Wednesday, September 30, 2015

Ride the Bull

Only in hindsight will we know if we had a successful retest of the lows on August 24, but if you wait for confirmation, you miss most of the move, as these bottoms usually are V bottoms, with the biggest gains happening in the first 2 weeks after the bottom.  In order to make the big gains in the market, you have to visualize and anticipate what will likely happen, based on recent trading.

Most of the evidence that we have seen over the past week, and looking at the bigger time frame since the crash on August 24, shows a market that has transferred stocks from weak hands to strong hands, is excessively bearish as shown by the extremely high put-call ratios, sentiment surveys, social media, etc.

I am long stocks and will ride the bull for several days.  I don't want to lose my position, so there will be minimal daytrading, although I expect some strong resistance around SPX 1945-1950.

Tuesday, September 29, 2015

Bounce Due

The decline is in the 9th inning.  Time is now on the bull's side.  You are on day 8 of the selloff that started on Friday September 18, after the sell the news reaction to the dovish Fed.  The bears have used up most of their ammo.  The odds favor the bull side starting today.

We got the rout in biotechs, the favorites: Facebook, Amazon, etc. got hit hard yesterday, and we are close enough to the August 24 lows that you will get retest buyers coming out to buy.  You have crude oil much higher now than on August 24, and you have very few signs of FX stress as indicated by a strong euro or yen.  The VIX has also been quite tame, which tells you that the hedging demand for volatility has been satiated over the past several weeks.  The put/call ratios were at extreme highs yesterday as well.  It wasn't a perfect capitulation, but it is about as close as you will get in this liquidity overflowing market.

The market should be strong supported at SPX 1875-1880.  The overnight ES lows of 1861 should hold intraday.

Monday, September 28, 2015

Release the Wolves

It is a full moon.  Time to release the wolves.  With the wolves on the prowl, looking for blood, the sheep are beginning to panic.  You saw the signs on Friday when the big gap up was faded midday, led by tech stocks, in particular, biotech.  You can tell it is not hedging or derivatives selling driving stocks down Friday afternoon.  It was cash selling, as the small caps and the biotechs took most of the beating.

This is usually the final stage of the selloff when the wolves come out and the sheep dump their favorites.  We have a gap down as the fear is becoming more palpable.  It is morphing from a sleepy range bound chop fest to a last gasp panic.  The extent of the panic is hard to predict, but it usually doesn't last more than a couple of days.  So we should see the panic low this week.

The ultimate low all depends on how much it goes down today.  Today should be the day where the bulk of the point losses occur this week.  Below SPX 1900 and you have forced selling come out.  There will be value dip buyers waiting at 1867.  So if I were to guess, we should bottom around 1870-1880, which also happens to be where a lot of support rests from the trading in early 2014.

Friday, September 25, 2015

Terminal Portion of Decline

We are approaching the end game for this correction.  This is when the rallies don't hold for more than a day, if that.  And you grind lower and lower until you make a sharp drop to finish off the selloff and form the V.  These selloffs usually last 7 to 10 trading days.  We are on trading day 6 of the selloff, so the final plunge should happen sometime next week.

Near the end of the selloffs, the favorites, like biotech, get thrown out with reckless abandon in an effort to de-risk high beta names.  Should be an interesting Monday.

Fully Invested Bears

It has been one month since we got the panic crash in equities.  I wanted to see how investors have reacted to the sharp down turn, and it seems like business as usual.  You would think from all the bears parading on TV and social media that you would have outflows, but instead, there has been net inflows since the crash, even though we've just been going sideways during that time period.  To me, it seems like the bears are fully invested, or at least the bulls are active but keeping quiet.

It makes you wonder what made the market suddenly crater like it did.  So I compared the 5 days when the market cratered in August with the past month.  You can't tell the difference.  The largest ETFs just didn't have many outflows.

The only way I can interpret this is that there is not that much pent up demand to buy equities, because there wasn't that much selling in the first place.  Now when corporate buybacks start up again after earnings season, then it is a different story, but during this light buyback portion of the season, I don't see where the money will be flowing from.

We've got a big gap up working here, Europe seems to love it when Yellen talks tough, but hates it when she does nothing.  Anyway, I give this rally about 1 or 2 days maximum before it peters out and we get back to selling.

