Dull S&P

We got the S&P 500 pullback on Tuesday, the first pullback after a grind higher is usually voraciously bought by dip buyers, and that is what happened on Wednesday.  Now we are back to no man's land, with no extremes that would interest me in either the long or short side.  I have focused my energy on individual stocks, with some Treasuries trading thrown in.

China cracked big time yesterday, going down 6.5%.  This reminds me of the internet bubble back in 1999 and 2000.  You have a parabolic move, with intermittent big down days to clean out the weak hands.  I still believe the bubble keeps going higher.  It is a stay away market for me, as the bubble is just not old enough to pop.  You need more time to suck in more investors before you reach saturation.  We are not there yet, and it should take at least another 3 to 6 months before we reach the peak.
There are no markets that are super interesting here, but I am looking at a possible crude oil long as it has pulled back closer to an area where I think there is good risk/reward.  Crude oil is usually seasonally strong during the summer, so I see limited downside here.  I am also looking into a possible Treasury short for next week, using any month end strength to put on a position.

A Tired Market

The dollar is strengthening again, giving the US equities a hard time.  And in a change of character, Europe could not rally on a weaker euro today, like it was able to do in March and April while the S&P was sideways to down.  The strongest market is ironically the one that seems to be the most hated of the big markets:  China.  Europe is completely saturated with fast money, and since they don't have the corporate buybacks and M&A like the US, the European equities rely on fund inflows to sustain the uptrend.  That is the most fickle source of capital, as any little scare will have hot money funds bail out of Europe.  Not so with corporate buybacks, where it will take a recession or lower profits to stop the buyback wave.

I believe we are starting a topping phase here, which should last into the middle of June.  I am not going to be shorting yet, but if I do, I will focus on shorting Europe, as it is the weakest of the bunch.

As for other markets, Treasuries look like they are consolidating the down move and we should chop around the 2.10% to 2.25% 10 yr level for a while here.  I expect another up move in the euro and crude oil in the coming weeks.

Find the Action

This is for the futures traders out there.  Most equity traders will always find something moving and active to trade.  But if you are in a dull market like we are in S&P index futures trading, there are other places to trade.  Don't limit yourself to just one or two markets.  If you are an equity trader, you don't need to worry about this because there are always stocks on the move, and the ETFs give you access to currency, bond, and commodities markets.

It is hard to make money in a dull market.  Sure, it is hard to lose big in a dull market, but the bid/ask spread and commissions become a bigger percentage of your trading cost in a dull market, because moves don't go far.

The catalyst for an exciting S&P futures market is volatility, and volatility usually comes when there is weakness.  This is about the worst market for S&P futures trading, so I haven't touched it.  I look, but don't touch.  Focus has been on bonds recently because that is where the volatility is, and the opportunity has been lately.  Before that, did some crude oil trading because that is where the action was.  This is not recommended for everyone, because it does take time to adjust to how a market trades.  Crude oil trades very differently than S&P futures, which trades very differently than Treasury futures.

Some will say that you can just look at a chart and trade these different instruments, but the participants in each market have different motives and opinions.  For example, you will not see Treasury futures crash and then just go sideways, like you will see often in individual stocks.  The Treasury futures will crash, and have a decent bounce because there are many more value buyers in Treasuries than there are in a particular stock.

Same old same old in S&P, it is untradeable.  Will look to buy Treasuries if we can get another dip.

No Lift in Bonds

Right back to your Monday selling in the Treasuries after a Friday short squeeze.  This time you can't blame Bunds for the selling, it is just Treasuries going down on its own.  And now equities don't care anymore.  The equity traders aren't going to fall for the interest rate scares anymore.  The scarecrows are gone in the equity space, all you are left with is die-hard bulls who will only get shaken out if we go back towards those lows in March around SPX 2040.

When the equity traders are comfortable, it usually makes for boring trading in the index futures.  But it does excite the daytraders who become more speculative.  I am seeing a regular dose of pump and dumps in the market these days.

Sitting on my hands, nothing exciting here.

