One More Push Lower

There were quite a few aggressive dip buying and short covering Friday afternoon.  Short sellers are once bitten twice shy.  They have been run over so many times, and dip buyers have been rewarded buying down days so many times, that you thought the V bottom had started again.  No way.  The gap down out of the blue (don't blame Hong Kong, the futures were actually green last evening) is usually a gap and go scenario.  We gap down and just grind lower all day to finish near the lows.

That is how I am setting up for today, in cash, and waiting with both hands to pick up ES at 1953 or lower.  I want to wait till at least 2:00 PM to begin buys.  If we are at 1953 or lower after 2:00 PM, I will start layering into a long ES position.

I am having second thoughts about this being another V bottom, we may get once of those classic old style sloppy U bottoms.  Either way, SPX 1960 is a good buy area.

Trading is a Long Term Business

As I look at my trading P&L for the month, I am down.  Actually, my trading equity hit its peak in June, so from that perspective I have been losing money for 3 months now.  Imagine working for 3 months and having your boss tell you that you owe them money for your shoddy work, and they debited your bank account.

I changed my mindset rather early in my trading career about making money every day.  I don't try to do it.  If I see a good opportunity, I will trade it.  If not, I am going to do nothing.  It is nice to make money everyday, but it doesn't drive me.  I am looking for the big score.  Isn't this the real reason why most people trade?  The last thing I want to do is turn trading into a chore, a job where I must do this, must do that.  If the opportunities are not that good, I rather do nothing than try to force the issue so I can try to make money that day.  You can beat a horse race, but not the horse races.

I don't need to make money every day, or every month.  Or even this year.  It would be horrible if I didn't make money over a year, but it is not a need.  I have money set aside for living expenses.  Trading is not a business where you decide success on a day to day basis.  Or even a month to month basis.  You decide it over a lifetime.

I have a bit of a gambler's mentality when it comes to trading.  What I mean by this is that when I have a losing day, or losing month, I want to make back those losses quickly.  Yes, it is that dreaded psychology of wanting to get back to even, on the day, on the week, on the month, on the year, etc.  It makes me want to put on positions impulsively even though they are not that good an opportunity just to try to make back my losses quickly.  It has cost me money in the past, and it is something that I try to control at all times.

That is the mental game in trading.  Overcoming those human urges to trade to try to get your money back.  I am a discretionary trader, so I have to control these human urges.  I don't believe in system trading, although one of the system trading benefits is the elimination of much, but not all of human emotion.  Behind every system is a human manning the controls.

A trader is a bit like a poker player who sits down at a casino and plays, waiting for a bunch of fish (bad players) to come into the game so he can make money.  While he is waiting for the fish to come, he plays in a mediocre game where he makes a little, or maybe just breaks even.  But he stays in that game to stay sharp, and also because he wants to have a seat when the fish come in.  In 1999 and 2000, there were a lot of fish at the trading casino.  In 2007 and 2008, there were a lot of fish at the trading casino.  In 2014, there aren't so many trading fish.  But the fish will come back again.  I have a strong feeling that there are enough excesses building up that 2015 should be a whopper for the bears.  That is when I will try to make a big score.  In the meantime, I want to preserve my capital, play short term, small ball, and stay sharp.

Beyond the Trees

Sometimes when you are staring at the trees, you forget about the forest.  If you are staring at a dead tree in a vibrant forest of healthy trees, then you are missing the point.  Shorting the market is like looking for the dead trees, hoping for a drought, hoping for a random fire.  The market is down less than 2.5% from the top.  Not from the closing high, just the intraday high.  From a closing high, its less than 2%.  We are in the middle of a raging bull market with low volatility.  Low volatility is more a sign of supply-demand balance than complacency.  From what I hear on CNBC, I see many more looking for a correction than a straight up move.

The fact that there are willing buyers of US equities (corporations, funds, etc) means that we don't get big dips.

Right now, we are passing through a little storm, the branches are shaking in the wind.  If I had to buy or short at the current price and hold for 1 week, I would buy.  Had to hold for 1 month, I would buy.  Had to hold for 3 months, I would buy.  Had to hold for 1 year, then maybe I would short.

