Friday, January 29, 2016

They Only Know One Thing

The central banks only have one button.  It is the buy button.  There is no sell button, and they don't need it.  They can buy as much as they want.  Those who think the central banks have limited ammunition don't know a thing.  The central banks can theoretically take interest rates to negative 100%.  to negative 1000%.  They can buy up all the financial assets in the world by printing money.  Everything.  In these crazy times of negative interest rates proliferating, you have to recognize that the central banks will do anything they can to pump up asset prices.

In the past, they used to exercise caution using these potent weapons: QE and negative interest rates.  Now it is almost as if they are expected by the market.  This is setting up extremely high expectations (very warranted) that the central bank will always have the market's back and will not allow any of the big 3 financial assets to fall much (bonds, stocks, real estate, etc).  If they continue these policies, the markets will be ok, but if they discontinue it and see that the risks outweigh the rewards, then they will crush both bonds and stocks.  That is a financial holocaust with no hiding places.  Maybe then investors will hide out in gold and bitcoins.

The BOJ NIRP policy just makes it that much tougher for the Fed to do another rate hike.  The dollar will strengthen to the point where the Fed cannot hike for fear of a dollar being too strong for the US economy.  The market loves this.  However, it doesn't eliminate the overvaluation, lack of earnings growth, lack of global demand, and China financial panic risk.  I give this BOJ rally 2 days tops.  You have to sell the rally if this takes the ES anywhere around 1910.  And these crude oil OPEC cutting rumors used to happen all the time back in the 1980s.  They usually led to nothing.  Even when OPEC did cut, they never had the discipline to maintain it and prices ended up jumping only to go right back down.  I would also short crude oil if it can get to 35.

BOJ NIRP just reconfirms that 2016 will be the year of bonds.  You have to buy bonds on any small dips.  There will be no big dips.  I would be surprised if the 10 year yields didn't get down to 1.60% later this year.  The short end of the yield curve is the place to be.  Expect further curve steepening as the investment community realizes that the Fed is one and done and that the next move is more likely to be a cut than a hike.

Thursday, January 28, 2016

Oil Putting Floor on Market

We are in the hope phase of the bounce back.  With oil bouncing strongly off last week's bottom, you are getting bulls hopeful for a stabilization in oil and thus a strong recovery bounce.  As I said earlier this week, it will be easier to play this choppy uptrend off last Wednesday's bottom by buying dips along the way, and selling the rips.  Yesterday was a sell the rip and buy the dip all rolled into one day type of price action.  It defined the top and bottom end of the current range, which is ES 1910 on the top, and ES 1860 on the bottom.  The market is nearly in balance at this currently level of 1890.  

The market is very resistant to stay below 1870 for long.  The ES is like a ballon being held underwater every time you get under 1870.

Looking beyond the next few days, there will be opportunities to get long bonds and short ES/oil at good levels.  Eyeing ES 1920 and WTI 35 as short levels.  The optimism is building, and that is when you want to build your short positions so you profit on the next down move, which will come again.  After all, as I have repeated many times this month, we are not in your old BTFD market, but a STFR market.  

Wednesday, January 27, 2016

Sell the Fed Rip

It looks like the hopeful bulls are banking on a dovish Fed to bail out their longs.  I will join the sell the rally crowd if dovish Fed words can provide a little short squeeze.  I will give the bulls plenty of room to operate here, they are quite frisky.

Fully expecting like everyone else that the Fed will dial back their bullish on economy rhetoric and that will excite the buy algos which should present a good price to get short.  Looking at ES 1910 and WTI 32.00 as short levels.  I am not interested in buying unless we can get back down to 1860.  I refuse to buy oil.

Trade the new formed range, ES 1855 to ES 1905.  We are closer to the top of the range.  Get ready to sell.

Tuesday, January 26, 2016

Choppy Moves

What you are seeing is a choppy move higher off the bottom that we set last Wednesday at ES 1804.  You have those who want to sell rallies to lower their equity exposure at decent prices along with short term traders looking to catch a move off the bottom into higher prices.  The big theme though is to sell the rally.  So you know these rallies are not going to last long.  That was evident yesterday as sellers swarmed at the first sign of weakness off the Wed/Thur/Friday thrust move and investors were unwilling to buy the close ahead of China.

