Thursday, April 30, 2015

Bond Market Carnage

It looks like the panic move ahead of the 25 bp Fed rate hike is providing a sneak preview.  I don't think this is the move that takes the 10 year yields to 2.30%, but we are probably going to test that 2.12 to 2.15% range that marked the top for yields for most of February and early March (except for that panic spike on nonfarm payrolls on March 6).

The bond market is taking control, as equities cannot rally when yields are higher.  It tells you how much this market is dependent on zero rates to fuel the rally.  Just like on that nonfarm payrolls day on March 6th when bonds and equities both went down hard, we are getting another one of those moves.

I will be buying dips in Treasuries for the next several days, I believe this move is temporary and is not the start of a bigger move as some fear.  That bigger move should not be far away though, probably starting in the summer.

P.S. - There is strong support for the German Bund at 0.40%, and usually when Bill Gross goes on TV to pound the table on the trade, usually he is trying to dump it.  I am sure he's already out of his short Bund calls position.

Tuesday, April 28, 2015

Fed Fear Trade Not Far Away

There is really only one thing that worries this market, and that is a Fed that is willing to ignore the stock market, even weakness, in order to get through a rate hike.  I am seeing subtle weakness in the Treasuries even as the S&P goes mostly sideways.  It is not an in your face weakness in fixed income, with weakness across certain sectors, such as investment grade corporates and long term Treasuries.  

The market is very complacent right now about the Fed, thinking that it will be on hold till at least September, so there is a very distinct possibility that the Fed Fear trade is going to open up anytime now, on any slight hint of hawkishness, even though it shouldn't be a big deal, just because of the high levels of fearlessness among equity investors.

This doesn't look like a top, because we need more time to pass from the pullback in March/early April to be put in the investor amnesia bank, but we are almost there.  Mid May would seem to be the perfect time to put on short positions, just as the corporate buybacks provide the bid necessary to get decent sell prices for the shorts.   These corporate buybacks provide their biggest bang right after earnings season is over, and the buyback spigot is open full blast.  Just look at what happened in November last year and February.

On Fast Money last evening, Dennis Gartman emphasized his long Europe/China/Japan equities and short US equities trade.  That can only mean one thing:  that trend is almost over.  

Friday, April 24, 2015

Buyback Wave Coming

Now that most earnings reports are out, the stock buyback surge is coming.  With the lack of retail involvement, the corporations are mostly sitting on their positions, so the driver are institutions buying back stock to drive up share prices.  This wave should start in earnest in May, but with earnings worries now in the rear view mirror, its once again "too bright gotta wear shares" market.  I will not fight it, not with the ease with which the S&P has shrugged off European weakness, and the kickoff from the nonfarm payrolls bottom only 3 weeks ago.  I need to give this move more time to develop, as I feel like marginal new highs will get the crowd bullish and that will be the setup to short.  Not now, right at all time highs.  Triple tops are rare, and this is the third time we are visiting this SPX 2120 area, and I expect it to bust through with ease in the coming weeks.

I am still not seeing enough equity excitement to make me comfortable shorting the S&P here, and the VIX is just too low, I would like to see the VIX rise with the market, as a sign that the end is coming soon.

I have noticed that the WTI-Brent spread is blowing out again, which is not a good sign for WTI as this is the time of year when the US should start playing catch up with refinery demand picking up.  I will look to play short on crude oil on rips again in the near future.  Brent crude will have a hard time staying above $65/barrel.

Monday, April 20, 2015

Blog Break

Be back on Friday, this should be a slow week, not much on the economic data front, and earnings releases haven't been moving the market.  The Greece dip was short lived, and it is becoming the boy who cried wolf.  Few opportunities here, may post a few tweets but nothing to write about.

Saturday, April 18, 2015

Technicals vs Fundamentals

What is better?  1.  Trading mainly on technicals/charts or 2. Trading mainly on fundamental data/news?  Some will say they use both, or will have a trading bias and interpret the chart to fit that bias.  Without a doubt I vote for 2.  If you ever see me here saying you have to short something because its a double top, or buy something because its a double bottom, tell me to shut up.  Because it is nonsense.

