Starting from today, you will see traders setting up their positions for nonfarm payrolls and the FOMC meeting in 2 weeks. You have to think ahead of what the Street will do ahead of those events. A risk off sentiment should persist for the next week or two, as the market prepares for a Fed rate hike. The best set up seems to be to short crude oil and bonds. I don't have as much interest in shorting equities due to the beginning of the month tailwind that equities usually experience.
There is a lot of speculation in small caps going on lately and it has kept me busy with some intraday trading in that space. Nothing exciting today however.
Monday, November 30, 2015
Monday, November 23, 2015
Crude Implications
Crude oil has been a laggard compared to the S&P as many of you have noticed over the past month or two. I have looked at the crude oil ETF flows and there are still massive amounts of retail/institutional inflows into the long and leveraged long ETFs.
As you can see above, there isn't that big of a difference considering that one was over 9 months and the other was over 50 days. You have much greater inflows on a per day basis over the past 50 days compared to the first 9 months of the year in both the UWTI and USO, the 2 most popular oil ETFs.
It seems like traders are still too enamored with trying to pick the bottom in oil, even though it hasn't paid off for over a year now. Eventually you will find a bottom, but I don't expect a V bottom. It should be a messy, sloppy bottom that wears you out rather than scares you out.
On equities, I am negative this week due to how close we are to SPX 2100 strong resistance, and the weakness in oil and the strength of the dollar. It reminds me of the earlier part of the year when you have 5 day rallies to the top of the range, and then weaken suddenly for the next 3 to 5 days. Examples are in January and March.
On bonds, I am positive because of the above view on equities, the relentless bid in Bunds due to upcoming Draghi fireworks, and the resilience that bonds showed last week despite a strong equity market.
As you can see above, there isn't that big of a difference considering that one was over 9 months and the other was over 50 days. You have much greater inflows on a per day basis over the past 50 days compared to the first 9 months of the year in both the UWTI and USO, the 2 most popular oil ETFs.
It seems like traders are still too enamored with trying to pick the bottom in oil, even though it hasn't paid off for over a year now. Eventually you will find a bottom, but I don't expect a V bottom. It should be a messy, sloppy bottom that wears you out rather than scares you out.
On equities, I am negative this week due to how close we are to SPX 2100 strong resistance, and the weakness in oil and the strength of the dollar. It reminds me of the earlier part of the year when you have 5 day rallies to the top of the range, and then weaken suddenly for the next 3 to 5 days. Examples are in January and March.
On bonds, I am positive because of the above view on equities, the relentless bid in Bunds due to upcoming Draghi fireworks, and the resilience that bonds showed last week despite a strong equity market.
Thursday, November 19, 2015
Bonds Up Stocks Up
We are getting the long term investor's wet dream this week: stocks up huge and bonds also up big. The market seems immune for the time being with crude oil weakness, and dollar strength. The immunity will not last for long. What you are seeing is the inflows of the wait after Fed minutes to buy crowd. They were substantial, judging by the price action.
The bond market is following the Bund, which has gone up for 8 straight days, the most since October 2008. The Bund is extremely well bid, as there are lots of buyers who want to front run the ECB QE announcement in early December, and those who use the Paris terror as an excuse to buy Bunds. Whatever the case, you cannot keep bond prices down for long when you have both ECB and BOJ with massive QE every month. And the Fed will not spoil the party with any hawkish talk or actions. They may raise in December, if they do, they will probably include a statement that they are on hold for a few months AT LEAST.
There is a power flattening in the 5-30 curve, seems like front running of the end of month buyers already. The buyers are getting bolder and bolder these days with central banks who have their back.
Expecting a run up to SPX 2100 by Monday, at the latest. We might even get there tomorrow. With bonds this well bid, that is always a positive when equities are strong. If bonds were selling off this week, I would be more concerned about downside in equities.
The bond market is following the Bund, which has gone up for 8 straight days, the most since October 2008. The Bund is extremely well bid, as there are lots of buyers who want to front run the ECB QE announcement in early December, and those who use the Paris terror as an excuse to buy Bunds. Whatever the case, you cannot keep bond prices down for long when you have both ECB and BOJ with massive QE every month. And the Fed will not spoil the party with any hawkish talk or actions. They may raise in December, if they do, they will probably include a statement that they are on hold for a few months AT LEAST.