Overnight, you had more crash like behavior in the Shanghai, but Europe acted like a champ, perhaps boosted by Draghi's dovish words, ramping up the weak futures.

Now we are right back towards the SPX 1900 area, where you have been getting selling.  You can feel the bulls getting friskier here, after that V bottom last week.  I am not so bullish here, but definitely am not going to try to short it just yet.  I want to see overextension on the rallies.  ES 1920-1935 is an overextension zone.  The most dangerous times to short are right after a flush V move higher, because the momentum and renewed bullishness usually lasts for several days.

Big picture, I am still bearish this market, but you have to play the chop correctly not to get cut to pieces here.  Buy ES 1860, sell ES 1900-1910.  Play that for the next few days.  With corporate buybacks set to comeback in February, you have to be careful shorting.  The corporations are going to be eager beavers looking to buy back their stocks which have been hammered this month.  Probably better and safer to buy the dips till early-mid February.  After that, it will be back to bear time.

Monday, January 25, 2016

Bear Time

The bears have gotten beaten up so badly over the past 7 years, that you have to wonder if there are any left with REAL money.  Sure you have the permabears that will always exist because they live to be negative, not to make money.  But the market moves based on the actions of those with money, not those who are loud.  And despite the low number of bulls in the sentiment surveys, I am not seeing the same extremes in VIX, put/call ratios, and money flows as during the August dip.

Moreover, what you are seeing is a broadening out of the selloff to include more sectors, leaving behind just a few leaders to keep the indexes afloat, masking the damage underneath.  Just from a psychological standpoint, most money managers who wanted to buy stocks lower have been able to do so over the past few weeks, in a greater number of stocks than they were able to do in August and September.  If the eager dip buyers are already satiated, the only remaining big buyers remain corporations and deep value investors.  We are still in the bulk of corporate buyback blackout period, so the bears still have some time to operate (about 1 to 2 more weeks), and we are nowhere even close to deep value territory.

If you are going to call yourself a bear, you have to make money during this time period.  This is about as good a market to short as you have seen since 2008.  The bears usually have much less time to shine as bear markets die much quicker than bull markets.  So bears have to feed when there is lots to eat, before the next hibernation cycle.  There still a lot of time in this down cycle, but this month was the first blatant sign that told you:  get more aggressive on the short side and have less respect for V bounces.

We are finally at the first favorable risk/reward spot for shorting since the start of the year.  It is hard to find these spots on the way down because you have to give the bounce a couple of days to work higher to avoid any V spikes to the heart.  We never got that until today.  So we finally got that 2 day bounce to higher levels, with bulls getting more confident again, at least short term.  You take this short here, along with an oil short, and ride it down with a target to the midpoint of the 100 ES point rebound (1804 to 1906), which is ES 1855, and oil towards 29.00.

Those lows from last week are safe for the next couple of weeks, so you can buy weakness now without fear of the market plunging.  But that bull grace period will not last for long.  You have err on the side of caution when holding longs and sell earlier than you would, because these are bear market conditions.  Likewise, you have to be earlier in shorting bounces, as they will not last as long and will not go as high as those during the 2009-2015 time period.

It's a new ballgame, and those bears who are still alive and remember how they made money in previous weak markets will thrive here.  They have suffered so badly over the years that only the most resilient and those with the most conviction will succeed here.  They never make it easy for bears to make money.  But since there are so few money managers that are naturally bearish, some great opportunities can arise to sell strength during those hope-filled rallies.

If you are not a bear, just turtle up and stay in cash until you see big dips like you saw last week.  It is now a time for bears to be actively looking for opportunities to strike on the short side.  Finally.

Friday, January 22, 2016

Areas to Sell

This is a short squeeze Friday, and we should be able to push higher today, even off a big gap up open, as the crowd gets bullish on hopes that Wednesday was the V bottom.  I am skeptical that this rally lasts beyond today.  Starting next week, we should start selling off again as reality hits that we're no longer in a bull market.  Looking at the following areas to sell:  ES 1910 and CL 31.60.

Thursday, January 21, 2016

Killer Moves

The movement is at least double what you usually see.  We have a 40 point range in the ES just in the overnight session alone, that is over 2%!  These are not normal times, but a time of investor stress and uncertainty.  It is not the uncertainty of the news or events, but of prices.  When you have a 40 point overnight ES range, you are in Aug-Sep 2011/Aug-Sep 2015 mode.  This kind of persistent lasting volatility is beyond anything else we've seen.  And it is not a one off move.  This has been happening a lot this year.