Thursday, September 24, 2015

Retest and Marginal Break

The market is not giving the dip buyers a graceful exit here.  It has been 1 week since we hit the highs of this post crash bounce.  Usually you would have already bounced after such a fall.  If a down move of this magnitude in a post crash market doesn't bounce within 5 trading days from when it starts, usually you go down for 2 to 3 more days to cause a panic waterfall and form the V bottom.  That is the most likely scenario here.

You cannot blame China for this one.  I guess you can blame Europe for this selloff, because that is where a lot of the fast money is parked.  And when the fast money leaves, Europe will feel the blow.

I know it seems almost consensus, but I think we will retest the August 24 lows.  Not the cash index, of 1867, but the futures, which went down to ES 1823, which would put it about SPX 1835.  There is a lot of support in that SPX 1840 to 1850 area, so I would look to buy around there.  Once we make a marginal break of the level everyone is looking at 1867, we should get the final panic flush which would form the V bottom.

As absurd as it seems with all this bearish price action, the selloff is on borrowed time.  I go back to a dovish Fed which gives the bulls the edge after the dust settles.  I would feel differently if the Fed had raised rates or looked eager to raise rates.  With this Fed, it's still a bull market in my eyes.

Wednesday, September 23, 2015

Sticky Dip Buyers

The dip buyers are lurking the shadows, preventing a clean flush down to SPX 1910.  Lots of bears out there, and they are the weak hands, triggering big short squeezes before the close, now 3 days in a row, afraid of the monster gap up out of the blue potential that always lurks in a downtrending market.

We got the sum of all fears after the China PMI came in weak, but that was pretty much the low, and we have rocketed higher since.  I am not interested in shorting here, but still looking for that one last flush out to buy.  I am ruling out a retest of SPX 1867 anytime soon, because this is not the type of price action that causes a waterfall.  Perhaps late next week.

Not interested in trading bonds here, it's in no man's land.

Tuesday, September 22, 2015

Deadly Market

They will dump this market on air.  That is what happened in the European session, as Europe suddenly hit the panic button and handed off deep red futures to the US.  Normally these big gap downs are screaming buys at the open to sell an hour later but since we had an up day on Monday, and the equity put/call ratios were fairly low, I didn't bite on the tempting gap down play.

It is too late to short, but too early to buy.  I am eyeing SPX 1915, or ES 1905 as a spot to look for some dip buys.  If I do buy at 1905, I will not hold for more than 2 trading days.  Not interested in shorting unless we can get a bounce towards SPX 1970.  Ultimately, I expect a retest of 1867, within 2 weeks, and a marginal break of that level, causing weak longs to puke out their positions to the strong hands.

Monday, September 21, 2015


Friday's action was a bit surprising.  Didn't expect that kind of selloff on triple witching, but the Friday selloff basically front ran the post options expiration selloff that you normally get post triple witching.  The fund managers are so eager to get protection, that they are willing to be double protected, that is, they will buy October out of the money puts to protect themselves ahead of the weekend even though they already own September puts expiring that day.  That is how nervous they are.

I doubt any rally gets any traction this week, so I am looking to short this market.  Perhaps a gap fill from Thursday's close would be a good spot, around SPX 1985.  Not much edge yet, although if I had to hold a position for a week, I would much rather be short than long here.

Friday, September 18, 2015

Fear and Loathing

That breakout above 2000 didn't last long.  All of one hour after the FOMC meeting.  Europe's big selloff comes after Yellen threw her hat in the ring in the currency wars.  The Fed will not tolerate a strong dollar, or a weak US stock market, so there were dovish words thrown all over the place.  Now the crowd feels suckered for believing the Fed might raise rates or at least talk hawkish.  They did neither.  You can never underestimate the dovishness of this Fed.  Never.

But we got a big selloff after the pop on the news and it is back to your fear and loathing market.  Stocks are hated out there, but that is not enough to get me to buy.  I want to see a longer pullback before I commit capital to this market.   We just had a long rally leading up into the FOMC meeting.  It takes time for the bears to get fully loaded with shorts.

The market still favors the dip buyer, but now is not the time to be aggressive on the long side.  In fact, I think there is a short term opportunity to short the market, but the post opex selloff was moved up a day into opex Friday, so I am just watching for now.  I am interested in buying bonds again as there should be a lot of pent up demand now that the Fed is out of the way and those fearing a rate hike will come back in to the safety of US Treasuries.

