yield curve flattens out.  Sometimes there doesn't need to be a catalyst to break down 4 or 5 percent, they can happen in a vacuum because most of the buyers are satiated and are unwilling to add more at current levels.  It is nice to have an imminent catalyst to propel the down move, but it isn't necessary.  Right now, I see no catalyst, which makes it difficult to time the drop, but from a price action and technical perspective, we are very vulnerable to a small correction.

I would like to buy a dip in Treasuries this week ahead of the nonfarm payrolls report, because expectations are high for the numbers after the rise in jobs numbers in recent months, and there is a lot of room for disappointment.

Friday, July 25, 2014

Least Interesting Market

When the bulls are in control, the fun goes away.  Rarely do you see panic buying in the market.  It is usually panic selling.  So when you only have buying, you have no panic.  No panic, and no emotions and no inefficiencies.  These are emotionless markets.  That is what happens when you have super low volatility and a rising trend.  

I don't expect things to change anytime soon.  Next week is FOMC meeting and nonfarm payrolls, two days when the market is not allowed to go down.  And you also have the beginning of the month next Friday, so that is also an up day most of the time.  So these are slim pickings for the bears for the next 7 days.

I am not comfortable getting long bubble markets, so I have been very selective playing the long side.  And to short is to lose money in this market.  So stuck doing nothing most of the time.  No pain doing nothing, but also no gain.  

Unless we get more exciting markets, I will not have anything to add.  Be back when the action comes back.  Otherwise, I will be mostly watching, maybe put up a few words on Twitter.

Tuesday, July 22, 2014

Either a Short or a Long

It is extremely difficult to trade both sides of a market.  You either have those who are good traders on the long side or those who are good traders on the short side.  It is tempting to try to make money on both longs and shorts of a market, but it can make trading heaven when you are making good reads or it can make it hell, when making bad reads.

Trying to trade both sides leads to overtrading, and while it can be great if you are in the zone and predicting tops and bottoms accurately, but if you are a bit off, it can turn into a nightmare.  A couple of weeks ago, I was trading ZN bond futures and I correctly predicted a rally by going long from 124 29/32 to 125 8/32.  And then I decided to short it at 125 9/32 because it looked overextended.  The market ended up going higher and higher and I got stopped out at 125 14/32.  At this point, I was a bit on tilt, lamenting the fact that I sold too early and on top of that, shorted the market right into the teeth of a parabolic rise.  The market reversed lower and I got long at 125 11/32, trying to make some of my gains back, thinking we would continue higher on the day.  But the market continued to go lower into the close, where I panicked out at 125 4/32.  What should have been a nice gain on the day turned into a loss all because I was trying to catch every little move on the day, and because I was playing both long and short back and forth.  

In general, everyone has to have a bias for a market.  For me, I am biased on the long side in bonds, and biased on the short side in stocks.  So when we have a super bullish S&P, I've learned to stay away most of the time.  Because I know I am not as good of a trader on the long side of the ES as I am on the short side.   

Market continues its chop, not going to play until I get stronger signals for shorts.  I do not want to play long except big dips.

Monday, July 21, 2014

Avoiding the Battle With HFTs

There is no bull catalysts.  Earnings are coming up for the big tech names, but they haven't mattered for years.  It is a money pump story, and it will remain that way.

Friday was another spectacular reflex response by the BTFD crowd and HFTs.  HFTs knew retail was on the short side, due to the previous day's "scary" headlines.  HFTs pushed the market higher all day Friday and pushed, pushed, and pushed the buy side even more until the shorts cried uncle above ES 1970.  Now the shorts got pushed out and stopped out, we get the gap down, or HFT buying hangover.

The moves are nothing like they were in the boom in 2006 and 2007.  HFTs are now predatory and hunt down prey, usually the retail money and dumb money funds.  Yes, there are plenty of dumb money funds out there.  Just look at all those underperforming funds, both mutual and hedge funds, that get crushed by the S&P year after year.  They are HFT shark bait.  Daytrading is mostly a fool's game except for the elite traders.

The post ex hangover is weighing on the market this morning, even though nothing happened this weekend.  I remain tilted bearish over the next several weeks, but today, I have no opinion.  I definitely feel much more comfortable being long bonds than being long stocks.  The Treasury bid is relentless, as we burst higher on even the slightest of down days for equities.  Expecting 10 year yields to go to 2.30% if we can get S&P down to 1900 in August.

