Santa Rally?

We are in the middle of the Santa rally.  Without any share issuance this week and with the post opex selling now over with, the desperate sellers are mostly done and with an absence of sellers, you get a low volume rise higher.  This is not aggressive buying here.  Most of the big boys are done for the year and planning for 2016.

This Santa rally should last the rest of this week, but beyond that, you are hoping for greater fools to jump in.  I don't see that happening after a flat year in the market, and nervousness ahead of 2016.

There is a huge wall of worry for next year.  Unless things really get bad, such as oil going to the low 30s and staying there, we should have a strong first quarter.  The first quarter is usually a bullish quarter as investors put in allocations to stocks.  Unlike this year, I think the trends will last longer and it will be less choppy than this year.  It is almost as if dip buying is getting too easy now with every dip except the one in August being contained to no more than 6-7%, and being met with immediate buying.  Even the August dip was met with aggressive buying after the first bottom.  We've had very few dips where the market goes down and stays down.  Most have been V dips.

Expecting a grind higher for the rest of this week.  Should give back some of this week's gains next week however.

I am taking a blog break till the first trading day of January.  I may post some comments occasionally here and in Twitter.  Merry Christmas and Happy New Year.

Beginning of the End

This bull market is almost 7 years old.  It has confounded a lot of investors, with the massive divergence between the real economy and the markets.  We are at a point in the cycle where the upside is limited but the downside is huge.  But it's a what have you done for me lately market, so any sustained rallies next year will force fund managers to get into equities to keep up with the indexes even though they know its a horrible time for a long term investment.

That is where we are at now.  The driving force for a rally from these levels is stock buybacks, cash M&A, and a chase for performance to keep up with the S&P 500.  The first two are still going strong, it is the third thing that will be the ignition for an irrational rally to new all time highs.  Of course this is a speculation.  But with the way this year is ending, and with the Fed rate hike, the stage is set for underinvested fund managers to be forced to buy to keep up with the S&P, even though they aren't true believers.

There are two main scenarios that I envision can happen in the first quarter of 2016:

1) We get a sustained change in investor sentiment to bullishness as oil bottoms and rallies towards $50/barrel, and we hit new all time highs in the S&P 500 in the first quarter, and the Fed raises rates again in March.

2) We continue this trading range from around SPX 2000 to 2100 as sentiment remains the same, oil stays low, under $42/barrel, and Fed stays on the sidelines.

I am leaning towards the first scenario, although I cannot rule out a small chance of oil continuing to go lower and lower down to $30/barrel and staying there and causing massive pain in energy names leading to a retest of the August lows at SPX 1867.

As for the rest of this year, we could bounce a bit from this post Fed hike hangover, but it will very tough to get back above positive for the year above S&P 2058.

Sloppy Bottom

I am not convinced that we are in a bear market yet.  But its so close to the end of the bull market that is it really worth it to try to play for the final up move before the trend turns bearish?  The US is fine, but the Asian markets are a total mess, especially Hang Seng and H-Shares.  They are barely a stone's throw away from the lows in September.  And Europe is weak despite being loved by the investment community.

We should bottom soon, and start a short term uptrend after all the sellers have vacated the premises pre-Xmas, but with oil stuck in this rut, you can't get any kind of meaningful up move that will stick long term.  I keep checking the retail flows into USO and UWTI to see if we are finally getting some selling but all they do is buy every day.  EVERY DAY.  The shares outstanding in both USO and UWTI are at all time highs.

This market is really doing a good job of wearing out the bulls, and the bears.  With options expiration forces pressing down on the market, and fund managers looking to hedge downside exposure after their December puts expire, you are getting some pain out there.  As I write this, after an auspicious start for curude oil, it is plunging again.  It is once again holding this market hostage.

There has to be a bottom somewhere near 2000, question is, do you step in now or wait for Monday?  Either way you gotta be a buyer, even though this thing looks so sickly.