There is a power flattening in the 5-30 curve, seems like front running of the end of month buyers already. The buyers are getting bolder and bolder these days with central banks who have their back.
Expecting a run up to SPX 2100 by Monday, at the latest. We might even get there tomorrow. With bonds this well bid, that is always a positive when equities are strong. If bonds were selling off this week, I would be more concerned about downside in equities.
Wednesday, November 18, 2015
No Terror Attack Gap Up
We got the absurb, but high probability no terror attack gap up. Yes, people are that scared of an overnight terror attack that they will sell stocks and or hedge with futures and unwind the hedge in the morning. This gap up is the unwinding of the hedge/buying back what they sold yesterday afternoon.
VIX has been reluctant to selloff too much, as it was relatively strong despite the rally mid day yesterday. It was a foreshadow of afternoon weakness. Maybe ISIS was buying VIX futures ahead of the terrorist plot in Germany.
We get the highlight of the week, the Fed minutes at 2:00 pm ET. I am hoping for a hawkish Fed so that bonds go down and provide a buying opportunity. With the relentless strength of the Bund, there is limited downside for Treasuries at these levels.
Crude oil is weak as usual. Ho hum. Hoping for a run down to the mid 30s for a possible swing long play on the long side. Short term bearish on crude, long term bullish.
VIX has been reluctant to selloff too much, as it was relatively strong despite the rally mid day yesterday. It was a foreshadow of afternoon weakness. Maybe ISIS was buying VIX futures ahead of the terrorist plot in Germany.
We get the highlight of the week, the Fed minutes at 2:00 pm ET. I am hoping for a hawkish Fed so that bonds go down and provide a buying opportunity. With the relentless strength of the Bund, there is limited downside for Treasuries at these levels.
Crude oil is weak as usual. Ho hum. Hoping for a run down to the mid 30s for a possible swing long play on the long side. Short term bearish on crude, long term bullish.
Monday, November 16, 2015
Still Long
Seems like ISIS must have shorted stocks ahead of their terrorist attacks. With no news, the market just got crushed on Thursday and Friday. Now that the bad news is out, and the weak hands have been shaken out, we can finally get a good oversold bounce here. If you took the pain in getting long, you have to ride the pain relief rally on the other side. Otherwise you just end up riding your losers and cutting off your winners. If you are going to ride your losers, you have to ride your losers when they become winners.
I am expecting a lot of resistance between SPX 2060 and 2080. This looks like the market in January when it was chopping around in volatile fashion for several weeks. We will probably repeat that chop as long as the Fed keeps the hawkish tone. They are unusually quiet today despite the Paris attacks. It was a total overreaction by the chicken littles and fear mongers this weekend. Panicking over terror is always a dumb bet.
I am expecting a lot of resistance between SPX 2060 and 2080. This looks like the market in January when it was chopping around in volatile fashion for several weeks. We will probably repeat that chop as long as the Fed keeps the hawkish tone. They are unusually quiet today despite the Paris attacks. It was a total overreaction by the chicken littles and fear mongers this weekend. Panicking over terror is always a dumb bet.
Friday, November 13, 2015
Nothing Easy in this Market
It is a market that overshoots. Both the upside and the downside. I got in early yesterday and am underwater on yesterday's longs, but I will hold on for the ride, since it is day 8 of the selloff and we have strong support underneath at SPX 2020. I like the risk reward at these levels, although I should have waited a day to get in. Another test of 2100 is in order as this market consolidates the huge up thrust, and with the derisking because of the Fed rate hike worries, it shouldn't last long as the Fed will likely be one and pause (for at least 2 meetings), which the market would rally huge on.
Don't be surprised if the Fed comes in with dovish words in the coming weeks to calm down the markets and give them room for flexibility in December. You have your classic Friday risk off trade today, and you can tell it is getting painful as the Nasdaq is taking a big hit, much more than the S&P. At the end of selloffs, the most beloved names are the ones that get taken out.
Crude oil continues its bear market, and I wouldn't touch it here. But any kind of dead cat bounce would be a huge boost for stocks.