Friday, July 18, 2014

Due for a Whacking

Yesterday seemed like the perfect storm for bears, but the market was due for a beating.  It was just waiting to grasp at something tangible, even though it doesn't have any fundamental meaning.  No, the Russians shooting down a commercial plane doesn't matter.  You think US and Europe are going to war over this?  In fact, it probably slows down Putin's push in Ukraine.  And Israel and Gaza don't matter.  Geopolitics doesn't matter, unless you stop oil supplies.  That's not gonna happen.  This market wasn't going up because of peace.

That being said, this market is just too overstretched, with too many bulls, for us to just shrug off this one day wonder.  It is actually two separate one day wonders.  Last week it was Portugal, also happening on a Thursday.  Eventually these one day wonders add up.  They will wear out the bulls and you will no longer have bulls acting with the FOMO (fear of missing out).  This is looking more like early January, increasing intraday volatility, chopping for a couple of weeks, and then a deeper selloff.

My buy zone of ES 1943-1944 was hit overnight and we've bounced 15 points from that zone.  At current levels, ES 1956, I see little edge either way.  If my forecast turns out to be true, we should be looking at a pullback down to ES 1880, which is the area of the breakout in May.  On the way down, we should see some good trading opportunities.  We could chop around for another week or two, or just start heading down next week.  Either way, I am short term bearish, but neutral for today.  I plan on expressing my bearish view with a combination of short stocks and long bonds.

Thursday, July 17, 2014

Toppy and Choppy

Since that blowout jobs number on July 3, we've been chopping around between SPX 1953 and 1983 for the past 2 weeks.  During that time, we've see some vicious moves in the overnight market, thanks to a newly vulnerable Europe and lack of bull catalysts.  We get another slap in the face gap down, coming after a similarly sized gap up yesterday.  These are no minor gap ups and gap downs.  There have been some chunky moves overnight, which tells me two things:  1) there are very few shorts left and very few willing to short.  2) value buyers are unwilling to step up at these levels.

SPX 2000 is a huge psychological barrier, and the consensus view is that the market is either fair valued or expensive.  I don't think anyone thinks this market is cheap.  So buying stocks is now a game of selling to the greater fool.  The value buyers are not going to be backstopping any dips from these levels.  It will have to come from underinvested fund managers or stock buybacks.  And stock buybacks have been waning this year, compared to last year.  Perhaps corporations don't want to push the envelope too far on leveraging up their balance sheets to buyback stocks.  Or they just don't see any value anymore in buying their overpriced stocks.

I am getting increasingly bearish here, and the bond market has been very strong despite almost hitting another new all time high yesterday.  And next week is post opex, usually a time of monthly weakness as there is less put protection.  Still not shorting, but shorting is increasingly looking attractive to me.  And not just for 5 or 10 point move, but for 30 or 40.

Wednesday, July 16, 2014

Yellen and Bubbles

It is one thing to say there is a bubble, it is another thing to do something about it.  Like Greenspan in 1996, she mentions it, but does not thing to stop it.  The Fed can raise margin requirements on stocks if it wants to, but if it didn't do that in the biggest stock bubble of our lifetimes, 2000, what makes you think they will do that now?

So the Fed won't stop the bubble, and probably won't raise interest rates in middle of 2015 unless S&P stays above 1900, economy holds up and doesn't slow in the next 12 months, and there are no flare ups in emerging markets or Europe.  That is a tall order.  Yet the consensus expects that.  I give the probability of all those things happening at less than 30%.  And it seems like the smart money agrees with me, because eurodollar futures are pricing in about a 50% chance of a rate hike by June 2015.  Not 100%, or even 80%, but 50%.  I would put it at 20% probability by June, rising to a 35% probability by September.

And I haven't heard a scant word about the end of QE, or the effective end, because tapering has whittled down the POMO to $35 B/month, which will soon be $25 B/month in August.  Effectively QE will be over by end of summer.  Without QE, a rise in stock prices is no longer a given.  The liquidity pump will have to come from money coming out of bonds to go into stocks, or vice versa.  So you won't be seeing so much rising tide of QE lifting all boats market, like you did this year, when bonds, stocks, and commodities all went up together.

The most likely scenario: Stocks selloff in August and September, and bonds rise as we approach the end of QE, and the market gets nervous.
Second most likely scenario: Stocks stall out and trade in a narrow range, and bonds fall moderately in anticipation of end of QE and possible sign of a rate hike in the future.
Least likely scenario: 3) Stocks keep going up into the fall and bonds fall hard in anticipation of end of QE and earlier than expected rate hike in 2015.

