Fed Missed their Chance

The ECI number today confirms what the last nonfarm payrolls report showed:  there is no wage growth.  Without wage growth, there is no wage-push inflation, and you get a monster bid in bonds and a rocket higher in the euro.  It is getting clearer by the day that the Fed missed their window to raise rates in this cycle.  If they start raising rates now, they will guarantee a recession.

The stock market is loving the new strength in bonds and a new view that Fed is going to have to remain dovish for longer.  I see more slow summer time trading for equities.  We are very close to a generational top in equities but timing the top is always difficult.  Short term, I still see more risk on portfolio adjustments after the heavy derisking in early July.  It will be a low vol slog for the next couple of weeks.  China is a nonissue, but will become an issue later on after the global market gets more toppy.

There are few opportunities right now, you may get one good opportunity in a day with this kind of market.  If you miss it, move on and don't force a trade here.  There will be much better opportunities in the fall.

Finding Excuses to Sell

This market is going back to the China is bad playbook.  The Chinese stock market does NOT matter.  The Shanghai went down Tuesday, after going down 8% on Monday,  and the S&P is now up 1% on the day.  Sure, if Shanghai goes down 8% in a day, it matters for that day, but only for that day, and maybe just for the overnight session.  And 8% down days happen in Shanghai about as often as you get an S&P bear market, which is about once every 7 years.  The reason the market went down for 5 straight days is because the S&P is just not Superman anymore.  When you are no longer Superman, you will have periods of weakness that just show up after getting overbought.  But what makes it tough trading is that S&P is no pushover either, so you definitely can't short.  For example, you get days like today with the big gap up overnight and the extension higher in the middle of the day for NO reason.

 Investors and traders are always trading to find reasons for something going up or down.  It satisfies our rational thoughts, but the market is driven by supply and demand, not rational thoughts.

So you have a market that is neither super bullish or bearish.  I would consider it a slightly bullish market, with a potential for significant weakness in the long term (over the next 3 years).  I don't have any significant convinction expect to buy dips on oversold days like Friday or Monday, and catch a bounce into the next day's overnight session or the next regular trading session.

The Fed is coming up for tomorrow, they will probably repeat the same old same old and that will be that.  The strategy for this week is to buy weakness that takes S&P down towards Monday's lows, and hang on until you get the bounce back higher into all time highs.  You cannot keep this market down for long, but at the same time, you can't keep it up that long either, at least by 2013 and 2014 standards.

As for bonds, after you had the weak hands flushed out in May and June, it is now a honey badger.  It will do its usual thing:  be tough and nearly indestructible.  Look for sub 2.00% on 10 year yields by November.

Bond Honey Badger Don't Care

So last week Yellen got hawkish and signaled an imminent rate rise, during that Humphrey Hawkins testimony, according to what I see in the news media.  All that has happened since then is the long bond rallying like a screaming meemie.  Basically, bonds are saying to the Fed: "hey raise rates, make my day!"  Gundlach is right, the bond market wants the Fed to raise interest rates to weaken the economy.  This bond market is not scared of the Fed, it is scared of a stronger economy.  And that definitely isn't coming if the Fed goes on an interest rate hiking cycle.

But the bigger factor is oil prices, with oil weak again, inflation expectations are going down and you cannot keep bonds down for long when oil is trading like this.  Forget equities, it was the massive selloff in crude oil that caused the huge run up in bonds in January.

So far we are getting typical market behavior after a V bottom, the initial blast higher for 1 to 2 weeks towards previous highs, then a pause to find excuses to sell, and a settling down of the up move.  We are in the pause to find excuses phase, which usually doesn't last for more than a few days before you get another leg higher.  The excuse this time was disappointing earnings reports from IBM, Apple, and Microsoft.

Pullbacks during this phase of the move are buyable, as fund managers are still feeling the after effects of the fear mongering about Greece and China.  They still need more time to get comfortable and to increase equity positions.  If you see a similar pullback a month from now, I would be careful, because this is an old bull market, which is vulnerable to dumping big out of the blue, like we saw last December.   For now, volatility should remain low, probably till at least middle of August.

