Thursday, February 26, 2015

WTI Weakness

WTI Crude Oil has diverged massively from Brent Crude, going from a spread of $2 in January blowing out to over $11.  There is a massive glut of oil, and inventory is quickly running out in Cushing, OK.  There are many who still think that WTI is the worldwide benchmark for crude oil, but that hasn't been the case since 2011, when WTI diverged from Brent for good.  The spreads between the two used to be less than a couple of dollars at almost all times.  After blowing out to over $25 in 2011/2012, the completion of a pipeline going from Cushing to the Gulf Coast crushed the spread back down to near zero, but the production must still be overflowing the pipes.

This is massively bearish for WTI, as any weakness in Brent Crude will only exacerbate the technical weakness in that market.  It just so happens that retail investors have piled into USO and UWTI to get crude oil long exposure just at the worst time, with extreme contango, and a WTI/Brent spread that is blowing out.  The contango is at $2/barrel per month.  That is almost 2009-esque.  The inventories are overflowing.  I am expecting WTI to get below $40/barrel sometime in March or April on an inventory scare that storage tank space is running out.  The best risk reward trade I see there is a WTI short on any pops, hopefully we get one at the beginning of March to sell into.  I am waiting eagerly.

On the USDJPY, I am being patient with this one, waiting for a premium entry point to get short, I'd like to get short around 122.

I am back to being bearish on Treasuries with 10 yr yields back below 2%.  German Bunds are trading 0.30%, which is absurd but they just can't get enough of the stuff over there.  S&P is boring here, the bull trend continues, but the music will stop eventually, just so hard to time a top in this ultra bullish market.  But the sentiment is starting to get a bit more frothy out there so I don't see much upside price wise, time wise, it might take a few  choppy vacillations near the top before we go down hard.

Wednesday, February 25, 2015

Wall of Worry Crumbling

The market looks unstoppable.  The future is so bright, gotta wear shades.  The slow crawl higher continues.  We no longer have to worry about Greece, at least for several months, which is forever in this business.  Then we have ECB QE set for launch in March, and then we had Yellen yesterday calming the market that the removal of patient in the Fed language doesn't mean an imminent rate hike.  In other words, Yellen just gave herself an excuse to keep rates at zero forever, while maintaining their "credibility".

Based on this kind of Fed, with rate hikes delayed perhaps forever, the dollar rally is on its final legs.  I am getting more and more interested in getting short USDJPY.  It is lagging the Nikkei, and the S&P.  Currencies are much more mean reverting that equity indices, and there is no dividend that you are charged for holding a short.  So on a fundamental and historical basis, it is just better to short a risk on currency than to short stocks.  Plus the yen is extremely undervalued relative to the USD, more than the S&P is overvalued.

Sentiment is now pretty bullish, not overexuberant yet, maybe we get that when Nasdaq breaks 5000.

Treasuries have rallied strongly this week, I will be looking to short Treasuries soon, looking for a move back up to recent yield highs of 2.15% on the 10 yr.  Looking for more boring trading until the crap hits the fan in March. 

Monday, February 23, 2015

Greece is Finally Done With

Now we can finally forget about the Greece headlines and get back to fundamentals.  This market is 3 weeks from the bottom, so that is still not enough time for me to be comfortable shorting this market.  I believe we are forming a long term top, and it will be better to be a seller than a buyer for most of this year.  The question is when do you short.  I am waiting to see a better setup to get short, the bull crowd has not fully migrated back to their maxed out positions.

I am considering shorting USDJPY instead of S&P because it does look like the weaker of the two risk on markets, and I believe the yen is massively undervalued based on PPP and money supply.  Also, the BOJ and Abe don't seem to want an even weaker yen here, and the rhetoric has toned down.  I see a USDJPY short as being a better place to be than S&P, especially if I don't time the top correctly.  Bullish Treasuries at these levels, looking for an entry point today, unfortunately we are gapping up hard off the weak close on Friday.

Thursday, February 19, 2015

Priced to Near Perfection

There is now Fed fatigue.  Just like Greek fatigue on the bear side, there is Fed fatigue on the bull side.  I saw a graphic on CNBC where they noted that the S&P was up 7 straight on Fed minutes days.  When you have so many conditioned to believe any Fed news is good news, you eventually get immuned to any dovish talk.  That is what happened yesterday, as the Fed minutes ramped the bonds higher, but the move higher in stocks was rather small, 5 SPX points, and that was a struggle to maintain that gain till the close.  And now, we get the gap down after traders already bought the good news.