The market is in the topping out process.  Europe cannot take the baton from US to drive markets higher, and no way emerging markets can.  So US is left by itself to go higher alone, and that's just the large caps.  Small caps have been laggards all year, and especially this past few trading sessions.  Market is getting more and more vulnerable, and the CBOE put/call skew is flashing danger signs as smart money are paying a premium to buy put protection, while calls remain cheap.

Saturday, July 12, 2014

Middle of the Desert

" You can beat a horse race, but you can't beat the races."  - How to Trade in Stocks, Jesse Livermore

It is a trading desert out there.  With no oasis in sight.  Volume is low, and volatility is low.  I am sure there are some traders who are doing well in this market, most likely the permabulls.  On Thursday, when Portugal was falling apart and the market was nervous about another European panic, 9:30 AM ET happened.  End of panic.  As soon as the US markets open, all the foreign anxieties are thrown out the window and the markets can go up as they please.

It is such a strong market, that I was waiting patiently for my levels, ES 1943, to get long, a small amount, because we are still in nosebleed territory, and the market left me in the dust.  It is almost as if the algos are all programmed to lift all offers on any big gap downs, and blast the market higher off the opening bell.

When markets are volatile, traders and investors get emotional, and that increases predictability of price movement.  When you have low volatility in an uptrend, traders and investors are comfortable, and act calmly.  Without much emotion, the price movements are less predictable.

Sure, you can say that if you just bought and held stocks, you would have made money.  But indicators of bullish excess have been flashing warning signs for the past month.  Yet I have resisted shorting despite this, because the uptrend was too strong and because of memories of past shorting horrors.  And if you can't go long or short with conviction, it is hard to make money.  No conviction, no money.

So I had to go back to a blog post I made 3 years ago to remind myself that you can't make money everyday, there will be dry periods, with little opportunity, where it is best to just do nothing and wait to strike at the optimal entry.  Trading isn't a normal job with a salary.  It is more like seasonal work, you will have a set period of time when there is a lot of opportunity to make money, and then it will be over.

The markets will be good for trading again.  In fact, the higher this stock market goes, it builds up that much more potential energy for a bear market, and more volatile conditions.  So as much as 2005 and 2006 were dead for trading index futures, 2007-2009  made up for it in spades.  Now I don't see another financial crisis, or a big bear market, but the seeds of low volatility and high stock prices sets up better trading conditions later.

Trading is a habit.  Trading begits more trading.  Sitting in front of the computer, with hands on the trigger, trading is a temptation even when there isn't much potential there.  Over the years, I've noticed that just taking positions and holding on to them is much more profitable than trying to make money on intraday movements.  In the future, I will incorporate more position trading and reduce intraday trading.  Of course, if we get very volatile markets, then I will reduce the position trading and increase the intraday trading.  Right now, this is a position trading market.  Intraday trading this bore of a market is death by a thousand cuts.

Friday, July 11, 2014

Hardcore Bulls' Market

Only hard core bulls have made money in this market this year.  That is not just hard core stock bulls.  It also includes hard core bond bulls.  I am neither, but much closer to a bond bull than a stock bull.

I am a natural stock bear, it is what I am comfortable with.  And for a while, it cost me money because I would fight these relentless uptrends and bleed, and bleed some more.  I gave up on that this year, and focused on expressing my bearish views by going long bonds, instead of shorting.  It is the smart play in this liquidity overloaded market.

With the Fed encouraging bubbles, you have to play the long side, the short side is just too hard.  Be it long stocks or long bonds, or long both.  This may be the most dovish Fed ever, shrugging off hot CPI readings as "noise", denying that there is a stock market bubble.  The asset inflation pump is still ongoing, and with an economy that is not self-sustaining, due to demographic headwinds, and reliance on zero interest rates.

It will get interesting if the Fed let's this bubble keeping growing, nurturing it with dovish talk, along with Draghi and his new QE, and we get a full blown equity bubble.  I see that with an S&P around 2100 to 2200, at which point you will get all kinds of IPOs from junk companies coming out to cash in, increasing supply, just as the economy goes back into recession, QE be damned, and then we enter a bear market.  That is a 2015 story, so not on my radar just yet, but in the back of my mind.

