2015: A Year of Transition

The market is delivering a surprising back to back selloff to end the year, and the VIX is trading at 17.5.  This is quite a resilient VIX index despite sitting just 1% below all time highs on SPX.  This market is resembling the late stage of a bull market that is transitioning to a bear market.  This transition is usually marked by higher volatility along with all time highs.  This happened in 2000 and 2007.

Despite this, the market shook out quite a few bulls on that December dip, and based on the V bottom template, January should be a strong month for stocks, or at least pullback proof for the first half of the month.  In the late stages of a bull market, you have a VIX that trades more often above 15 than below 15.  Also, you get drops out of the blue without warning, like we had in December and even October, which didn't give warning signs such as increasing volatility ahead of the fall.

It is going to be a treacherous market, a market where you will have to be positioned short or in cash before there is any warning of a drop.

Crude oil looks like it is near a bottom here, and with seasonality getting much more positive as February and March arrive, the start of the refiners pumping out gasoline for the driving season.

Overall, expecting a stronger 1st half of the year, with increasing volatility as the valuations are overvalued and we are nearing saturation in equity ownership.  This should lead to a transition during the middle of the year, just as the Fed prepares for rate hikes, and the market will likely be weak and dare the Fed to hike rates in the face of stock market weakness.  And once again, I predict that the Fed will placate the market and not hike rates next year.  We'll see.  Forecasts are often wrong, I will take advantage of opportunities as they arrive, and not force the issue like I did sometimes this year.

Happy New Year, and hoping for a whopper in 2015.

Grecian Formula

We got another Greek special.  Talk about bringing out your dead horses with bat in hand.  All of Greece could fall into the Mediterranean and I doubt the S&P futures would be down more than a few handles!  We got the rejection of the establishment candidate in Greece and now there are fears of an anti-bailout party coming in at the next election.  Greece needs the EU much more than the EU needs Greece.  It still amazes me how much fear was brought up over Grexit, quickly forgetting that there is no growth in Europe, which is the main problem, not Greece exiting the EU.  A bazooka QE by Draghi will make any screams from the Greeks totally irrelevant and fruitless.

We got the gap down on Greece, as the chicken littles are in control today.  It may last for a day or two but I expect another surge higher as the calendar turns to 2015.  Overseas, Hong Kong H-shares had a huge rally, as the recent A-share strength is spilling over into the H-shares.

Slow Trade Till January 2nd

We are now in the holiday trading season.  The Monday after December options expiration is usually the beginning of low volume slow trade, lasting until the first trading day of January when volume explodes higher.  I will trade accordingly, expecting much less volatility and will be making few trades given the few opportunities on hand.  If you are long, stay long.  Those who are in cash should buy any dips down to ES 1960, or SPX 1967.  There should be an upward bias during this slow period, but nothing like what we saw the last 3 days.

This is a benign period, both seasonally, and due to recent history of strength for up to 2 months after a V bottom.  We had that V bottom last Tuesday.  So we should be pullback-proof till at least middle of January.

Ridiculously Bullish

The bull market is entering warp speed.  We are entering the bubble phase here, higher volatility, more abrupt fast moves, up and down, and VIX that is trading closer to 20 than 10.  We are at all time highs and the VIX, which would normally be trading around 12 or 13 in previous instances last year and this year, is now trading above 16, right in front of Christmas.  Ridiculous.  A bit 2007-esque.  Remember, the low in VIX during the bull run from 2003 to 2007 was from 2005 to early 2007, not summer or fall of 2007 when the S&P hit its peak.  Long term tops are marked by higher VIX readings, not lower.

The VIX has been quite sticky here, maintaining higher levels despite the rally.
I believe we are now entering a new phase of this bull market, more volatile, more rapid moves up and down with very few warning signs.  This 110 point pullback really showed no symptoms of weakness before the drop.  It just happened.  It will be a more vicious and treacherous market out there.  I have finally seen the first signs of a long term top of this bull market.  This bull market is on the clock.  I give it 9 months max from here.  Next year  should be similar to 2000 and 2007.  2015 will be quite the show.

Pure Strength and VIX Remains Bid

Wow.  That was a show of power that I haven't seen in a while.  Back to back 2% up days right near all time highs.  Extremely rare.

The VIX futures were barely down today even though SPX went up 52 points.  And that is right before a slow 2 weeks of trading before Christmas and New Year's.  That is almost unheard of.   I don't want to read too much into two days of trading, and perhaps this is a short squeeze ahead of triple witching tomorrow.  But, it is quite possible that we are entering a new volatility regime.  And that is what happened to volatility in the late 1990s as we entered the blow off phase of that 90s bull market.  Something to think about as we head into what should be an epic 2015.

Another V?

We are well on our way to another V bottom.  I am surprised that we are seeing such a big gap up after a 2% up day yesterday on "good" Fed news.  Europe seems to have found a bottom, and in a weird change of circumstances, Europe is helping to drag the US higher.  Of course, higher crude oil prices is satiating the commodity bear is bad for stocks crowd, however irrational they are.