You cannot treat this like August 2015.  The breakdown is more severe and broader, hitting the emerging markets and Europe harder than before.  Also, you have more stress in junk bonds and most importantly, the dip buyers have had ample time to load up on stocks.  Remember the key to the rallies in 2012 to 2015 were that dips were usually short and quick, and of the V shaped variety.

The dip buyers back then didn't have much time to buy or else they missed the dip.  It was a different psychology, the memories of 2008 were very vivid and the dips felt scary, even though they weren't too deep and usually didn't last long.  And since you had V bottoms most of the time, the timid buyers just didn't have much time to buy weakness or else they had to chase prices higher to buy what they wanted.  Not this time.  Not including the August/September correction, you had a dip in November, two in December, and a massive one this month.

The increasing frequency of these dips along with the deteriorating fundamentals and overvaluation make it shorter's market.  I have heard many times from those saying that the sentiment is too bearish.  You have to be careful interpreting sentiment, because they are usually bearish when the market is in a downtrend, and usually bullish when it is in an uptrend.  We are now in a downtrend, so it will take even more bearish sentiment to have an effective contrarian indicator.

Once again, you have to have a different mindset than the previous BTFD markets of past 6 years.  Yesterday we got a flush out that should be a short term bottom that lasts for a couple of weeks.  It doesn't mean we go higher in a V bottom, we can bounce, pullback, bounce again, and trade in a lower range (probably between SPX 1860 to 1940) before deciding on the next move.  I believe that next move out of that range will be lower, as China deteriorates and more and more investors realize that the US and European economies are also weakening.

Don Mario is giving bulls hopium this morning and we have a healthy gap up.  I see very little upside from these gap up levels and expect us to close lower today.  A weak close should be bought to ride the oversold bounce over the next few trading sessions.  This is not a long term bottom, but the price action will give bulls hope for the short term and that will help to drive the market higher for a few days.  A move to 1920 over the next few days is very doable here.  Short term bullish, but with the recognition that we are now in a shorter's market.

Wednesday, January 20, 2016

Close to Capitulation

When you get these 30+ point gap downs in the S&P futures, within a few days of each other, you are getting closer to a climax bottom.  These climax bottoms can lead to very long term rallies in an uptrending market, like the numerous times we saw over the past few years.  Or they can lead to short term bear market short squeezes, which last 1 or 2 weeks, and then fade back to the previous lower levels.

Anecdotally, I am seeing a lot of investors on social media looking for a bounce, and there was very little fear as the market was going down from the gap up open yesterday.  A lot of investors are fighting this downtrend, thinking this is just like August and September of last year, when you have big rebounds.  I am much bearish than them, but do recognize that we are at levels that will bring in short covering.  The market is close to the SPX 1840 support level which should bring in buying this morning off the big gap down open.  The only troubling aspect of this selloff is the contained rise in the VIX, we haven't gotten any spikes except for last Friday.  So at least Friday was a sign that you are getting close to a capitulatory bottom.  Unfortunately, you had a lot of investors buy yesterday looking for a bottom.

There is still too much complacency considering the amount of damage done for me to view this as a long term sturdy bottom.  You will not do a V bottom from this level.  We are likely to get some bounces and then retracements to wear out investors.  China is a total mess and its effect on an overvalued US market is underestimated.  If the SPX was at 1500 or 1600, it would be much easier to be a dip buyer but we're still very overvalued.  How can you pay 17x P/E when earnings are flat and we are near peak margins?  There are no bargains.  The shorts have the wind at their back.

I am looking to catch a short term bounce in the first half of the day off the big gap down open.  Nothing long term here, just a quick trade.  Perhaps if we can get a nasty close, I might be interested in buying for a longer term trade.

Crude oil is on everybody's mind, but it is just an excuse to sell. There is underlying weakness outside the energy names and the market is much weaker than people think.   Short term bounce from these levels, but I wouldn't look for a monster V here.  We just don't have the firepower.

Tuesday, January 19, 2016

China Didn't Implode Gap Up

So much for those 3 day weekend fears.  Looks like all the weak hands sold on Friday and they are the same ones buying this big gap up.  Money switching from weak hands to strong hands.  You do that enough and the weak hands go extinct.  The put/call ratios spiked on Friday to levels that we saw in the depths of the August panic.  It usually signals a short term bottom.  I will not go so far as say that it signals a long term bottom, because this market is more bearish than the dips you had in October 2014 and August/September 2015.