Don't be surprised if the Fed comes in with dovish words in the coming weeks to calm down the markets and give them room for flexibility in December. You have your classic Friday risk off trade today, and you can tell it is getting painful as the Nasdaq is taking a big hit, much more than the S&P. At the end of selloffs, the most beloved names are the ones that get taken out.
Crude oil continues its bear market, and I wouldn't touch it here. But any kind of dead cat bounce would be a huge boost for stocks.
Thursday, November 12, 2015
Relentless Selling in Crude
Crude oil never gave the counter trend trader an opportunity to reload on the short. It is weaker than I thought. We will be going to the 30s by December. I would guess $38 is a floor, the low from August. It is the weakest time of the year seasonally for crude oil, and the way it cannot lift at all when equities bounces, but always falls when equities falls is a bright flashing red light.
Usually with this weak crude oil you would be getting a strong bid in Treasuries, but that hasn't been happening either. Perhaps after all the Fed speak today you will get the bond buyers coming back in, but fear of the rate hike will be around for the next few weeks. I still want to buy but there is not much volatility, the market hasn't gone anywhere this week.
Stocks are gapping down again today. It is probably a sell the rumor, buy the news thing going on with Yellen and company speaking today but just not that excited about buying the dip here. It would be more interesting if we could get down towards 2040, but I am not holding my breath in anticipation. Just a bad trading market, overall.
Usually with this weak crude oil you would be getting a strong bid in Treasuries, but that hasn't been happening either. Perhaps after all the Fed speak today you will get the bond buyers coming back in, but fear of the rate hike will be around for the next few weeks. I still want to buy but there is not much volatility, the market hasn't gone anywhere this week.
Stocks are gapping down again today. It is probably a sell the rumor, buy the news thing going on with Yellen and company speaking today but just not that excited about buying the dip here. It would be more interesting if we could get down towards 2040, but I am not holding my breath in anticipation. Just a bad trading market, overall.
Tuesday, November 10, 2015
Fed Liftoff Fears
If you were trading bonds in 2013, you know that stocks and bonds were going in the same direction, but usually only in the down direction. The fear in the bond market was the most I have ever witnessed because of the complacency of the crowd regards to believing QE3 was forever.
Now with a much more calm Treasury market, with much lower yields, you have a mini version of the taper tantrum, this time it is the Fed liftoff tantrum. It isn't very scary, just because with the ECB promising even more negative rates, and possible QE expansion, the Bund ain't going anywhere. And Bund yields will not rise until we see much more strength in the Eurostoxx. Despite a very weak euro, Eurostoxx is still about 8% below its yearly high, with S&P only about 3% below yearly highs.
And it is pretty much a given that the Fed is one and done, or two and done (if you see a stock market bubble), and that will not be enough to keep bond yields high. It looks like we are coming to a great buying opportunity in bonds that will pay off for all of 2016, just like buying bonds at the end of 2013 paid off for all of 2014.
Once this little selloff passes, expect the S&P to get back above 2100. I am not buying yet, but I see limited downside for S&P given the backdrop. I would be a very willing buyer at 2040-2050.
Now with a much more calm Treasury market, with much lower yields, you have a mini version of the taper tantrum, this time it is the Fed liftoff tantrum. It isn't very scary, just because with the ECB promising even more negative rates, and possible QE expansion, the Bund ain't going anywhere. And Bund yields will not rise until we see much more strength in the Eurostoxx. Despite a very weak euro, Eurostoxx is still about 8% below its yearly high, with S&P only about 3% below yearly highs.
And it is pretty much a given that the Fed is one and done, or two and done (if you see a stock market bubble), and that will not be enough to keep bond yields high. It looks like we are coming to a great buying opportunity in bonds that will pay off for all of 2016, just like buying bonds at the end of 2013 paid off for all of 2014.
Once this little selloff passes, expect the S&P to get back above 2100. I am not buying yet, but I see limited downside for S&P given the backdrop. I would be a very willing buyer at 2040-2050.