I am just looking for a good entry point, so I am waiting, but this sucker is going to go flying back up.  That's what ALWAYS happens.  Just a matter of how it does it, and whether its today, Monday, or Tuesday.  I am betting that we still have one more push lower before the BTFD moment.  I could be wrong, and we could go straight up from here.  But the severity of yesterday's selloff and the calendar tells me we have 1, maybe up to 3 more trading days where volatility will be elevated.  Once October comes, you have to already be long.  Got 3 trading days left to buy the dip.  Before the next blastoff to new highs.

Still Waiting for Lower

I am not shorting today, although I feel like we need to test 1960 on the SPX before the all-clear signal to get long.  There is also a strong support zone in the IWM at 109-110, which would mark a double bottom from the August low in the Russell 2000.  The S&P has been much stronger, as you probably know, so a move down to 1960 would equate to about a move down to that 109-110 August bottom area for the IWM.

This selloff reminds me a lot of the early April selloff, when went down from 1888 to 1815 over a span of a week.  It is definitely less volatile than that selloff, but the sentiment and put-call readings are quite similar.  The seasonal characteristics are also similar.  Back in April, there was tax selling to pay for 2013 capital gains in stocks.  This time, it is quarter end fund flows, which often mean selling stocks at the end of September.

Without a lot of big bear catalysts, other than a fairly slow global economy I don't foresee a big drop in stocks.  The Fed is on hold till at least next summer, so that is nothing to fear.  And Draghi will jam down a QE of some kind before the end of the year.  And a strong dollar has never been a catalyst for weakness, but simply a sign of dollar demand.

Bonds look strong here, the 5 year auction is over, and after the 7 year auction today, there are no bear catalysts and of course month end extensions coming up next week.  Would not be surprised to see overall bond strength till the end of the month.

Waiting for the ES ball

The ES 1955 ball.  We have one of those rare gap down after trend down day events.  It is rare these days.  Usually you expect the gap up after a down day.  Even if its not that big of a down day, just because of the demand from ravenous dip buyers.  But Europe won't stand for it.  It wants to remain a laggard, and it is doing a spectacular job, as usual.  They blame it on the bad Eurozone PMIs.  I blame it on a lack of QE.  If Draghi doesn't jam QE down the throat of the Germans, Europe is toast.

There is strong support around SPX 1960, which is roughly ES 1953.  That would be very close to the 50% retracement from the August low, at 1905, and last Friday's high of 2019, which would be 1962.  I am not a Fibonacci fan, but it does match the support level that you see in July where 1960 held numerous times before the dam burst.  

If we can get down to ES 1955 within the next 5 trading days, that would be a exquisite dip buying opportunity.  I am already seeing some bearishness creep in after yesterday's trend down day, with high equity put/call ratios and bearishness on Fast Money.  So the skittish are mostly out.  If I do end up buying that ES 1955, it will be for a long term trade, perhaps into Thanksgiving or early December, targeting new all time highs.  

Emerging Markets Weakening

We have a little post opex hangover, with the down futures.  But it is really minor considering the weakness we have seen from the emerging markets.  China is looking to roll over again, the liquidity injection to the banks didn't move the needle, and we are back to the lagging China, stalwart US trade.

The Chinese property prices are sinking for the past few months, it seems we are on the other side of the mountain, known as the China property bubble.  Unlike in the US, China has a much bigger percentage of its economy tied to construction and housing.  It is the main driver of domestic demand and investment.  If housing crashes in China, you have a headless dragon.

Other than China, I see no bear catalysts.  That is the only bear catalysts out there.  Europe is fine, with QE coming down the pipe.  US is always fine.  And nothing else matters.  Rate hikes are way way out in the horizon, so that will have no effect.  It is clear blue skies, except for China, and even the IPOs are not going to have much of an effect with M&A deals and stock buybacks easily neutralizing the excess supply.

So if you're going to short, short China, otherwise, wait for a dip to buy S&P. I am a bit bearish on bonds, not enough to take a position, though.

Market Refuses to Budge

Those sitting with cash waiting for a pullback to buy are being forced to wait.  I was expecting some kind of pullback this week ahead of the Alibaba IPO, but Yellen leaving "considerable time" in the language and refusing to say anything hawkish keeps the market afloat.  Unusually, the bond market actually sold off on the dovish Fed, which is counter to the price action we've seen for the first 8 months of the year.