Don't Believe the Fed

They know nothing.  Even if they do know something that's gonna spook the crowd, they aren't going to say it.  The part that Yellen said about oil prices was laughable.  Since when did she become an oil expert?

And the Fed dot plots?  They've been completely wrong ever since they first came out.  Let's not forget those claims in 2010, 2011, and 2012 about the Fed funds rate being such and such by 2015, way higher than they are now.  And these aren't all hawks either, one of them was asking for negative interest rates this year (Kocherlakota)!

4/7/2011 – Fed Governor Jeffrey Lacker – “Rate hikes by year end certainly possible

5/5/2011 – Fed Governor Narayana Kocherlakota – “Under my baseline forecast, it would be desirable for the (Fed) to raise the fed funds target interest rate by a modest amount toward the end of 2011”

2/6/2012 – Fed Governor James Bullard (as reported by Reuters) – “Fed should raise rates in 2013”

Are these Fed officials fortune tellers?  More like contrarian indicators to me.

We got the sell the rumor, buy the fact reaction yesterday.  Everyone was waiting for something horrible to happen with the rate hike that when it did finally come, there were no more scare crows left holding stock.  They had already sold into the hole on Friday and Monday ahead of the FOMC meeting.  You were left with strong hands holding stock and when the expectations were met, you had vigorous buying by those holding too much cash.  The leftovers of that buying power are spilling over to today in the form of another gap up.  After the big gap down on Friday, as the market's tendency to do, you have 4 straight gap ups, one of them being a monster gap up.

When there is no clear trend in place, you have to buy the fear and sell the greed.  This trendless market will not last for much longer.  I expect there to be a last gasp rise in the first half of next year followed by a bear market.

As for now, you have to be leaning bullish in bonds and stocks for the next few months.  I am neutral on oil, and have changed my mind on gold.  Gold just looks like its stuck in a stagnant area, probably stuck in a narrow range.  Too many bears for it to go down much, and with its blood brother, oil, this weak, not enough potential gold bulls for it to go much higher.

Expecting a short term pullback in stocks over the next few days starting today or tomorrow.

It's a Crude World

The market is hanging on with baited breath waiting for every move in WTI.  You saw crude bottom in pre market yesterday and continued crude oil strength provided the support that the market needed to make an intraday reversal and finish near the highs.  Now with the Fed announcement just one day away, you are getting some optimism coming back as the Pavlovian response to buy on Fed days comes back to the market.

Everyone knows that the Fed will raise rates, but it still makes them nervous, just because it hasn't happened in such a long time.  Let's not forget that the UK has interest rates at 0.50%, so it doesn't mean the end of the world for that economy.  In fact, the UK is probably one of the strongest economies in Europe.

And pretty much everyone knows that the Fed will be excruciatingly reluctant to raise rates any further after tomorrow if oil stays below $50/barrel.  The benchmark, Brent crude is only trading at a slight premium to WTI, so year over year, the cost for gasoline and heating oil are much less.  That is going keep the inflation numbers low.
Crude oil usually bottoms in December, but it doesn't really start making a strong move higher till February, so there is lots of room here for crude oil to linger in the 30s, which is a horrible scenario for the energy names.  I am bullish on the market overall for the next few weeks, as the tax loss selling will be over and we'll have some new yearly inflows coming in at the beginning of January.

We need oil to get to at least $45/barrel to have a good chance to make new highs.  That is asking a lot for such a weak market.  So it is a time to be bullish, but the weakness in oil will prevent this market from breaking out strongly to the upside.

Capitulating

The crowd is starting to capitulate.  We are getting scare mongers act like junk bond experts now.  Who cares about the junk bond market.  There is a reason it is called junk.  These are speculative companies that raise capital at higher interest rates for a reason.  It is weak because of weak oil and nat gas, nothing more, nothing less.

I sold out of the ES long on Friday and will re-enter today as we get close to SPX 1985 support.  I will be buying intraday weakness today.  It is getting nasty out there, the best times to buy.  The Fed will be dovish as all get out and is probably one and done for good.