Monday, November 9, 2015
All About Bonds
Nothing else matters. The bond market has stolen the show. The Fed rate hike in December is getting priced into the markets. Usually weak crude oil would help support bonds but the weakness is due to a potential Fed rate hike, so investors aren't touching bonds. And equities don't like a Fed rate hike either. Usually a big beat on nonfarm payrolls is good for stocks but everyone knows that zero rates is much more helpful to stocks than a marginal increase in jobs. Plus, I don't think anyone believes the economy is as strong as Friday's NFP states. Nobody.
When the dust settles, you will have a great buying opportunity in bonds. This move will last as long as the Fed's resolve to keep raising rates, which means it won't last long. The Fed is most likely one and done, or if equities squeeze higher next year, two and done, because if they dare try more than that, the stock vigilantes will crush equities and show who's boss. There is no way this market can keep rising with rising rates.
ES is untouchable here. Bonds will be volatile till the Fed meeting in December. That is where the blood is being shed. Forget equities.
When the dust settles, you will have a great buying opportunity in bonds. This move will last as long as the Fed's resolve to keep raising rates, which means it won't last long. The Fed is most likely one and done, or if equities squeeze higher next year, two and done, because if they dare try more than that, the stock vigilantes will crush equities and show who's boss. There is no way this market can keep rising with rising rates.
ES is untouchable here. Bonds will be volatile till the Fed meeting in December. That is where the blood is being shed. Forget equities.
Friday, November 6, 2015
Bond Rout
Well that monster nonfarm payrolls report puts a cap on a horrific week for bonds. As I write, the 10 year is trading at 2.31%, and the 5 year is trading close to yearly highs. This is not a quick move that will just dissipate. The catalyst for this selling is not just the jobs report but what set up the weakness ahead of it: Yellen saying December is live. Well with this kind of report, and my doubts about any significant stock market weakness till year end, there are no more excuses to delay. If they don't hike in December, they will have lost all credibility with the market, and they will be ignored until they take action.
I have little interest in trading equity index futures now, with the low volatility. But with blood running in the bond desks, there will be some interesting action in the coming weeks. I always prefer trading a market that is falling, because of the emotional trade that gets involved. When everything is going up, the market is calmer, and almost emotionless and lifeless. You need to see fear in the fund managers eyes to get good two way trade.
This dip in the bond market is not buyable yet. I am looking at a couple of levels, 2.36% in the 10 year and 1.78% in the 5 year. Those are big support areas and should be a good risk/reward area for dip buyers. With the curve staying relatively steep (30 year is weaker than one would expect for such a strong jobs number), there seems to be a lot of liquidation left to go. Probably will be weak till the 10 year note auction next Tuesday, which is ahead of Veteran's Day holiday (11/11) for bonds.
I have little interest in trading equity index futures now, with the low volatility. But with blood running in the bond desks, there will be some interesting action in the coming weeks. I always prefer trading a market that is falling, because of the emotional trade that gets involved. When everything is going up, the market is calmer, and almost emotionless and lifeless. You need to see fear in the fund managers eyes to get good two way trade.
This dip in the bond market is not buyable yet. I am looking at a couple of levels, 2.36% in the 10 year and 1.78% in the 5 year. Those are big support areas and should be a good risk/reward area for dip buyers. With the curve staying relatively steep (30 year is weaker than one would expect for such a strong jobs number), there seems to be a lot of liquidation left to go. Probably will be weak till the 10 year note auction next Tuesday, which is ahead of Veteran's Day holiday (11/11) for bonds.
Wednesday, November 4, 2015
Lots of Resistance
As we go towards new all time highs im SPX, the resistance gets stronger. A lot of trading took place at these price levels before the big August drop. There will be those looking to sell at these prices. More importantly, fund managers will be reluctant to buy aggressively at these levels at the moment. Perhaps with a bit more consolidation we can move to new all time highs. No strong opinion either way.
I have entered short in crude oil this morning and expect a pullback down to 44 later this month. Also, SPX should struggle to keep blasting higher. Bonds look attractive here as there has been a deep pullback since the FOMC meeting. I don't expect much from Yellen testimony today.
I have entered short in crude oil this morning and expect a pullback down to 44 later this month. Also, SPX should struggle to keep blasting higher. Bonds look attractive here as there has been a deep pullback since the FOMC meeting. I don't expect much from Yellen testimony today.