There are a few headlines on Greece, as if the market is still clinging on every detail.  It really is beating a dead horse.  I am sure Greece loves all the attention, because otherwise no one would care about the country.

I closed out the Treasuries long yesterday, just waiting to re-enter a bit lower.  Looking for a down day today, as we are overbought on many measures, and all the good news is out of the bag.

Wednesday, February 18, 2015

Bond Market Pain

Haven't seen a move like that in the bonds in quite a while.  Up 50 bps in less than 3 weeks in the 10 year yield.  It is a massive reversal of the rampant buying that we saw in January, and looks like a preemptive strike on fears of a possible summer Fed rate hike.  It cerrtaintly isn't Bunds driving this move lower in Treasuries, as we have seen Bunds stay around 0.3 to 0.4% 10 yr yields so far in February.

I bought the dip in Treasuries when the 10 year was trading 2.14% yield.  We are right around those levels right now.  After such a big move, and with strong support in the 2.15 to 2.20% area, I decided to bottom fish.  This is not a long term trade, and I have a short leash on it.  Looking for a move higher into the end of the month, with a move perhaps back down to 2.04%, the gap that we left behind on Friday.  Looking for a bounce starting today, but not expecting a big move higher in Treasuries.  Just a bounce.  No need to be ambitious here, as now the intermediate trend is down for bonds, with a March Fed meeting looming, where "patient" will likely be taken out, which I am sure bond investors are loathe to be long into.

Stocks are stuck in a small range here, and the Greece news of a deal didn't give much of a boost, because we already went up ahead of it.  Anyway, it looks like the all clear signal with Greece out of the way and should be risk on into early March for equities worldwide.

Tuesday, February 17, 2015

Greece Fatigue

Europe could care less.  Eurostoxx is right back to where it was before the headlines of Greece/EU no-deal yesterday after European market close.  The scarecrow investors who are scared of Greece will be scared to the end, until Greece gets their deal.  They are obviously in a small minority because futures are pretty much flat from Friday's close when there was optimism of a Greece deal on Monday.

This S&P market is not strong enough to just power into 2200.  I really believe that the top in the S&P 500 is less than 50 points away.  In other words, I don't think we get to 2150, much less 2200.  Money will be flowing into European equities as they will get a somewhat similar type lift as Japan did when devaluing their currency. I have pictured an ECB QE as the final blowoff top catalyst, and it is here.  The top is within sight, it is just a matter of waiting for a bit more optimism from the investment public before going short.  Short S&P, short Nikkei, short USDJPY, long Treasuries are the trades under consideration when the time is right.

Expecting mostly consolidation and small ranges for this week after making a hard move up the last 2 weeks.

Monday, February 16, 2015

Grexit the Boogie Man

This is not 2010, 2011, or 2012.  Spanish and Italian 10 yr bond yields are 1.58% and 1.67%.  In 2011, they were 6+% and 7+%, respectively.  It doesn't take a genius to figure out that the markets have spoken.  They could care less about a Greek exit of the EU.  They hardly budged when Syriza got elected, and when there were worries about Greece at the end of February.  It just doesn't matter, no matter how many articles or proclamations of another Lehman.

The PIIGS minus the G don't care if Greece exits.  Because they aren't anywhere even close to a Greek situation.  They aren't on a bailout program.  If you can issue sovereign bonds at interest rates less than US Treasury, you have NO contagion risk.  How can you compare a government bond rate of 17% for Greece with less than 2% for Spain/Italy?  And the whole foundation of the Grexit scare is contagion, not Greece itself.  Greece is in a whole another ballpark compared to Spain Italy or even Portugal.  Even Portugal 10 yr is at 2.4% now.

Greece has little leverage left.  If they tried to bargain in 2011, they would have gotten a sweet deal.  But they didn't.  Now the threat of Grexit is an empty one.  I am sure some scarecrow politicians will fear Grexit, and probably a few scarecrow underperforming investors, but the market sure doesn't.  Greece is better off leaving the eurozone anyway and defaulting on their debt.   Even a weak euro is not weak enough for Greece.  Greece needs a massive devaluation like no other country in the world.  The only way they can do that is going back to the drachma.  Europe is also better off because it will finally be able to prove that one country leaving the EU won't blow up the whole project.  Europe isn't decaying because they are cobbled together with a single currency.  It is because they have the worst demographics in the world with the most levered banks.