Stocks will love a dovish Fed and finally get the cloud of an interest rate hike out of the system.

Buy the fear.

Blood in the Water

The sharks are circling the bloody baby seal.  Gap down is just a flesh wound coming from Europe.  We got crude with another gap down today and it is starting to really affect the indices.

I can finally see the blood in the water as the pre FOMC nerves and endless bottom in oil are acting like a 1-2 punch to force a risk off.  Funny thing is, this rate hike is doing a great job of pushing down interest rates with risk off price action.

Looking to get long ES later today around SPX 2024.  This will be a long term holding.  Fed is going to be very dovish with their statement and conference call.  That will excite equities.

Tragedy of the Common Man

We are seeing a pile into oil ETFs like its a blue light special.  UWTI, the triple leveraged ETF, added 21M shares yesterday, to get up to 200M shares outstanding.  That is a 10% addition to the ETF, or $100M.  That is the most speculative oil ETF out there and retail is piling in like its a once in a lifetime opportunity.  USO was not far behind, and it is a combination of institutions and retail, that added 8.4M shares, or $100M as well.  The bottom pickers have not given up, and oil continues to drop.

Now, I do think oil will bottom in the short term before the year is over, and we should get a strong rally in Jan and Feb, but there are so many other better asset classes to be in for that strong rally, that I'd rather just be in ES, because it will go up with oil, anyway, and it doesn't have the negative effects from steep contango taking away from returns.

This week is the pre-FOMC meeting position squaring and crude oil collateral damage combo at work.  It will present a good BTFD opportunity later this week.  I am on the prowl to buy ES and ride it into the New Year.  Also think we'll get a good rally in bonds as well so I will add bonds into the long mix.  After thinking about it, I will hold off on gold but if gold can dip between now and Fed meeting to 1050, I will look to buy.

Bonds and Gold for 2016

Although I trade often, I always want to keep an eye on the long term moves in play.  As George Soros states, the market trades based on a perception until is proven false.  Right now, the overriding perception is that of a dovish ECB/BOJ and a hawkish Fed.  While the perception about a dovish ECB and BOJ are correct, I believe we will find out in 2016 that the market is wrong about the Fed.

I do not believe that the Fed is hawkish.  Yellen is in fact acting as if the economy is strong in order to commit to their promise of raising rates this year.  After that promise is fulfilled this month, expect your normal dovish Fed talk and actions.  The US economy peaked in 2014 and has been slowly getting weaker.  That is not being fully reflected in Treasuries because of the fear of buying ahead of the Fed tightening cycle.  If the Fed is perceived as being one(not going above 0.50% Fed funds rate) and done, which I believe is the case, there is a LOT of upside in Treasuries.  It is something I see happening in 2016.

That doesn't mean that equities will be weak.  The economy is not weak enough to signficantly affect profits, but it is weak enough to keep the Fed from raising more than once.  And lower bond yields will help corporations, all else being equal.  Also the perception of a one and done Fed will get asset managers excited about equities again.  So after the Fed meeting on December, 16, I expect equities to do very well for the first few months of 2016.  Stock buybacks and cash M&A are still rolling along like a freight train.

If the Fed is indeed one and done, then on December 16, the Fed tightening cycle would officially be over.  That is extremely bullish for bonds, especially the belly, between 5 and 10 years.  It is also bullish for gold, as gold will not have to worry about a hawkish Fed anymore.  It just happens that gold is probably the most hated asset class out there.  Also, gold tends to bottom in December and explode higher at the beginning of the year.  Bonds aren't hated, but they definitely are not liked.  There could be some seriously explosive moves happening in bonds and gold in 2016.

I can picture an S&P at 2200, 10 year yields at 2.00%, and gold at $1150 by February 2016.  Risk parity funds should also be back in style next year.

I will use any weakness in equities, bonds, or gold over the coming days ahead of the Fed meeting to put on long term positions.  The short term trading game just doesn't pay when volatility dies down.