Most chart readers, so-called technicians, which makes them sound like experts in the markets, have a bias on the market that they are viewing, and will draw trend lines and see patterns to fit their bias.  I have seen it over and over again.  The latest example was crude oil, where everyone and their mom was bearish crude oil as it tested $54 resistance, because it looked like a double top on the daily chart, and when it broke through, what should have invalidated their thesis, the chartists remained bearish, drawing up trend lines to say the market was short term overbought.

A trader that had no bias on a market, and traded purely based on technical analysis that can be formulated into an algorithm could make money, but that is not a technician, but a systematic trader.  But most of the traders that you see on the Twittersphere are discretionary traders who are paper napkin chartists.  They are a dime a dozen.  If you post a chart, and put a bunch of trendlines on it, it somehow makes it look more professional.

Most of the information on the internet is useless, or has negative value.  It takes a lot of digging and searching to find sources that are valuable.  And that is the easy part.  The hard part is interpreting the valuable data and news.  Some you take at face value, others are contrary indicators.

The job of a trader is to predict the future, based on the movement of prices, the news in the marketplace, and the supply/demand forces at work.  Depending on time frame, each aspect has a different level of importance.  What I've learned is that the intraday time frame, the one that draws in the most traders, is also the hardest to trade well.  That is because the best traders populate that time frame: the HFTs.  They are not just scalpers, but front runners, stop runners, and predatory position builders, who will seek out the weak hands and force them to say mercy.  The HFTs throw out feeler trades, to see which side is more eager.  If they see someone looking to accumulate, they front run it by buying ahead.  Likewise on the sell side, selling ahead of the distribution.

Trading full time makes intraday trading very tempting, because it can be viewed as a source of steady daily income, but on most days, it is difficult, especially in the futures.  In individual stocks, yes, intraday trading is much easier, especially the small-cap more speculative retail  traded stocks.  But the big markets, like S&P 500, FX, bonds, crude oil, etc. are filled with HFT sharks.

From experience, the biggest edge is found based on taking a position at a good price, with supply/demand economic fundamentals supporting that position, and holding on to it for big gains.  This is done over several months, not a few days.

Friday, April 17, 2015

Waiting for a Good Long Term Play

The money is made in the big moves.  Right now, I am waiting for setups to play a long term big move.  Nothing is too compelling here.  The top of the list is to buy Treasuries on a dip, down towards 2.05-2.10% 10 year yield.  I am also looking into getting short the ES if the traders get too bullish at marginal new highs, around 2120-2140.  Also looking into getting short USDJPY if we get a move back towards 122.

No, I am not interested in buying 1% dips in ES on the way to marginal new highs.  It is picking dimes in front of a bulldozer, and the sudden drops without much warning at the December top and the March top make it dangerous to buy a dip hoping for a consolidation at the top, when it could just be a straight waterfall down 5% with no consolidation.

The Greek worries are simmering here today, and the Eurostoxx has gotten crushed, for rare back to back down days.  Monday probably brings a relief rally, but again, I am not interested in going out on the risk curve unless you get a deep dip, no playing 1% dips for me.  So not much going on here as far as long term trading opportunities.

Thursday, April 16, 2015

Greece Default Worries

Something popped out at me today as the Greece default worries weigh on the equity market.  The euro is substantially higher as the equity market goes lower.  This tells me one thing:  The dollar is a risk on currency right now.  In other words, the long dollar, short euro, long equities trade is a heavy part of fast money portfolios.  Oddly enough, the Chinese market soared today, the A Shares went up 2.7%, and the A Shares futures is hardly flinching on this European market selloff.

Today is a mini-preview of how the market will react when you get a risk off day.  The equities obviously will be lower, with the European indices taking the biggest hit, followed by Japan and then finally the US.  The emerging markets are so underweight that they will hardly flinch unless things get really panicky.  And the main thing:  the dollar will likely be weaker, not stronger.

