Tuesday, January 6, 2015

Volatility at the Top

My previous proclamations of a blowoff top will probably not happen.  The ingredients for a blowoff top are all there, except the desire of the public to go overboard in love for equities.  Instead, there is a tepid like for equities, and I don't see investors giving any more love.

The ingredients are:
1) BOJ going full throttle QE with foreign asset purchases thrown in igniting yen weakness, which all the funds love.
2) You had China with a rate cut, igniting their market like a bottle rocket.
3) Draghi with incessant hints of QE, even as recently as this past Friday.
4) Consistently strong nonfarm payrolls numbers throughout most of 2014.
5) A 5% print on US GDP with rates staying low despite the Fed threat of rate hikes in 2015.

Yet, there is quite a lot of volatility right as we are trading near all time highs.  That has not happened in this bull market.  It is a game changer.  The first hints were on December 19, when I opined about high VIX despite the rally.  What is troubling about the bull side is that the last two big drops, in December, and in the last few days, came on no news with no warning.  Price action screams saturation to me.  The S&P is dropping 20 handles intraday way too easily.  The investment community is saturated with US equities.  Those that want to be long are for all intents and purposes, long.  It feels like January 2000.  It feels a bit like July 2007.   There may still be a few on the sidelines waiting for that 10% correction to get long, but they've been waiting for years and are irrelevant.

Lots of volatility as the market trades sideways near all time highs is a big flashing red light that a long term top is being put in place.

So the easy trade of shorting the blow off top in the S&P by going long Treasuries is out of the playbook for now.  Treasuries have caught the scent of deflation and the bid there is relentless.  Long term, over the next 2 to 3 years, bonds will be the place to be.  I was hoping for a blow off S&P top to provide an exquisite dip buying opportunity in Treasuries but that is likely off the table.

As for today, we should have an inside day, trading between ES 2024 and 2009.  I will be looking to buy the dip today again, hoping to sell into any bounce on Wednesday.  No more big time targets on the long side.  This could be just one of those 5 day pullbacks, but the way we went down the last few days, and the probable fear ahead of Greek elections on Jan 25 means that I put higher odds on this selloff extending for at least 13 days into January 16, which is opex day.  If that is the case, then we should have much more ground to cover lower, with the December lows of SPX 1972 being an obvious target.


Anonymous said...

If oil stays low Fed should not hike rates this year. That being said, oil will not stay low. So when to short bonds?

Anonymous said...

Short the bonds through TBT Feb puts. Looking for a little sell off here in the next few days. Bonds aren't biotech stocks so TLT looked like a blowoff top today.

Market Owl said...

Still think its too early to short bonds. I don't think today was the blowoff top. Tough market, and I don't think oil will bounce as much as people think. I doubt we get above $60 this year.

Only worthwhile strategy seems to be to wait for extreme dips to buy equities or extreme optimism in equities to buy bonds. I don't wanna mess with a POS like oil. And yes, oil is now a POS.

Douglas Gammons said...

Shorting bonds? Wait for a dip to buy.

Market Owl said...

I will be willing to short bonds when I see equities and oil close to a bottom. But then again, probably just better to buy equities if that is the case.

Oil is influencing equities and bonds more than it ever has.

Martin@hellosuckers.net said...

I do not know, maybe I am off, but my thinking is that 30 yr Ts are yielding around 1.9% - soon we will get a better yield in a savings account (LOL). Eurozone is melting. China slowing down. Not sure what emerging markets do. US claims growth as far as GDP goes (how much can we trust it). QEs didn't post threats to the economy and inflation as common sense would tell us. Commodities are down and there is no sign of them getting better any soon.

So where else would investors go? It still seems to me that the US stocks are a better investment (and safer) than anything else out there. That's why I think this is not any different sell off than those before.

People have been complaining and expecting crash since 2009 feeling that the economy was bad and that the US was going in the wrong direction. Did they change their mind and I missed it? I think they are still about to change their mind as there is still many who are sideways since 2008 and these people didn't come to the markets yet. Or did they? And now they are about to leave again?

I do not know, maybe this is a game changer and I am wrong, but I still think we will end this year higher than the previous one. Slowing down and seeing higher volatility, but still in a bull trend.

Anonymous said...

I may have been a little early to TBT calls. Maybe I should have waited till 41. We'll see tomorrow.

I tried HABT today, had their double char burger. It was the best fast food burger I ever had, better than In N' Out, Fatburger, and most restaurant burgers. They use a unique mix of seasoning with a special mayonnaise and thousand island and also seem to season their meat. It's noticeably more intricate taste for a fast food burger. Not sure how much lower HABT will go but I don't think it deserves a 250 mln mkt cap.

America loves hamburgers and I think this restaurant has the potential to be a mini CMG. Just on taste alone. And their food is way better than the poor excuse for mexican food that is CMG. I don't like the shitty late 90's college alternative music they play in the restaurants though, but the inside of the restaurant is pretty nice as well. Tuesday night at 6 pm pretty big line for dinner crowd. Maybe 1 bln market cap if the market climbs high single digit return this year. This restaurant will serve the similar corporate and young yuppy urban and suburban demographic such as CMG.

Market Owl said...

Investors will dump equities if they feel like the market is going to go down. There is no such thing as bonds are yielding only 1.9%, so equities are better. If equities are going down, they are yielding negative. Better to get 1.9% than to lose money. And investors will buy bonds if equities are going down. There is no doubt about that. You think its a better investment to own the German Bund 10 yr bond yielding 0.44% over 10 yr US Treasuries yielding 1.9%?

No opinion on HABT, seems like a bit of a boring stock to me.

Instead of TBT calls, why not just go long TLT puts? Its the same trade. TLT options are more liquid than TBT options, and although non-leveraged, that will be reflected by the lower price for options.