Widow Maker

What you are seeing in the EURUSD, the Bund, and the Treasuries are widow makers.  Six sigma moves.  You don't often see the Bund yield up 20 bps in one day.  Along with the euro up 3%.  It is rare indeed.  Treasuries are selling off to the tune of 16 bps so far, with a few hours left in today's session.  Ahead of tommorrow's nonfarm payrolls report, there are no willing buyers here.

All because Draghi didn't UPOD.  Underpromise Overdeliver.  He overpromised, got the markets all excited, and underdelivered.  That is a no-no in the QE driven world we are in.  It has crushed the European indices and the spillover is carrying over to the US.  This is an overreaction.  But so much hot money is in the short EURUSD and long European stocks trade that the hit is massive on both sides.  For a euro-hedged buyer of European stocks, you are getting the worst of both worlds.  An absolute crushing.  And that just happens to be one of the Street's favorite trades.  The unwind is extremely painful for the hedge funds.

The pain in equities should easily extend into next week, with nothing to look forward to, with Yellen intent on raising rates come hell or high water.  The market is scared to death of the Fed raising rates while crude oil is hovering around $40 and with ECB not delivering the goods.  I see ES 2020 in the cards next week.

Don't Ask Don't Tell Bond Buyers

Yesterday we saw something that you rarely see:  an explosive rally in bonds, without Bunds forecasting it, on NO news, with a strong stock market.  To top it all off, it happened on the 1st day of the month.  Totally out of left field.  I don't think I was the only one caught off guard.  The move was a one way freight train.  Now I know some of the amateurs will say that the Turkey bomb news caused the rally.  Gimme a break.  Then why didn't stocks selloff?  That kind of news doesn't cause a 9 bps move in the long bond.

As I've stated before, when the fund managers are comfortable and acting rationally, they make fewer mistakes.  My edge comes from taking advantage of the institutions making mistakes.  And in a bull market (applies not only for stocks, but also for bonds), fund managers are feeling no heat, and make very few emotional decisions.  In a bond bull market, you get motivated buyers stepping in out of the blue, in a strong stock market, without warning, like yesterday, ahead of a nonfarm payrolls report later this week, and there just isn't enough selling force on the other side to keep it orderly.  That kind of unpredictability doesn't happen as much in a bear market.  The best trading markets are bear markets.  Obviously, that is the worst market for the institutions, who are always long.

Believe or not, this Fed rate hike is doing nothing to scare away bond investors.  The long bond has been screaming higher and when that happens, you are not going to scare away bond buyers, even those that are buying the short end ahead of a Fed rate hike.  Eventually that long end strength spreads out to the short end.  Rarely do you get short end weakness to spread out to the long end over extended periods of time.  The long bond is the general, and the shorter maturities are the troops.

In this QE world, you can only really have a sustained weak bond market when the long end is leading the way down, not the short end.  Flattenings scare nobody in the bond space.  Why?  Because rates are going to stay low, no matter what.  That is what you saw in 2014.  A flattening that was extremely bullish for bonds.  You need a bear steepening to catch the attention of the bond investors.  It happened briefly from May to June, but that was it.  That just so happens to be the high for yields this year.
Now all the bond fund managers can't put on flatteners fast enough.  It should continue for the rest of the year, as the Fed rate hike will embolden them.

Mind Numbing

When you have such a tight range over the past several days, there isn't much to do.  It is tempting to attempt a short here but with Bazooka Mario on Thursday, I would rather just wait a bit longer.  It doesn't bother me too much if I don't take advantage of a mediocre short opportunity.  The shorts will always be available for the S&P skeptics, as the market spends a lot more time near the tops than near the bottoms.

The surprise move of the day is the big time rally in bonds, even with strong stock market.  I definitely didn't see that coming, not with nonfarm payrolls coming up on Friday, and the much anticipated Fed rate hike in middle of December.  Trading is a game of probabilities, no matter how certain you are that something will happen, nothing is guaranteed.

October was a good trading month, November not so good.  It is a grind out there.  Will look to short WTI on any rallies up to $42.50, with a target of $40.