Greece doesn't really matter, but it is like a little midget hurdle that the market will jump over and congratulate itself for getting past the Greek default/exit issue.  In reality, the dip on a Greek default would be a buying opportunity, because there will be no collateral damage since would get rid of a so-called "bear catalyst".  Not that it would be much of a dip, since there would be no fundamental effect on the financial markets.  Greece is a giant red herring covering up what the core problem of equities are:  overvalued and overowned.

Tuesday, April 14, 2015

Implications of a Dollar Reversal

The big consensus trade that is on right now is the strong dollar trade.  If there is a reversal of that consensus trade, and the dollar weakens here are a few of the implications:

1) Weaker European equities.  Counterintuitively, weak US economic data leading to a weaker dollar and a more dovish Fed will be more bearish for European equities than US equities.  This is why European equities will be the nexus for upcoming equity weakness, because the biggest potential catalyst for equity weakness is a weakening US economy.  The other global economies are so moribund, not much is expected from them.

2)  Lower global interest rates.  The one catalyst keeping traders from going all in on Treasuries is the potential for Fed rate hikes.  A weaker dollar would be a sign that the US economy is not strong enough for rate hikes, thus pushing money from equities into bonds.

3)  Weaker Japanese equities.  For the same reason as noted above with European equities, as a stronger yen is the kryptonite of Japanese equities.

4) Hedge fund panic.  The hedge funds are heavily betting against the euro, and for a stronger dollar.  A weaker dollar would wreak havoc on their returns.  This could lead to collateral selling of their favored positions, which is European and Japanese equities.

5) Yield curve steepening.  The weak dollar would be a sign of lower for longer, and the front and the belly of the curve would be the biggest beneficiary of a weaker dollar.

By the way, I am not calling for a weaker dollar, but the strong dollar theme is long term unsustainable given the purchase power parity and trade flows.

Monday, April 13, 2015

Central Bank Omnipotence

China is the last frontier for the central bank play.  If the central bank is lowering interest rates or doing QE, buy that country's equities.  It is a simple game plan, and it has been working brilliantly for the past 6 years.  But nothing in the markets that is so simple and widespread lasts forever.  Everyone knows this gameplan.  Even the daytrader in China.  China is the last man on the central bank train, and retail over there has piled into Stock Bubble 2.0, just 8 years after the last one.  Not to forget the US markets, where we are in the final stages of the central bank led bubble.

The more the spring gets coiled, the bigger the move in the other direction.  We are building enormous amounts of potential energy in the negative direction, as the spring is about as coiled as it gets.  If the spring gets anymore coiled, it would be like nuclear fusion, bringing about spontaneous combustion.

Usually when you get these extremely high valuations and bubbles, you hear a lot of bubble talk.  Believe me, there was a huge chorus of "this is a bubble" talk in 1998 all the way to 2000 before the thing imploded.  This time, there really isn't that bubble skepticism, it is almost as if the central banks are believed to be alchemists who can create wealth just by whispering into the market's ears.

I believe we are less than 5 months away from the start of a long bear market in not just US equities, but global equities.  I don't believe those who say that you can't fight the Fed or that central banks can keep equities at high levels forever.  There is not enough of a sample size of QE to support such brash confidence.  This is an experiment with a short history.  Unless the Fed directly starts buying equities like the BOJ, there will be a bear market coming soon.  It is a combination of overvaluation, equity allocation, sentiment, and price action that have led me to this conclusion.

We should see a couple days of pullback ahead of April 15 tax day, as investors sell stock to pay their tax bills.  It should be a boring market for the rest of this month, so don't expect anything exciting here.

Friday, April 10, 2015

Eye on the VIX

The VIX is giving off signals here that bears will not like.  It closed at 13.09, which si quite low for not being at an all-time high.  The VIX was higher in late March when the S&P was also a bit higher.  When you have a VIX hitting near new lows while the S&P doesn't make new highs, it tends to be a bullish indicator.  On the other side, a higher VIX and a higher S&P is usually a bearish indicator.