The bond market has no fear of a Grexit.  And I'll take the opinion of the bond market over the opinion of writers and chicken littles any day.  In 2011, the whole euro zone falling apart was a big giant empty scare that was solved with the printing press.  ECB QE is a panacea for the ills of Europe, for at least a few months.  It trumps any Greece headlines or a Greek exit from EU.  Money talks, Greek BS walks.  If there is one lesson to take from the last 6 years, if you print enough money, or promise to, you can solve anything.

Friday, February 13, 2015

All Time High Again

My forecast for the year has not changed.  This is the year where the bull market turns into a bear market.  As the days go by, the stronger I feel about the end of this 6 year bull run.  Wouldn't it be neat to have the bull market top out on the 6 year anniversary of the 2009 bottom on March 6?

The breadth has been terrible despite going up steadily this week.  The market doesn't go down on really big volume anymore.  It is almost as if investors are so saturated with equities, and with so many dips this year, that it doesn't entice a lot of buyers to come in.  That is a change of character from the past 5 years when down days were always on heavy volume, and up days on very light volume.  There was always a lot of willing buyers coming into meet the sellers on a dip.  Not so much these days.  

The VIX futures are stubbornly trading much higher than the VIX cash, even though the Feb futures only has a few trading days till expiry.  Perhaps it is Greece risk, but equities haven't gotten the memo to sell on Greek uncertainty.  Let's not pretend like this is some kind of grave danger to the market.  How many rumors do you need to figure out that the Greeks and EU will agree to kick the can down the road, another 6 months at least.

I am seeing tops forming across the two favorite risk asset classes: S&P 500 and USDJPY.  USDJPY is very close to the 124 level that marked the top in 2007.  Both should make marginal new highs in early March, which should coincide with the coming rate hike talk from the Fed.  This market is toppy enough to collapse from its own weight, it doesn't need any help from Fed rate hikes to go down.  But if the Fed is stubborn and wants to prove that their rate hike talk was not a bunch of BS even though the economy is slowing down, then they will just be hiking into the next recession.

So many bearish forces are at work while we dance around new all time highs.  Like 2000, and 2007, the economy is slowing down ahead of the top, not after.  The commodity complex can attest to this.  It is not just increased supply, demand is lackluster.  China is clearly slowing down, and Europe is moribund as usual.  The 2013 and 2014 US economy is much stronger and healthier than the current one.  Don't let the strong nonfarm payrolls fool you.  These are low paying McJobs, many of them part-time.  Are two part-time jobs better than one full-time job?  

When March arrives, I will be ready to zip up my bear suit and operate from the short side.  The bear suit has gathered a lot of dust.  I've always felt more comfortable from the short side, so it shouldn't take long getting used to shorting gap up opens and covering weak closes.

Monday, February 9, 2015

Blog Break

I see very little edge in either the bull or bear side at current levels.  We are in neutral territory, not too bullish or bearish.  Don't want to force any trades in this situation.  Treasuries are buyable around 2.00% yield on 10 yr if we get another dip, and ES is buyable if we can get back down to 2016 on Greek-related weakness.  Remain bearish on crude oil, but it does look like it could go up to 54 short term, but ultimately should go back down to the low 40s later this month.

Taking a blog break while we are chopping around in no man's land.  May post occasional comments here and on Twitter, but will be laying low this week.

Friday, February 6, 2015

Less than 1% from ATH

The all time high is less than 1% away, with VIX at 16.4, but VIX futures at 18.35.  And there are no big events coming, so the VIX futures are acting quite firm for an up day after a nonfarm payrolls report.  It feels like we're still in this choppy range, and will soon revisit the lower end of the range.  I know I have felt this way before in 2013 and 2014 and it just kept going higher, but in those times, the VIX futures were hovering between 13 and 15 when so close to an all time high.  Big change this time.

Bonds are getting destroyed today on the NFP beat and positive revisions.  Will the Fed finally get rid of their put by raising rates in June?  I wouldn't bet on it, but then again, Janet Yellen is no Bernanke.  She doesn't seem like such a market slave, so far in her tenure.  Staying with crude oil short.  Its the only trade that I have confidence at the moment.