Yesterday, the bulls ripped the face off the opening bears on Portugal news.  What's new.  US market doesn't care about anything but the Fed.  I have little confidence in this market, long or short.  I am looking for a dip in Treasuries in the coming weeks to get long for a longer term trade.  Until that happens, I wait.

Thursday, July 10, 2014

Europe Going Down the Drain

Europe cannot sustain itself without a QE.  Draghi knows this.  You have banks in Portugal with serious credit problems, and that is spilling over to Spain and Italy.  This is a little mini 2011 version of the European sovereign debt crisis.

I cannot remember the last time we've had such a big gap down, it must have been a while ago.  Looking back, last week on the nonfarm payrolls seems like the good news top for stocks, and a bad news bottom for bonds.  Since then, they've gone in opposite directions.  With Treasuries being heavily shorted, and most fund managers underweight safe assets, you get monster rallies on very little, like you saw after the Fed minutes that showed that QE was likely to end in October, a bit earlier than expected.

The futures are getting pummelled as I write this.  I wrote the other day that ES support around 1943 is solid, which is SPX 1950.  We are only 5 points away from that level.  It might be worth it to put in a small long position at 1943 and then see if the market stabilizes.  I don't have much faith in the long side at these nosebleed levels, so will keep size small.

Wednesday, July 9, 2014

No Conviction No Money

This market must be sucking the lifeblood out of a lot of traders.  It is a good investing market, low volatility, steady uptrends, and minimal stress.  For traders looking to capture quick moves in volatile markets, this is agony.

Yesterday we finally got a decent down day, and market rallied off the bottom decently, although I mistimed it.  I probably deserved to take a loss because I don't have sufficient trust in this market at these levels.  It is always an uphill battle to make money if you do not have conviction on your trades.  I did not have conviction when buying ES 1959 yesterday.

It still is a buy the dip market but at these nosebleed levels, it is hard to pull the buy trigger after just a one percent pullback from all time highs.  And I don't think its a good shorting market either, so we're stuck in no man's land.

Huge rally in Treasuries and Bunds over the last 2 days.  It is surprising, coming off such a big jobs number.  Supply and demand fundamentals still favor going long Treasuries, just because of the gravitational force low yields in Europe are having on the US bond market.  But I can't get myself to get long Treasuries here, because I see a potential short term trend change in Bunds which will spill over into the Treasury market.

Neutral here on everything, just like Dennis Gartman.

Monday, July 7, 2014

Europe Laggard Again

Apparently negative deposit rates, TLTRO, and threats of QE are not enough.  Europe is again badly lagging the S&P.  Since the announcement in ECB June meeting, ES is up 33 points, or 1.6%, and FESX, Eurostoxx 50 is down 55 points, 1.8%.

You would figure the announcement in Europe would boost Europe more than the US, but it has been the opposite.  It emphasizes once again the importance of shorting the weaker indices, not the stronger ones.  Europe is still underperforming the US, even with all the announcements by Draghi.

Same goes for bonds.  The US Treasuries continue to lag the German Bunds.

We are getting a gap down today, I would use any one percent pullbacks to get long ES exposure.  That means a move down to ES 1959 would be a buy.  Wait for your spots and buy, that is high probability way of making money in this bull market.

It is a slow market, the blog posts in the coming weeks will be sparse as there is nothing much to say.

Thursday, July 3, 2014

Bond Market Correction

With today's blowout nonfarm payrolls number, we are now entering the teeth of a bond market correction.  In the uptrend that we've had in bonds since the start of year, we've gone from 3.03% to 2.40% in 5 months, we should give back a lot of those gains in a panicky selloff this month.  Still a longer term bond bull, but there will be some worry among the bond fund managers with all this hot jobs data, not to mention last month's hot CPI number.

Since bonds bottomed in late May, we've gone up 29 bps from the bottom, to today's high at 2.69% 10 year yield.  Looking ahead to the 10 year and 30 year bond auctions next week, and also inflation data coming out later this month, we could get an eventual push higher to 2.80%.  At that point, we should get an influx of foreign buyers who want the extra yield, compared to their low sovereign yields (Japan, Germany, France).

The stock market is extremely boring here, we are grinding higher, and the excitement is slowly building.  I can't be a buyer here, at these nosebleed levels, but with such a strong uptrend and Fed just sitting on their hands, it is too tough to short.

With this kind of action, the holiday can't come soon enough.  Be back next Monday.