Monday, November 2, 2015
Expressing a Bearish View
I know there are a lot of traders out there saying this one month rally in the SPX is way overdone, ridiculous, a setup for another dive. etc. But there are other ways to express your bearishness without having to deal with the underlying strength of the S&P.
1. Long bonds. The ECB has upped the stakes and will do more QE. There is a strong correlation between German Bund yields and Treasury yields. If Bunds maintain a low yield, expect Treasuries to follow. There is limited downside in Treasuries as long as Bunds remain strong. And since the ECB is expected to make the announcement in Decemver, there should be a solid bid remaining for Bunds even as equities rally. And if equities selloff, then you could get an explosive move higher in bonds.
2. Short crude oil. As I mentioned last week, crude oil is in a seasonally weak time period and has been weak relative to equities for most of the rally. It caught up a bit last week, but still can't get close to $50, and is down today even though equities are strong.
3. Short USD/JPY. For the currency traders, this is the best way to express your bearishness. With the BOJ failing to act last week, and with Fed rate hikes still uncertain, the bears have the upper hand. My least favorite of the three ideas, but better than shorting ES.
1. Long bonds. The ECB has upped the stakes and will do more QE. There is a strong correlation between German Bund yields and Treasury yields. If Bunds maintain a low yield, expect Treasuries to follow. There is limited downside in Treasuries as long as Bunds remain strong. And since the ECB is expected to make the announcement in Decemver, there should be a solid bid remaining for Bunds even as equities rally. And if equities selloff, then you could get an explosive move higher in bonds.
2. Short crude oil. As I mentioned last week, crude oil is in a seasonally weak time period and has been weak relative to equities for most of the rally. It caught up a bit last week, but still can't get close to $50, and is down today even though equities are strong.
3. Short USD/JPY. For the currency traders, this is the best way to express your bearishness. With the BOJ failing to act last week, and with Fed rate hikes still uncertain, the bears have the upper hand. My least favorite of the three ideas, but better than shorting ES.
Sunday, November 1, 2015
Times to Hustle
The market is a bit like the ocean. There are long periods with nothing to catch and then suddenly a school of fish come by the boat and you can't haul the fish in fast enough. It is also a bit like Mardi Gras, as I wrote a couple of years ago, Feast or Famine. There are times when there is nothing out there. A trading desert. e.g. March to June of this year. Low volatility, calm markets, and investor neutrality. Now is one of those times. The dry season. You can't make rain when there are no clouds.
If you've traded long enough, you know when you need to hustle and make as much as you can because you know its not going to last for long. The perverse thing is that often times, these great trading markets happen after a sudden loss in my account. The opportunities are greatest when the market suddenly makes a big move, usually in the downward direction. And if you are trading based on a low volatility regime, and buying dips, then you will lose a chunk when the vol explodes higher and the dip turns into a trench, like it did on August 24.
But the aftermath of those vol explosions is panicky trading, with more predictable and larger price movements. The overnight futures movements get exaggerated as the fear intensifies. During that August/September panic period, you saw quite a few big overnight moves, often times larger than the intraday movements during the regular trading hours. A lot of that is emotional and fear based trading that produces moves that are big, but unsustainable, which often reverse during the regular trading hours.
With the craziness in the overnight futures market, I was trading more actively and getting less sleep. Probably averaged about 4 hours/day of sleep during the heart of the volatility in August and September. The reason was I knew I could make more by trading more during that time period. Instinctively I knew that was the time to hustle, and pump up the score. During those weeks, by the time Friday came around, I was heavily sleep deprived and exhausted.
Now there is no way I would sacrifice that much sleep to trade this market. In fact, most of the time, this market actually puts me to sleep. Even in individual stocks the action isn't all that good. It must be the relative weakness of biotechs and the small caps that have quelled the speculative fever. You know you have a bad trading market when the bond futures is more exciting to trade than equity index futures.
When the golden periods of the market arrive, you know you have a short period of opportunity to collect before things get tougher and return to normal. There were a lot of good opportunities in a short period of time. But it's over.
The time to hustle has passed. If you didn't take advantage of these opportunities, learn from this experience. Be prepared and stay sharp by observing the market so that when the next golden period arrives, you know to hustle and make a big score.
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