Thursday, February 5, 2015

Greek Fake Out

Whose idea was it to come out with the ECB Greece news with 30 minutes left in the trading session?  These news releases are not random.  There are higher ups that are screwing around with the markets, taking positions to profit off these kind of news bombs.  Anyway, as you can see by today's trading action, no one really cares about Greece anymore.  Selloffs based on Greece news don't have any staying power.  It is old news.  And most with real money to manage could care less, except to use the dips as buying opportunities.

Everything is bouncing back up, euro, crude oil, stocks, everything except bonds on the Greece didn't blow up the world relief rally.  I am slightly bearish on this market, but not enough to take a position.  Will remain short crude oil for a while barring any unforseen movements.  

Wednesday, February 4, 2015

Short Crude Oil

Maybe it was the wait that caused me to jump the gun.  I have been waiting for over a month to short a short covering rally in crude oil.  The opportunity just never really came, until yesterday.  And I was anxious to get in before oil went back down, and got in a few hours too early.  I should have seen it coming, with the lack of follow through weakness in US hours after making highs during European trading hours.  Shorting at $51 seemed like a good risk reward swing trade, but it was a horrible day trade.  In any case, the fundamentals of this crude oil downtrend is something that won't be clear until much later.  But from a big picture perspective, the high oil prices from 2007 to 2014 set the stage for an increase in production, which comes on with a lag, because it takes time for production to come online after all the plans, infrastructure, wells, and drilling takes place.   It just happened to come online as the global economy was slowing, especially with China slowing down noticeably.  It is not just US shale oil, but also OPEC production which is higher.

As for the S&P, that was something that I envisioned but didn't hang on because of trying to microtrade and avoid a possible weak close on Monday, instead it was a monster short squeeze that kicked off another rally day yesterday.  Now we are at levels where it will take real motivated buying to take the market higher.  I also noticed that the volume was higher than normal yesterday, which is unusual for an up day in this bull market.  Usually the rallies have come on very little volume, because there just wasn't a lot of overhead supply coming into to sell them.  Now, we are getting volume coming out to sell when we get these rallies.  That's not a good long term sign for this market.

I am neutral on the SPX, and bearish on crude oil.  It is a choppy market, and I don't expect that to change anytime soon.  My gut tells me that nonfarm payrolls on Friday will be a miss, so Treasuries will probably rally some more after yesterday's pullback.

Tuesday, February 3, 2015

Choppy But Higher

That last hour squeeze in SPX was quite unexpected.  My swing long, which I wanted to hold until 2040, was sold too soon, because I thought I could rebuy at the close, for a bit lower.  Completely wrong on that.  And missed the trade.  You cannot get caught up in microtrades when you could lose your position in the process.  I lost my position, and had to settle for a small gain when I could have a very healthy 30 point gain on my hands here.  You can have an edge with your game plan, but if your execution of the plan sucks, you won't make anything.

I am still bullish, and looking for higher going into the European close today, but yesterday's moves took the starch out of me.  I am back on the sidelines waiting for a better setup, but probably will go higher today, just conviction isn't that high.

Monday, February 2, 2015

A Lesson from Super Bowl

The Seattle coach made the right decision to pass when New England had a goal line run defense set up.  The execution was poor, and thus resulted in an interception.  Then came the armchair quarterback criticism saying it was a dumb decision.  The statistics for the season, although a small sample size, showed Marshawn Lynch having very little success in running it in for a touchdown around the goal line when the defense was stacked up against the run.  Just like in investing, everyone that keeps score is results-oriented.  For fans, just like investors, it is never about what the probabilities are beforehand, just what the outcome is afterwards.  The pass was the higher percentage play than the run, but nothing is 100%.  The odds of an interception are very low in that situation, but not zero.  The worst possible outcome occurred, but it doesn't make it the wrong decision.

Just like in poker, what keeps the long run losers in the game is the luck factor.  Trading is a game of probabilities.  The long run winners are usually on the right side of probability, and the losers on the other side.  But anything can happen in one day, in one week, even one month.  The losers, if they have luck on their side, can win in the short term, but the more they trade, the more the probabilities come to bear.  In the long run, the probabilities play out and the long run winners win, and the long run losers lose.

On to the markets.  Crude oil has rallied strongly now for two straight days, after bottoming at a new low last Thursday below $44.  With seasonality suggesting a bottom in oil any day now, it should be a support for this market, at least for those who are in energy names.  I remain long ES from Friday's close, and will hold it for a swing.  ES resistance levels are 2015-2018, and beyond that 2033-2036.  A close below Friday's low will be a warning sign that this market will need to probe lower levels before bottoming.