Still, crude oil is underperforming during these risk on gap ups, and it is routine now for crude to selloff as soon as the US crude pit opens (9:00 AM ET).  I still lean bearish towards crude oil, and that will hang over like a dark cloud for equities.

We should selloff a bit from this gap up opening but find a bottom sometime in the morning trade and grind higher into the close.  Not really an interesting level for either shorts or longs.  If we get a rally today and tomorrow that takes the ES towards 1920-1930 area, I would be inclined to short it.  Or a capitulation move lower down to 1840 would be buyable.

Friday, January 15, 2016

Trending Lower and Overvalued

Short term traders usually ignore valuation but you shouldn't.  There is a big difference between buying something that is oversold and undervalued versus buying something that is oversold and still overvalued.  We are in the latter.

It is like the difference between buying an oversold market in December 2000 (overvalued) versus buying an oversold market in July 2002 (undervalued).  Measures of valuation are subjective, but usually a market that has gone up 200% over 6 years and goes down 10% is not cheap.  That is what has happened over the last 2 weeks.  If you buy a downtrending market that is still very overvalued, then you set yourself up for big air pockets lower like you saw in August, or even worse, what you saw in January 2008.

Now I hear people saying its not like 2008, its not that bad.  Well if you compare any market to the weakest that we've seen in our lifetimes, of course it won't be as bad.  But if this market is even half as bad as 2008, we've got lots of air underneath.  Lots.

It is hard to have much confidence in sentiment indicators and oversold readings when the trend has turned down after a 6 year bull market where prices went up over 200% and people are bearish.  There were plenty of bears in 2001, 2002, and 2008.  The market went down anyway.  You cannot read sentiment indicators the same as if this dip is the same as those in 2010, 2011, 2012, 2013, etc.  The global economy was stronger and the market was much cheaper back then.

Its like a department store jacking up the price 200% and having a 10% off sale.  That is what has happened in the stock market over the last 7 years.

Expecting an intraday bounce from this monster gap down towards 1880 support on this break of $30 in crude oil.  This is just a one day bounce I am expecting.  Not a firm bottom.  I am expecting a break of 1867 next week.

Thursday, January 14, 2016

2016: Altered Beast

This is a different market than the one you saw for the last 6 years.  I don't say that lightly.  I was still on the bull train and rarely shorted last year.  I still thought we had one last gasp move higher towards S&P 2200.  But there aren't enough suckers out there to buy even higher so that never materialized.

The valuations that supported dip buying in 2009, 2010, 2011, 2012, and 2013 are not there anymore.  The market is overvalued and dangerous on the long side.  I know it is becoming consensus, but it is now a sell the rips, and buy ONLY the big dips market.  Get used to it.  Burn the 2009-2015 playbook.  They are useless now.

Can't say that I am excited about longs yet, even though my price target of SPX 1880 has almost arrived.  This is because the market is even more bearish than what I thought it was a week earlier.  It is not because of the price level, or the big drop yesterday.  Despite the weakness, it is the lack of a VIX spike, and fewer extremes compared to similar prices levels in August/September that alarm me.  If you told me last Thursday that we would be trading this week at ES 1880, I would probably say the VIX would be at 30.  It's at 25.

We have gone straight down for 180 points, in two weeks, and we are still not getting any kind of serious panic selling.  The VIX has hardly budged for a week.   In fact, I saw a market webcast on Monday, when the ES was trading at 1915, and what is usually a grumpy bunch of forecasters were all looking for a stronger close to the week.  Lots of complacency.  I was shocked.

The last time I saw such a weak market without the VIX budging was January 2008, right before you had one of the scariest moments I have seen with the futures locked limit down after the MLK holiday.  I will never forget that week, because it was unprecedented to see such a big gap down on no news.  I lost a boat load of money that week because I didn't know how to trade such a panicked market, which also probably keeps that week in my memory bank.

What I see are traders looking back at what happened in August and September and expecting a repeat.  I don't think so.  The situation is much worse now than back then.  You have a Fed that is less dovish than the market expects, Draghi unwilling to pull out the really big guns and disappoints the market, and credit markets even weaker.   I don't even need to mention China and the emerging markets which everyone knows about.