It seems those who waited to get bonds finally threw in the towel and got back to their normal allocation and that buying force has dissipated.  Also, the Bund has been a driver for global yields to go lower, and since we've rallied so far and really have limited upside in those German 10 year yields, it has seized to provide that lift.  I still believe there will be a bit more consolidation at these yield levels, before a strong stock market and imminent Fed language changes begin to take a bearish toll on the bond market.

I am left with nothing to do, with stocks refusing to pullback.  I am forced to wait and hope for a pullback to buy.  It will be gobbled up by buyers just like me for sure.  The last 2 weeks of September are weak seasonally, hopefully post-opex can provide a bit of selling in order for me to get in stocks.

Using the Topspin Forehand

It is hard to make money shorting the indices unless you have very good timing.  But is not hard to make money going long the indices even if you have bad timing.  That is the market environment that we are in.  It feels quite repetitive, but you can make money both long and short, its just that the margin for error for going long is much greater than that for going short.

It is like hitting a forehand without topspin, sure if you hit it perfect, it will fall in, but if you use topspin, it is much more likely to fall in bounds.  Going short is like hitting a forehand without topspin, hoping it goes in.  Going long is the topspin forehand.  Why do you think Rafael Nadal makes so few unforced errors?  Its because he uses a ton of topspin and his balls don't go flying out of bounds very often.

Well, I just am very reluctant to short at this stage of the market.  Even if I feel like we will pull back, it is not the high percentage play.  The high percentage play is to wait for the dip and buy.  Well, we are dipping, and I am waiting for just a slightly bigger dip and I will be buying with both hands.  Still waiting for SPX 1950 to 1960 for an exquisite dip buying opportunity.

The FOMC forward guidance language change and the Alibaba IPO have combined to make this market heavy.  It shouldn't last too long.  I give it until the end of the month, at the most.  We should bounce back easily once the uncertainties are gone.

Theory on Market Volatility

I recently read a tweet that stated that the S&P 500 has not had a 3% weekly move, up or down, in 87 weeks.  I can probably remember the last time it happened, it was the first week of January 2013, when we had a huge ramp up from resolving the much worried about fiscal cliff.

It got me to thinking about the reasons why the market volatility remains so low.  I can think of it in terms of trading a long time ago, in stocks, when I was short selling active daytrader stocks.

For those that are familiar with short selling daytrader stocks, a bull market provides much much more opportunity to make money than a bear market.  It is counterintuitive, because many more stocks go down in a bear market than in a bull market.  But most of the best stocks to short have no relevance with the real economy, or even the S&P 500, because they are either scams or have no viable long term business.  In order for there to be a good short selling opportunity, a stock has to go up above and beyond its reasonable value.  That happens much more frequently in a bull market than in a bear market.

One of the reasons short selling was so profitable during the dotcom boom (before the bust), was because there were so many stocks where the price was going way beyond their fair value.  People usually assume that those that made money in the internet bubble did it by going long the internet stocks.  While among the small minority, I know many traders that made their money exclusively shorting pumped up POS during that era, trading short term, with most trades lasting just a few days.

During those internet boom years, the number of traders playing the long side overwhelmed the number of traders playing the short side.  There are always more traders willing to go long than short individual stocks, even in a bear market. That's just how the market is.  The long/short ratio in short term trading was even more highly skewed than normal towards longs during that time period.  What you had was a lack of shorts in speculative stocks, which allowed a pumper that ran up on some news release, to go from 8 to 18, instead of just going from 8 to 15, because of all longs overwhelming the natural sellers, and also the lack of short sellers.  And after the pump was over, because of the lack of shorts covering during the subsequent dump, the stock would actually fall further on the way down, going from 18 to 11, for example, instead of say 15 to 12.  If you had a more normal ratio of shorts to longs, the volatility would have been dampened.

Of course, high volatility is a double edged sword.  If you are too early in entering a position when volatility is high, there is a lot of pain to be endured, even possible margin calls, before the position goes your way.