Calm after the Storm

That was a giant storm that just passed through the bond space over the past 2 weeks.  It is a once a year type move, except last year skipped the panic altogether because it was a such a bond bullish environment.  This is not going to die down quickly.  It doesn't mean I am bearish, it just means that I am not very bullish, or at all sanguine about the bond market over the next 2 months.  The ideal game plan for this environment is to buy those panicky dips, because they will happen on a regular basis, but you have to sell the short covering rips in order to have the dry powder for the next round of potential buying opportunities.

This is not a buy and hold bond market like you had last year.  You have to stick and move, jab and step.  Get your points at opportunistically and get the hell out of there.  At the same time, I am unwilling to play short on bonds because you never know when all this bond negativity reverses and we go back to normal trading.  I cannot go short bonds except for really good setups after we've already moved so far down.  Plus, I would rather short Bunds than Treasuries if I want to short bonds.  Bunds are the source of the weakness, and have been leading this downswing.

Equities are at all time highs.  It doesn't surprise, what surprises me is if we had a swoon lower.  I am rarely surprised by a show of S&P strength, especially when I see nervousness on CNBC about rising interest rates being a reason to sell equities.  That never lasts for long.  We will continue to go higher, with the corporate buybacks leading the charge.  You cannot fight that torrent of cash going towards equities.  You need to see a lot more IPOs and secondaries to justify a long term down move.  We haven't seen that yet.  When we do, that is when I will look to establish a long term short on S&P.

Bund Baby Bund

It is all about the Bunds.  It is taking over the global bond market, which is in turn making equity traders nervous.  The S&P has hardly moved down, but it seems like everyone on TV is worried about a possible rate squeeze like 2013.  I don't see that happening, because this time, it is Bunds, not Treasuries leading the down move.

And unlike Treasuries, there just isn't enough Bund supply considering ECB QE to generate a true bear market from these levels.  It like hoping for JGBs to start trading like Treasuries.  It just won't happen.  Europe is now stuck below the zero bound, and it has no lift.  There is no way Draghi cuts back on QE anytime before its due date.  So you are getting this move due to bad positioning among bond traders, the fundamentals are irrelevant at the moment.

These days, the trading in the equities has been quite boring, as all the action has been in bonds.  The Eurostoxx is having a tough time with the double whammy of a stronger euro and rising government bond yields.  All the inflows from the investment community came just in time to form a generational top.  I still believe that the S&P will be the least hurt in the next bear market.  The majority of the carnage will be in emerging markets, Japan and Europe.  That also happens to be where all the hot money flows are currently going towards.

It is back to the short anything but America theme.  I am still waiting for the exquisite short opportunity.  It should present itself on the next rally out of China and Europe, probably this summer.

For Treasuries, I will be looking to buy dips down towards 2.30% 10 yr yields, and sell the rips towards 2.18%.  That should coincide with a Bund range of 78 bps on the upside, and 60 bps on the down side.

Bond Panic

This is what happens in a bond panic.  Regardless of equities, bonds do their own thing.  They will selloff in big chunks, and have short squeezes in big chunks.  The short squeeze on Thursday and Friday setup the bond market for a monster selloff yesterday and into the European session today.  The Bunds are back towards 0.70% yield, and the 10 year is getting very close to what I would consider a great long term buying opportunity at 2.40% 10 year yields.  I can only play from the long side in bonds here due to the lopsided risk/reward scenario.

What is interesting about this bond selloff is that it is not due to equity strength, or strong economic news.  It is due to overly bullish positioning in bonds, especially the long bond, and Bunds.  We are quickly getting rid of the excess.  Bonds also are a lot like stocks in that they can selloff quicker than they can rally.  Of course, not to the extent of a stocks, but what you saw in 2013 is typical of what happens when bond investors panic.  You get a one way freight train of a move higher in yields, reaching the uncle point for a lot of fast money, then you consolidate for a couple of months, and then the original trend continues (lower yields).  That is what I expect to happen as we get closer to a Fed rate hike, likely in September.