Commodities vs Stocks

There are counterforces going on in the markets.  You had a huge flush out in gold overnight during the Asian session, and oil seems like it wants to just keep grinding lower and chew up and spit out the bottom pickers.  Bonds are a choppy mess, refusing to go down much despite equities rocketing higher.  The Bund is back in fashion, as we see the Bund-Treasury spread back towards 161 bps.  We have the Treasury flattener back in vogue.

This all looks like we took a time machine back towards late 2014/early 2015.  With commodities so weak, the Fed has its hands tied, not to mention the softer economic data over the past few weeks.

The market doesn't seem like it can go much higher, we have gotten back near all time highs, and the fund managers are not too willing to dive in to buy near the top after a V bottom.  They have learned their lesson since early this year.  They will wait for a dip to buy.

It makes for a chop fest in bonds, and stocks are going to make the VIX at 11 look too expensive.  It should be a boring summer.  Neutral on almost everything.

Going Higher

The selloff over the past few weeks has taken out the weak hands.  The market didn't do it by taking the price very low and scaring people out with violence, but with scary headlines from Greece and China.  Those are the bottoms that usually last for quite a while, the ones with the scary headlines.  Now that Greece is solved, not that it matters (except for the chicken littles), and China has stabilized via brute force market manipulation, you have a market that has a clear runway to new all time highs.  It should not be a blastoff, just because we didn't go down enough, but it should be slow and steady to new all time highs.

There is no way I would short this market, and although short term overbought, any consolidation here will just set up the market for higher prices next week and the week after.

Bonds look like they will retest this year's lows, despite the weak economic data.  It is the fear of Fed rate hike again creeping in, and also the slow dissipation of the safe haven trade over the next few weeks which will put downward pressure on bonds.

Be back next week, the market is back to the old bore grind up higher mode.  Been there, done that.

We Bottomed

But its not because of the Greece deal.  We bottomed because we ran out of panicky sellers at current prices.  You need fundamental change for the worse to cause a lasting drop.  You don't get that with Grexit or with a dropping Chinese stock market.  You get it with Yellen talking interest rate hikes, a weakening US economy, etc.  These exterior forces for selling are insignificant when money is overflowing in all corners of the world.

In the end, its a money game.  If the central banks want to keep pumping out more money, then the stock market will have a hard time going down.  Same goes for the bond market.  Contagion is only an issue if there is not enough money.  If there is enough money, contagion doesn't happen and doesn't matter.

It is a chip shot to new all time highs with sentiment about as bearish as when we went down 9% in October last year.  We are going higher, whether traders like it or not.

VIX Remains Relatively Strong

The VIX should be imploding today amidst the global rally in stocks, but the VIX is actually higher compared to the same SPX price level from yesterday.  In other words, volatility is being bought in this market despite a strong market today.  Contrary to what most people think, the VIX is actually a leading indicator, when it diverges like this versus the S&P 500.

These gap up opens on Greece deal news and a strong Chinese market aren't doing the job.  The Chinese market is so manipulated that having half of the stocks halted is going to have terribly bearish ramifications for that market.  And their real estate market isn't doing too hot either.  Usually the US can shrug these things off, but this is an old bull market, the BTFD strategy is not going to work as well as it did in years past, or even earlier this year.

We should be rallying with all this bearish sentiment but these good news gap ups aren't doing the job of washing out the BTFD hopefuls.  You probably need a break of SPX 2040, where a lot of bulls are making a stand, in order to get that flush out you need to get a real bottom.  It just isn't attracting enough strong hands at these levels.  Everyone is looking to get out on a rally at these prices.  When you get lower prices and some real fear, then you will wash out the weak hands and put stocks back in strong hands again.

The other option is to form a messy U bottom, where rallies are faded and dips are bought, until you wear out the bulls, and exhaust the bear fuel, and eventually go higher.  That is what happened in June 2011, but they have been rare the last few years, as almost everything has been a V bottom.  There is no edge here, just watching.