In general, a lower VIX is not a bearish sign, especially when it is accompanied by an S&P that is not making new 52 week highs.  Options buyers and sellers that determine implied vol of put options are usually not dumb money, they usually are on the right side of the trade.

I should have paid more attention to VIX, but one set of eyes can't keep track of everything.  But this low VIX does set up a sell signal later, but it takes time, usually at least 2-3 weeks.

Cannot be a seller here, I am afraid we are back to the buy any 15 SPX points dip mode for the rest of the month.

Thursday, April 9, 2015

Shanghai Bubble

The Chinese are serial bubble blowers.  We got another one on our hands.  From the stock bubble to the property bubble back to the stock bubble.  Usually you don't get these bubbles so close in time to one another, since the last bubble in Shanghai was in 2007, just 8 years ago.  I am surprised at this bubble, considering the weakness in the real estate market in China.  It is mostly retail driven, and from the articles that I am reading, it seems like there are a ton of IPOs that have been issued and are being issued.  Eventually all this supply will wreck the bubble there, when I am not sure.  The bubble shouldn't last long, considering how fragile the Chinese economy is at the moment.

This all points to the theme of investors moving out on the risk curve as the bull market ages.  Now international stocks are the most popular, even though the fundamentals are not very positive.

The action in crude oil recently is wild and unpredictable, they love them one day, they hate them the next.  I don't have a good read on it.  I do believe this S&P 500 should pullback some before the earnings start to stream in next week, but it is hanging up high here longer than I expected.  Tough market these days.

Tuesday, April 7, 2015

Crude Oil Hook

They hooked em.  The crude oil shorts got the hook.  The Iran nuclear deal news was the bait.  The fish bit in droves on Thursday.  After the Easter weekend, hook, line and sinker.  The fishermen are those that are long, who bought from the shorts last Thursday below 50.  I smelled something fishy last week when the market hardly went down ahead supposed upcoming "bad" Iran deal news for crude oil longs.  I got out before the deal, afraid of a counterintuitive bounce on the news, as shorts covered.

Well, WTI refused to go below 47, and spent most of the time trading between 48 and 50 as the deal was being negotiated.  After the deal, I am sure the shorts were just counting their money but the market doesn't work that way.  All the nervous longs already sold before the deal, and the eager shorts helped to keep the prices below 50.  With that pressure off after the deal, all you had were shorts in the hole and longs that waited to buy lower, being forced to buy higher or miss out.

What to do now that crude oil is almost 54?  The WTI-Brent spread is almost down to $5, and the super contango is gone, with a more reasonable $1.25 spread between May and June futures.  The market moves before the news, and it is sensing inventories stabilizing here, and with driving season coming up and refineries ramping up production of gasoline, the inventory builds are soon to be history and you will see continued upward pressure on prices as the nervousness of oil hitting storage tank tops dissipates.  It is now a market that favors the long side.  My crude oil short thesis was dependent on longs panicking out as they feared storage getting full, but its too late for that.  May is when inventory drawdowns historically begin, and last until the winter.  However, I will not play it, because the long term trend is still down, and I don't believe there is that much upside, but there is even more limited downside.

As for stocks, I think we are near a short term top, and believe we will have one more move down to ES 2035-2040, where I will look to be a buyer.  I will consider a small short tomorrow if we stay above ES 2075, targeting a move lower by Friday.  Concurrent with my short term bearish equity view, I am bullish on bonds.