In any case, looking at the volume and the VIX this week, it smells like a bottom and feels like a bottom.  It probably is a bottom.  That plus you get positive seasonality for the next two and a half weeks and you have all the ingredients for a move higher from here.  It may seem a bit painful to pay up so much from earlier in the week, but if recent history is a guide, you have to be a buyer.  And hang on.  Buy the dip and ride it, for at least 1 to 2 months.  That is the story of this bull market.

The time to ride it higher is here.  Expecting new S&P highs by January.

Russia and Oil Fears

Who cares about the ruble?  Liquidation doesn't care.  Margin clerks just liquidate based on price, not reason.  Russia is getting crushed, along with the ruble, and now there are fears that it will crumble the S&P.  We are in a time period where liquidity is starting to thin out ahead of the holiday, and traders want to reduce risk before Christmas and year end.
The much touted Santa Rally will have to wait, at least for a bit longer.  I am liking these levels to get long, and will be buying the fear at the open.  It is almost standard now.  Gap down big on exogenous events and squeeze higher at the open when the US traders come into battle.

Europe has been getting crushed lately, perhaps due to those Russian fears, but if the fears are irrational, which I believe them to be, this is a time to buy.  There will be volatility today, and there is no real solid support now till you get to SPX 1960 to 1965, 1980 was support but we're trading below that in pre market as the futures are getting whacked.  ES 1953 to 1958 are your absolute puke out levels to watch for today.

Treasuries are doing a October 15 rehash as the market volatility goes to a higher level.  Treasuries look toppy to me, and this could be the capitulation.

I am a buyer of stocks today.  It is buy and just hang on tight.  This roller coaster ride is almost coming to an end.

Closing in on a Bottom

Starting to see divergences between an S&P that keeps going lower and a VIX that is not making higher highs as we go lower.  Plus you have bonds finally selling off here, which means the fear bid is slowly dissipating and oil is getting closer to a short term bottom.  Even though it is irrational, lower oil has scared equity investors who fear some junk bond contagion coming from the oil sector.  But lower oil helps just about every other sector, although on a small scale, so net net, it is a positive, not a negative.  But the forces of liquidation can control short term price movements. Those in energy names are bleeding, and they are being forced to dump their shares as prices go lower.

I am constructive on ES around 1995, so if there is any intraday weakness today off this gap up, I will be looking to scoop up some equities on the dip.  IMO, worst case scenario, ES gets to 1975 to form a short term bottom, and bounce 3%.  Best case scenario, it bottoms on a dip today to 1995 and runs back to all time highs by beginning of January.

I do not want to be short here at all.  It is just be long, or wait for the right long entry.  Being short is out of the question for me.

Watch the VIX

The VIX was a clue yesterday that the market was not going to be able to sustain the rally.  VIX was not down that much even though the SPX was up over 1%.  Of course when SPX sold off, you had a monster volatility squeeze as those short VIX scrambled to cover.  It is pretty amazing to me that the VIX went over 20 yesterday even though we are only about 2.5% below all time highs.  It seems like there is very little risk tolerance at these moment in time, in front of the holiday season and end of year.  Those short VIX or too long equities are cutting back exposure before the liquidity dries out.

Right now, we are close to a buyable level, around 2020 on SPX, and I will start to nibble n the long side today.  I think today will look like a good buying opportunity when we look back in a week.

5 day Pullback

I underestimated the pullback and thought we would get a quick dip and rip higher, which did not happen.  Probably the biggest clue yesterday that we would close weak was the lack of volume on a down day by lunch time.  Usually on a down day, you want to see a lot of volume to clear out the weak hands and get the job done.  Low volume means you have to stretch out the pullback over more days.

After the quick one to two day dip, the next stage of pullback severity is the 5 day pullback, which is fairly standard after a big up move.  As I have mentioned in a previous blog post about pullback cycles, the 3 most common lengths of pullbacks are the 5 day, 13 day, and 22 day.  Since we are nearing Christmas and the slow trading season, a five day pullback seems most likely here, especially considering the lack of volatility previous to this down move.  The first dip is usually to be bought, and this is the first significant dip we've had since October.  The next dip will be trickier.

So that gives us today and Friday as the most likely window for any more equity market weakness.  After that, you start getting more positive seasonality as we approach December options expiration and then Christmas.  Most of those looking to lighten up before the Fed next week, Christmas and New Years are doing it this week.  I view this week and these price levels as a buying opportunity of course.  It doesn't mean that we can't go a little bit lower.  We could probably get down to around 2015 on this leg lower, or we could have made the lows yesterday.  Not totally sure, it is nitpicking price points, in either case, the upside from here is greater than the downside for the rest of the month.  Keeping the swing long.  Perhaps till we reach Christmas.

Greece, Crude Oil, and a Bit of China

The three worries for investors.  Greece is going to have snap elections and the fear is that Syriza, the left wing who are anti-euro bailout will win.  This tanked the Greek stock market 13% yesterday, and more today.  Do the Greek politicians trade Eurostoxx futures and options?  They sure do a good job of manipulating the market in the short term.  Long term, they will keep pumping bailouts to Greece, always have, always will.