Thursday, September 17, 2015

Fed Gameplan

The gameplan for today depends on one very unlikely scenario and one likely scenario.

1.  About a 5% chance of raising rates today.  It could happen, but extremely unlikely.  Under this scenario, you just short and hold short and watch the delta hedgers gonna  go nuts as the market plummets for the rest of today and into the open on triple witching Friday.  Just remember what happened after the June 2013 FOMC meeting, when the market just got crushed.  There is no fade of the dip here.

2. 95% chance of no rate hike.  The 30 year bond is telling you all that you need to know about what the smart money thinks about the likelihood of a rate hike.  Long bond weakness is a hint that bond traders don't expect a rate hike.  Besides that, just the history of Fed dovishness, slow to tighten financial conditions, markets having been crushed in August, low oil prices and no inflation, and fear of spooking the markets.  Since this is what most of the smart money is expecting, most of the smart  money will be prepared for this outcome and were the ones buying this week ahead of the meeting.

After the announcement of no rate hike, we could just shoot higher and don't look back, or we could have a volatile 15-30 minutes where we chop in a volatile range, and then eventually rally higher into the close.  If we have that volatile chop, I would be buying any 5-10 SPX point dips.  Extremely unlikely that you selloff and sustain a selloff under the no rate hike scenario.  The fear of a Fed rate hike is removed and the sideline money waiting to act after the Fed gives the green light will be significant.  Don't believe the Fast Money gurus on CNBC who say we selloff on the Fed doing nothing.  That is exactly what this market wants and needs to go higher.

Bonds will be tougher to game as it often does its own thing and doesn't necessarily do the opposite of the S&P on Fed days.  A dovish Fed is usually good for bonds, but we are at a point in the cycle where the bond market wants a rate hike to weaken the economy, and a failure to raise rates would be deemed as building a stronger stock market and economy which is bad for bonds.  Thus, I am expecting a selloff (less conviction than a stock rally) when the dust settles today in bonds, especially the long end, if the Fed does nothing.

Wednesday, September 16, 2015

Fed Will Be Doves

The big Fed decision is on Thursday.  Yesterday, the highlight was not the stock market strength but the notable bond market weakness.  10 year yields hit 2.28% and the 30 year yield hit 3.07%.  Contrary to what many believe, the bond market wants a Fed rate hike to slow down the economy.  So if as expected, the Fed doesn't raise rates, the bond market will counter intuitively selloff.  This is why you had such weakness in the bond market yesterday, especially the long end.

I am hearing a lot of opinions on what the market will do if the Fed raises or doesn't raise rates.  First of all, on the slim chance that the Fed raises rates, no, the market will not go up on that.  If it does, it would be a slam dunk short.  That would be the worst thing possible for the market to have a hawkish Fed with a weakening emerging markets.  No, a rate hike and dovish words will not be what the market wants.  The markets wants no hike and could care less about the wording because the Fed will backtrack on whatever hawkish things they say anyway.

There are many right now who believe no rate hike is bad for the markets, because it continues the uncertainty.  What is so uncertain about ZIRP and delaying rate hikes?  It is what has been happening for 7 years!  The more uncertain scenario is how the financial markets handles higher short term interest rates.

I don't think this choppiness is over but I get a feeling that there are a lot of bears now.  We had a big rally yesterday and the put/call ratios stayed high.   It doesn't mean that we will go up, but any down move will likely be short and quick.

Friday, September 11, 2015

Tepper and Hedgies

I see that David Tepper came out yesterday morning and talked bearish.  I didn't know who this guy was until he made a famous call on CNBC in 2010 that stocks would rally because of the Fed and QE.  His bearishness just confirms that he is probably heavily in cash and waiting to deploy it.  I am not going to say he is like the rest of the hedge fund managers, but he is a good representative of what the average hedgie is thinking.  What I noticed was that he said he would get more constructive if he heard the right things from the Fed.

And guess what?  The odds favor the Fed being dovish next week.  Since their last press conference meeting in June, oil has dropped from $60 to $45.  The SPX has dropped from 2100 to 1950.  And there have been no blowout jobs numbers.  You think they are going to raise rates into that?  Really?  The crew that is painfully slow to tighten monetary conditions despite a raging bull market and a strong labor market is going to suddenly raise now because people expected September as a time to raise rates?  I don't see that as being likely.