There is a certain range for the ratio of willing buyers to sellers that needs to be maintained to have low volatility conditions.  Granted, this range is usually maintained in equities, so markets are usually low in volatility.  But when you get a ratio of willing buyers to sellers that is skewed towards too many buyers, you get volatility at the top.  If you get a ratio of willing buyers to sellers that is skewed towards too many sellers, you get volatility at the bottom.  Emphasis on willing, because buyers and sellers always have to be matched.  In order to entice unwilling buyers to buy at the bottom, you have to lower the price.  And vice versa at the top.

Bottom line is that this kind of low market volatility condition is not a symptom of a top, but a symptom of a balanced ratio of willing buyers to sellers.  You don't often see a market top under these conditions.  Remember in the run up from 1991 to 2000 bull run, the lowest VIX years were not when the market was near their highs in the bull run, but in the middle of it, in 1993 and 1995.  And in the bull run from 2003 to 2007, the lowest VIX years were in 2005 and 2006.

Bond Crush

There is something that we haven't seen in quite a while, and that is a long squeeze in the bond market.  As I mentioned previously, I don't believe bonds are a good place to put your money any longer.  We've reached the point where German Bund 10 yr. yields are struggling to go lower, having reached sub 1% there, and with QE almost down to a trickle, there is much less demand coming from the biggest buyer over the past 5 years.

The Treasury market is now on its own, without QE, you will have more of these spastic selloffs that extend for much longer than we're used to in a QE world.  Plus the fear of being long bonds ahead of forecast Fed rate hikes next year is getting more real, as we get closer to launch off on hikes.

However, I am always very hesitant to be short bonds at anytime, with the drip drip nature of negative carry and my long term view that the US economy will weaken again like the rest of the world.

Stocks are going to feel some of the effects of the higher interest rates, but unless we get a huge bond selloff to 3% on the 10 year, I don't expect that to have much of an effect on stocks.  Stocks are in their own world, with money flows coming from fixed income as TINA (there is no alternative) comes into play.  Plus the bubble aspects of higher prices begetting higher prices are in full motion.  The strongest market in the world, the S&P 500, will likely the be last man standing before a new down cycle begins.

Short term, there is a lot of angst about possible change in Fed language at the upcoming FOMC meeting.  Don't bet on Yellen feeding the bond bears this time, because last month's job numbers probably have them frozen in their tracks for the time being.  But it seems like there will be a change in language in October or December meeting.  Still looking to BTFD a bit lower from here.  Seems like we'll grind higher once all the dust settles after the FOMC meeting and after the Alibaba IPO.

Late Day Reversals

We got another late day reversal to the down side yesterday.  The market has been finishing relatively weak and looks heavy.  It doesn't have much predictive power, but it is noticeable that we are having trouble trading above 2000 for more than a few hours.

That AAPL event was well advertised, and traders seemed to remember being burnt by buying ahead of the event in the past, so we didn't get that big selloff on the event.  Overall, the coming IPO supply is casting a shadow over this market, and fund managers could already be raising cash for the Alibaba IPO.  That is a lot of money to free up, $20B.

Bond market looks worried about the Fed changing the language in their statement, to take away lower for longer language.  Should we also analyze what Yellen is going to eat on FOMC day?  The lack of new news is forcing the traders and media to nitpick for anything out there to move the market.  After the taper tantrum last year, the Fed is going to be extremely careful hinting at tighter policy.  This is meaningless, and last week's NFP number is probably gonna freeze the Fed in its tracks next week.

Looking for a pullback down to 1950 to 1960 after the Alibaba IPO comes out and the supply weighs on the market.  That should be near the end of September.

2015 Gonna Be a Whopper

2014 has been a tame year.  A ho-hum market filled with low volatility periods with very brief bouts of mild worry.  But it is setting up a whopper for 2015.  I believe 2015 will be the year equivalent of the 2007 that people feared last year, and this year.  The economy cannot hold on much longer.  The long term economic weaknesses are being masked by a strong stock market and animal spirits.  There is no escape velocity for this economy.  I am a bigger believer in Harry Dent Jr., and his Demographic Cliff, than I am in economic optimists who believe the job market is strong and economy strengthening.  I am in the minority here, and that only strengthens my belief that when others come around to my view, the repercussions in the market will be vicious.  In 2015, I can envision a move down to 1740 in the S&P 500, a move to 1.80% in the 10 year Treasury.  A move to 0.6% in the 10 year Bund.