Crude oil tanking worrying stock investors is puzzling.  The US is the biggest oil importer in the world.  The effects on oil producers is a drop in the bucket to the stimulus that lower oil provides the US economy.  A supply driven drop in oil prices is always a positive for the US stock market.  And lower oil will help to keep the Fed more dovish due to lower inflation expectations.

China dropped huge yesterday and rebounded big today.  The money is going from real estate to the stock market.  The Chinese are stuck with few good investing options.  They can't take their money overseas because of capital controls so they either have to go with Chinese stocks, Chinese real estate, bonds, or savings.  It seems like they are going for stocks in a frenzy lately, that is unrelated to any kind of real fundamentals.  The liquidity is overflowing there as well, so you can get huge moves in stocks.  So China dropping big is rarely a driver for US equities.  They have been dropping since 2010 and that hasn't done anything to deter a US equity bull market.

Staying long, the irrational fear of lower oil will soon pass.

Buying this Dip

We got China plunging after surging for the past several days, on tighter liquidity conditions.  The Chinese officials have no idea what to do.  They cut rates one day, and tighten liquidity by imposing stricter rules on loans.  I guess if the market is up, they will tighten.  If market is weak, they will ease.  This is on a day to day basis!  The central bankers are just stock jockeys now.  They are slaves to the market.  If the market is down, it's time to ease.  If the market enters bubble territory, talk it down but don't do anything (don't dare tighten) until the bubble gets out of control.

Anyway, this S&P is quite weak today, and Europe is weak as it usually is.  I have bought the dip in premarket, although a bit higher than current levels.  It is a swing trade.  The forces for stock prices are up.  You need much higher rates or another crisis/recession to bring this market down for good.  We have neither.  The Chinese have shown us their cards, and they are going to be leaning towards the easing camp.  The ECB QE is inevitable.  The Fed will be late raising rates, like they always are.   Positive for risk assets for the next 2 months, till we reach true bubble territory.

We are beyond the up thrust stage, so there will be short term down days mixed in with up days, it will no longer be 90% up days like before.  But the market environment is benign.  In these markets, you have to lean long.

Bonds look like they are reaching for a climax top here.  My view is for a higher stock market, under that scenario, bonds are likely lower and sustainably so for the next two months.  We have reached the near limits for Bunds to push Treasuries lower, and I doubt Treasuries have the inherent strength to go higher on its own with rising equities.  Bearish Treasuries here.

First Dip Always Bought

Monday was the first closing dip we had since October 22.  What I mean is that we've had a couple of intraday dips, but they ended up coming up by the close.  Well guess what, the first dip was voraciously bought, as we went straight up off the opening bell yesterday.  I don't see any catalysts to take this market lower, lower oil prices is not going to do it.  The anticipation of ECB QE will keep a bid under the European indices.  If you keep Europe under control, then really there is no boogie man out there except China, and they are on the monetary easing path with that surprise interest rate cut.  And more to come for sure.  So no negative global catalysts.  None.

So all the monetary spigots are open, and the Fed will not do anything to disrupt the party until we get a full blown bubble.  We have a long ways to go to get that full blown bubble.

You need to see interest rates going higher in order to even get a small hint that the rally is in the late innings.  Rates are not going higher yet.  So rally still has much more to go.  Same old, same old.  Game plan is to look to short crude oil between $69 and $70, and buy any 1% dips in S&P.    On bonds, just play the 10 yr range, from 2.20% to 2.40% for the rest of the year.  In the middle right now, so wait for 2.38-2.40 area to get long bonds, or wait for 2.20 to get short bonds.

It's the Crude Oil Show

Crude oil is in the news, everywhere, all the time.  The market is now obsessed with crude oil and how it will affect everything from other commodities, to stocks and bonds and currencies.  This is not a demand driven selloff, but a slow building up of excess supply with a strengthening dollar pushing prices lower.  The stronger dollar was the catalyst for a market that was vulnerable to the downside because of the strong oil production coming out of US shale oil plays.

I have never seen a supply driven drop in crude oil prices leading to long term weakness in the stock market.  The US is a net importer of crude oil, lower crude oil prices is a net benefit to the US economy.  If this drop was demand related, it would be something I would be more concerned about for stocks, but it is not.  The lower oil prices will act like a mini stimulus for consumers and it also helps to keep bond yields lower, both benefits to the stock market.  Whatever negative you get from the energy sector is vastly outweighed by the benefits elsewhere.

Watching crude oil, it doesn't look like it is ready to bottom yet.  Crude oil is not like the S&P, it is more like gold, it usually doesn't V bottom.  You will be stuck at this lower range in crude oil, between $60 and $70, for at least another few weeks.  I am much more comfortable selling short than getting long crude oil.  Only extreme dips in crude oil are buyable.  But a few dollar bounce is a raging shorting opportunity.  A bounce to $69 this week would be a good short entry point.

As for stocks, I would be buying dips here, this is a buyable dip because it is based on collateral effects of lower crude oil hurting energy and creating some instability, but it will pass quickly like most dips do.