This is the second cannon shot, the first one in March was a warning shot, this one is the real deal.  So I am not sanguine in believing that this is just a blip in the bond market bull trend.  This is not like the March bottom in bonds.  This will last longer, just because of the threat of a Fed rate hike keeping bond investors on their toes, reluctant to jump in with both feet.

Equities have proven that they cannot shrug off the bond selloff.  It could in 2013 because we were at much lower valuation levels, and the economy was stronger.  Now it is a struggle for equities to rally unless you get perfect conditions.  These are far from perfect conditions.

Blowoff Time?

We've been stuck in this range, from SPX 2040 to 2120 for the past 3 months, and it is getting tighter and tighter, towards the top of that range.  It looks like we are poised to make a breakout above 2120.  I don't expect it to be an explosive breakout, because this is an old bull market, and we never got the flush out or V bottom.  I am looking at perhaps a 30 point breakout to 2150.  It shouldn't go beyond that.

Bonds look like they have hit bottom, it seems like all this selling was much in part due to fear of a blowout NFP number.  In any case, a lot of fund managers waited till after the number came out to buy bonds.  The reaction was definitely more bullish than I expected, the number came in right around consensus, but bonds still shot up higher.  We may get a pullback in bonds in the middle of next week ahead of the 10 year and 30 year bond auctions on Wednesday/Thursday.  That could be the time to get in bonds for the eventual move back down to 1.90%, perhaps by the end of the month.

So we are all lined up to get back to our normally scheduled program of stocks higher and bonds higher.  However old and boring it may be.  Those are the fundamentals.

All About Rates

The market is now focused mainly on interest rates.  Normally you don't get the bond and stock market to selloff together in this QE world, but it has been common this week.  Even though the economic data hasn't come in strong, you are still getting this massive selling in bonds.  Overnight, you saw a six sigma move, another flash crash in German Bunds, as their 10 year had panic selling down to 0.79%, then V bottoming off that level.  That was the cause of the big drop in ES and Eurostoxx futures during European hours.

Most of the damage has been done, and I see little downside in bonds from these levels, but we should consolidate this move by chopping around for a few days, then we should get bonds to rally again.  Levels I am looking at on the downside for bonds is the 10 year at 2.25% and 2.30%, the 2.30% being the area where we bottomed off of overnight.  On the upside, 2.14% and 2.10%.

The S&P is remarkably resilient despite Europe getting pummelled and China having a big drop earlier this week.  It looks like a teflon S&P again.  Cannot short it, but also don't want to go long it.

Bond Carnage Continues

Wow.  This kind of massacre in the global bond market hasn't been seen since 2013.  We have the German Bund going from 5 bps to 52 bps in a couple of weeks.  It has been absolute panic selling in the Bunds for 4 straight days.  We are now right back near the end of 2014 levels, which also happens to be where the Treasuries are trading now (2.18% 10 year).  There is no denying that the stock market cannot go up when bonds are going down like this.  Yes, in 2013 stocks went up despite a weak bond market, but that was when the S&P was at 1650, not 2100.

This equity market is not strong enough to overcome such bond weakness, especially now that the equities are tied to the bond market via debt-fueled stock buybacks.

What is a bit baffling about this bond move is that economic data has not been coming in strong, but the positioning in the Wall St. community was too long and that is quickly being unwound.  I am getting a sense that most institutional investors believe bonds are overvalued, and stocks are less overvalued.  I believe it is the other way around, because there is a huge demand for bonds that is built into the central bank led financial system now, and it cannot go away for fear of weeks like this, when there is no bid for bonds.

Now we are right around the 200 day MA line from 10 years, at 2.19%, and that should provide some support for bonds, and I am a buyer at these levels, looking for a move back down over the rest of May.  If the 10 year yields can stay below 2.25% over the next few days, there should be a move back down to 2.00% later this month.
I am neutral on stocks, and getting interested in perhaps taking a look at a crude oil short sometime soon.  Brent crude oil will have a very hard time busting $70.  It is trading at $67.60 as I write this.