The higher the equities goes, the spring just gets more coiled for an explosion.  You are building up potential energy for future volatility.  You don't get volatile periods out of the blue.  It has to be set up by overvalued markets that tip over into less stable entities.  To a certain extent, you need excess to build up in the economy in order to set up a fall.  That excess can be present in the real economy, in the form of overcapacity in the tech sector, or overcapacity in real estate.  Or it could just be excessive supply of stocks or excessive stock prices.

But all this is looking beyond the peak and into the next valley.  Is it not of immediate concern.  It is just in the back of my mind, something to pull out when the time is ripe.  We must first deal with the coming peak, which we are still climbing.

The market should struggle with the current levels, as we are heading into a monster amount of supply in the Alibaba IPO, and other IPOs lined up afterwards.  A lot of free cash will need to be freed up at the funds in order to sop up the new supply.  It is looking like post opex starting the week of September 22 looks the most vulnerable for a decent pullback.

Increasing Intraday Volatility

Yesterday probably surprised a lot of traders.  After having a gap up open and selling off right from the opening bell for Tuesday and Wednesday, yesterday, we had a gap up and there was some follow through buying, but it didn't last long.  While Europe was roaring higher, after Draghi's QE musings, the S&P reluctantly went higher, but the air is quite thin up above 2000, and we sold off viciously intraday, something we haven't seen too much of.

And now for what I haven't seen in what seems like ages, a big gap down heading into the NFP report, on no news.

After the past 3 days of price action, it is becoming more apparent that equity buyers are not eager to pay up at these levels.  We may have to consolidate for a few days and have a little pullback to scare out the skittish bulls, before we grind higher again.  I will not play short to try to catch the pullback.  Instead, I will be waiting with baseball glove in hand waiting to scoop up stocks on the dip.

This is a benign environment, now that Draghi is bringing out the bazookas and the Fed ignores the strengthening economy and refuses to speed up the rate hike schedule.  After 5 years of upward price action, it looks like we have the recipe for a full blown bubble.

Short term, we are looking shaky, due for maybe a 2% pullback soon.  Buy it.

Do Not Be Influenced by AAPL

Some may see the 4% drop in AAPL today and extrapolate that to future equity index weakness.  But I would caution against making that quick assumption.  For most of 2013, AAPL was a laggard while the S&P ripped higher and higher.  I also would ignore the too high, too fast theory.  That may have applied when we hit 1980 in July, but we've had the scary pullback, and the V recovery.  The market has mostly gone sideways for the past 2 months, although with a slight upward bias.

Fundamentally, there is still the QE catalyst from the ECB, probably set for December, and the Fed will not be doing anything for the rest of the year.  There are no bear catalysts right now, and the price action is quite bullish, with bulls preventing any big dips from happening.  Also, there is a healthy skepticism on down days, as even though we barely went down today, put/call ratios were fairly high.  

Seasonally, now till mid October is bearish, but that doesn't guarantee weakness, as we've seen plenty of strong Septembers and Octobers.  I am not going to ride the bubble, but I will be opportunistic in buying dips for quick trades.  Eventually we will top out, and I probably won't be able to catch the top for a short, but I don't want to get squeezed out on a short just because valuations are high.

Surprisingly Weak First Day

Was expecting a bit of bull fireworks this morning after the long weekend and no bad news.  Instead we got a weak little gap up that quickly faded to fill the gap.  The volatility is quite low and not very conducive to trading the indexes.  Now I don't think we'll be able to make much ground above 2000 before we get a little 2-3% correction which will be a raging buying opportunity.

There are some interesting things going on in individual stocks, as I see more pump and dump activity, looking at HGSH and DGLY this morning, both stocks are continuing their pumps, even though the news and theme are quite weak.  Cops having to use cameras is a bit of a kneejerk theme, based on that cop shooting in Ferguson, as daytraders are running out of good ideas.

It looks like the month end pump is being unwound very quickly in bonds, as bonds are getting crushed even though equities are only slightly higher.  I would stay away from bonds on the long side for the coming months.  The up move looks to have exhausted itself.