So you have a mountain of hedge fund fast money ready to be deployed as soon as Yellen confirms that yes, she is a dove and will not rock the markets at a vulnerable time.  Thus, I am playing the long side into the FOMC meeting next week.

Wednesday, September 9, 2015

Ranking the Indices

Since the big drop on August 24, I would have to rank them as follows:

1. Europe.  Surprisingly Europe has shown the most strength even though Germany depends on China for many of its exports and heavy long hedge fund exposure.  Draghi's dovishness a bullish factor again.
2. US.  Not as strong as one would expect with the limited China exposure in US equities and the less bullish exposure among hedgies compared to Europe and Japan. 3. China/Emerging markets.   There are too many outflows and the fundamentals are too weak to support much of a bounce despite extreme bearish sentiment.
4. Japan.  Lots of China exposure, heavily long positioning among hedgies, and vulnerable with USDJPY weakness to continue with a dovish Fed coming soon.  Abe also less committed to his failed experiment.

If you are going to short, short the weakest, and get long the strongest.  Despite Europe being the strongest lately, I still prefer US over Europe for a bounce trade.

Tuesday, September 8, 2015

Classic Long Weekend Gap Up

Just classic.  Just your typical post long weekend monster gap up after chicken littles sell their equities on a down Friday because of the fear that global markets will crash.  The put-call ratios were out of this world on Friday despite the market staying above last Tuesday's "scary" lows.  We got all kinds of fear talk, fear of the Fed hiking rates in two weeks, fear of China re-opening their markets after their holiday.  Fear of a new bear market.

The fear itself is a greater depressant of stock prices than the actual cause of the fear.  You had China basically flat over the past two trading sessions, Japan was quite weak,  yet you have S&P futures up huge.  The only thing really supporting this huge surge higher is Europe, and that's not necessarily a good thing for US equities because it is based on a weak euro/strong dollar.

You have to have a long bias for the next several days.  As long as the markets are volatile, the Fed has your back.  It has been a proven winning formula for almost 30 years.  I would be shocked if they raised rates in September.  Absolutely stunned.  Since Greenspan ignited the Fed put, anytime you have a weak stock market, the Fed will do whatever it takes to soothe the market.  It doesn't always work over the long term, but over the short term, it works a high percentage of the time.  I will make that bullish bet again on the Fed, and history is on my side.

Thursday, September 3, 2015


We are through the rough patch of this correction, and volatility will go down as traders and investors get more comfortable with the new trading range and lessening volatility.  There should be a choppy up move over the next two weeks all the way up to the FOMC meeting on September 17, where the Fed will sound as dovish as ever.  Draghi and his intense dovishness this morning was the preview of things to come for the Fed.  There is no way they hike rates here, and the market knows this, so they will rally into the meeting expecting soothing words from Yellen.

Draghi is helping the cause by dropping Bund yields, which in turn help to drop Treasury yields, which is bullish for equities, all else being equal.

Crude oil should follow equities higher now that it has reset to be more in lockstep with S&P movements.  BTFD for the next two weeks.  Yesterday's lows of SPX 1920 are a raging buy anytime over the next few trading sessions.

Tuesday, September 1, 2015

Eyeing SPX 1900

The market has shown it cards.  And it's no full house.  I heard on CNBC last Thursday that traders were eyeing 2040 for a rebound, when the market was at 1990.  I thought that was insane.  Apparently, I am not the one who lost his mind on the bounce back last week, it was the others who thought we could shrug off a VIX 50+ event like it was just some HFT computer glitch.

I am not going to regurgitate worries about China or global growth or the other excuses that you hear in the media about the reasons for weakness.  It is a simple look at the chart of the broader market.  You are negative on the year, by about 6%, you are at levels that haven't traded regularly since last summer, so you have a mountain of overhead resistance, while the market is overvalued, while there is no positive catalyst.   The key is this: the Fed is not on the bull's side this time.  There is no QE.  They were there the whole time from 2008 to 2014.  When you see bonds selling off with stocks, the market has problems.   

I still view this market as a chop fest at a lower range.  We have established the lower boundary, around SPX 1870, with a higher boundarry of SPX 1990.  SPX 1900 is a good level to put on longs, for a trade.  Perhaps we can get to that level later this week.  Crude oil is also a short, with the biggest short squeeze I have seen ever in the product.  I would short anything above $48, and cover around $44-45.  The downtrend is not over, and commodity downtrends last a lot longer than equity downtrends.