Monday, April 6, 2015

Bad Econ Data = Good for Stocks

The market could care less about the weaker economic data.  Most of it is made up anyway.  So whatever you can do to get the dollar weaker, the stock market will love.  We are still firmly entrenched in the weaker dollar, strong stocks meme.  So the gap down today was an invitation for rookie bears to get their face ripped off while the fund managers loaded up on cheap shares (well, relative to pre-NFP).  It should be a one-day wonder, as the Europeans will take down their market because the euro is stronger!  The pie is not growing.  If the Europeans like it, then the Americans won't.  Strong dollar is good for Europe, bad for U.S.  It is that simple.  At least till we get through the next couple of weeks, then you'll get the wave of stock buybacks coming back looking to ramp up prices.  

Crude oil looks to be in a bottoming phase, but with the steep contango, going long is treacherous.  Yield curve has been steepening as the bond market has sensed that the economy is not so strong and that the Fed will delay rate hikes.  It should continue to steepen.  

Still want to be an opportunistic short, but today is not that day.

Friday, April 3, 2015

Raging Bull in Bonds

The baton was passed from equities to bonds in 2014.  And bonds are running away with it, leaving the equities in the dust.  There is really only one official safe haven government bond market that is relevant.  US bond market.  The German and Japanese bond markets have been nuked to ground zero.  Those markets trade by appointment, in between central bank purchases.  Completely distorted beyond any recognition.  There is only one defacto "true" bond market, and that is Treasuries.

It just so happens that Treasuries are the only safe haven bond asset that provides any meaningful yield, with German Bunds at 0.19%.   It is still stunning to see how quickly the Bunds went to those levels from a year ago.  It was a one way freight train to lower yields, strengthening European economy be damned.

I underestimated the effect that the German Bunds would have on Treasuries, thinking that they are two totally different markets.  And while that is true, the collateral effect of the Bunds becoming Japanized is that global government bond demand seeking yield is now almost all aimed at Treasuries, providing a lift like Michael Jordan had when he dunked from the free throw line.

The only thing holding back bond buyers was a possible Fed rate hike, but if you take that off the table, and the last Fed meeting went a long ways towards that objective, then you have a free for all to gobble up Treasuries as there are no bear catalysts.  In fact, if the Fed doesn't hike this year, I would be surprised if 10 yr Treasuries did NOT trade down to 1.00% by 2016.

I overestimated the amount of dumb money that would panic more after the strong jobs number last month, hoping for a 2.30% 10 yr to buy Treasuries.  Instead, March 6 ended up being a grand buying opportunity for bonds.   I doubt if we go back up to 2.17% on the 10 yr, which is where we closed 2014 at.  

The reason I say this is that I don't believe the equity market can sustain its bull market for more than a few months before falling apart.  If the equities fall apart like I assume, then the Fed is completely off the table for a minimum of 6 months, perhaps a year.  This clears the runway for investors to pile into bonds like there is nothing else worth buying.  It will be TINA, but in bonds, not stocks.

Watch for this later this year, but it could happen as soon as this month, depending on when equities crack.  That is a matter of when, not if, IMO.  Equities are a ticking time bomb to explode to the downside.  On the other side of that equation, bonds are a ticking time bomb to explode to the upside.  And that explosion just might be happening right before our eyes.

Thursday, April 2, 2015

Little Conviction

I had this raging feeling that the market would get smacked down hard in April, down to 2000.  But I am losing conviction on that idea, although I do foresee a bit more of a pullback, perhaps down to 2040.  But I don't have a lot of confidence in the idea because April has a tendency to be a bullish month and I am reading articles about lots of S&P hedging with puts.  I don't feel comfortable making a bet on a big down move, I would rather be an opportunistic short and sell strength, up to SPX 2080, and cover weakness down to SPX 2050.

Same goes for crude oil, I have little conviction on a short, and in fact, it could be we are in the process of forming a bottom.  I would rather just be an observer for now.  Probably the strongest market right now is bonds, believe it or not with all this Fed rate talk.  The spike up in early March has been completely faded, and it looks like the search for any kind of bond yield by global fixed income managers is relentless.

As far as the nonfarm payrolls report is concerned, I believe there is pent up demand waiting to get long bonds after that report, whether its a good or bad jobs number.  I don't see that pent up demand for equities after the report.