Now its China

All eyes have been on Greece headlines but now a lot of the eyes have shifted to the growing selloff in Shanghai.  The Chinese government has no idea how to deal with a stock market, letting company execs halt their shares so they don't go down is laughable.  All it does is make it that much worse for those in those shares who want to get out but can't, forcing them to panic sell on the reopen, whenever that happens.  It prolongs the selloff forcing the selloff over many more days.  Anyway, the Chinese bubble has popped, and it will not reinflate.  Too much damage, too much bad government policy, and an economy that is dependent on loans collateralized by real estate and now equities.

Yesterday we had a V reversal intraday but it seems like a lot of short covering and eager beaver buying.  I would wait for a weak close before I would be willing to say we are near the end.  You have to get investors scared, and a V reversal just doesn't do the job.

The SPX is hanging in tough here, acting like a safe haven while Europe and Asia underperform.  I would not be a buyer today, the level where I am looking for a long is around 2040.  Based on the reluctance to go down, high put call ratios yesterday, we shouldn't get too much selling beyond that level.  But any rally attempts early today will probably be sold.  Strong resistance at 2076 and then 2082.

Greece is a Cancer

Greece is a cancer, not something to hide with pain killers, something that needs to be obliterated and eliminated.  The best thing that could happen is a Grexit, as that will finally get rid of the Greece cancer once and for all and you no longer have that as a bear catalyst.  If you have another can kick, you revisit this same situation later on and the cancer grows.

Still seeing too many hopeful fund managers waiting for a last minute Greek deal, like Greece is the only reason we're going down.  No, most of the reason we're going down is because of reflexivity, general derisking, and fear of badly positioned players who have to puke out their positions if we go any lower.

Getting closer, but not quite at that V bottom moment.  We had the CNBC special on the Sunday night gap down, so that is the first sign of nervousness.  We didn't have a special last Sunday.  We are on the 5th trading day since the big sell day last Monday  Usually you will get a bottom usually between the 6th and 7th trading day after the big sell day, when the selloff has started in earnest.

The Chinese have outdone themselves.  The king of all micromanagers have jumped another level in the realms of historical micromanaging by ordering brokers to support the big caps on Shanghai.  So a market that goes from 2500 to 5000 and back down to 3800 over a span of 6 months requires government support?  LOL.  Tragic comedy.  Sure, you can mask anything with money, as the last 7 years have shown you, but this is really reaching.

Levels on SPX where I will look to scale into buys are 2040, and 2025.  Pretty sure we get to 2040 this week, give about a 50/50 shot that we get to 2025 on this down leg before we go back above 2100 by opex Friday, July 17.

Change of Plans

In order to make the big bucks, you have to have conviction. I had a lot of conviction that the big gap down on the Greece news was a BTFD opportunity. But the price action on Monday and Tuesday have lowered my conviction considerably. I still believe we'll eventually rally from this dip and make another run towards 2120. The sentiment is too pessimistic considering the small dip. But a selloff that goes beyond a certain point, and without an immediate bounce, usually means further selling and lower prices in the days ahead.

On Monday, you had a big gap down, and although well off overnight lows by the cash open, you were still down over 1% from Friday close, and yet, the market could only gain a few points off that fear open, and immediately sold off the initial bounce, trading lower all day, and even breaking 2060 support. Then on Tuesday, you had the good news gap up on Greece coming back to the table looking to make a deal, but that was immediately sold off, and we closed weak.

Now today. Word of a possible deal. Again. Another reflex gap up higher. Now considering today is the first day of the month, and with automatic equity inflows coming in, this gap probably holds, and we could rally some today. But if we can't break above Monday's intraday highs, then it tells me odds are that we'll have to test lower ground before bottoming. I don't think this selloff will last too long, because we've already had a bit of derisking going into Monday. But we should be weak into the middle of next week, where I will be looking to buy a dip around SPX 2040.

As for Treasuries, the action is quite weak considering the news and equities. I do eventually expect Treasuries to sell off in earnest when the equity market bottoms out and rallies. That selloff should take us to around 2.57-2.60% 10 yr yields.

 Taking a blog break for the rest of the week. Hoping for crescendo selling to buy next week.