I know I sound like a permabear this year but the action is really bearish.  I don't see anyway to form a sustained bottom until we break the 2015 SPX lows of 1867.  Once we break the 2015 lows, you will see panicky selling and what I expect to be a VIX spike to 30.  Do we go to 1840?  1825?  1800?  I don't know, but I am waiting for that last flush lower before I take any long term longs.  Based on the price patterns, it looks like we'll have to wait till after opex Friday to really get the fear juiced up.  I am no longer looking for a bottom on the 2015 low retest at 1867.  I am looking lower than that now.  Next week should be the final panic low for this down move that will be buyable.

As I said, I am not interested in shorting below 1900 just based on risk/reward ratios.  But that doesn't mean I am interested in buying right here either.  If I had to choose, I would rather just wait for the capitulation to get long or just hold cash.

Wednesday, January 13, 2016

Don't Touch Crude

I see many simpleton counter trend traders/knife catchers think this crude oil move is overdone and that we are near a bottom.  Maybe they are right, but it would be one of the very few times when the retail crowd and its massive inflows into oil ETFs outsmarted the big boys feeding them that oil.  The ETF flow data still scream that we are going to continue lower or just stagnate at these lower levels for a long time.

It doesn't mean I want to short crude here, because we could have one of those big one-two day short squeeze rallies.  But if you see one of those short squeeze rallies, they are very shortable, even at these low levels.

Looking at the trading in the indices today, it looks like we are selling off again from a gap up.  One of these days, these suckers at the US open will go on a buyer's strike and there will be real pain then.  If you don't short at the open or during the European session, you aren't able to short at the day's highs.  When the real money comes to show up, the overnight buyers disappear.

It is a sickly market, and we will have to go to SPX 1870-1880 to really flush out those clinging to V bottom hopes here.  Still leaning bearish till then.

Tuesday, January 12, 2016

More Like Bear than Bull

I see many still debating whether we are in a bull market or a bear market.  Everyone wants a clean and neat description for this market.  I can only compare what I see now from what I have experienced over the past 20 years of trading.  And this market is more like a bear market than a bull market.   Beyond those 20 years, I can only look at past prices and charts, with no idea about the fundamental news, sentiment, or overriding themes of those times.

If you count from the mid 1990s, we had bear markets in 2000-2002, and 2008-2009.  Well, is not as bearish as either of those markets.  Those were absolute bull killers.  But it is not as bullish as anything else from 1996 to now.  So you could call it a bearish consolidation, but not a bear market like we've seen after the past 2 bubbles.

In any case, you cannot treat the market like you did in 2010, or 2011, or 2012, or 2013, or 2014, or 2015.  This market is much more bearish than any of those markets.  Since most traders have a recency bias, they either trade as if it is BTFD, QE4ever mode or 2008 mode.  This is neither.  It is in between, but more like 2008 than the raging BTFD markets of the past 6 years.

So what is the game plan for this type of market?  It is to treat it like early 2008, but with a more bullish lean.  The crowd is getting quite bearish despite the fact that we're above those August lows, and that tells you that the amount of time left in this selloff is limited.

If we were below those August lows, I would be more interested in picking bottoms because there would be more value, and better risk/reward ratio, but you have to trade what you see.  I see a market looking to flush out as many equity holders as possible until the bulk of earnings season starts next week.  That could take us to SPX 1870, or even as low as 1825, if the crowd really panics.

After this selloff, we should bottom and have a face ripping counter trend rally that should take us to 1980.  But unlike August/September, I don't expect us to keep ripping higher to 2100, but expect a bearish consolidation near new lower levels which will set up another drop later on in the year.

For today, I expect a bounce to suck in the optimists and short term bounce players, only to set up a skull crushing move lower down to 1870 later this week.   That is the gameplan.

Monday, January 11, 2016

More Downside

We are getting a relief gap up from oversold conditions on the scary Friday close, with people havin August flashbacks.  Of course, to thwart the hopes of the scared, the market opens with a strong gap up and we are back in no man's land.  Not a good enough level to buy, even after a brutal selloff, but not enough of a bounce to short with any comfort.

It is usually much easier to try to play reversals in these oversold markets, just because it is easier to recognize a fear point than a greed point.  What I mean by this is that when you see the VIX and put/call ratios spiking, that tells you the downside is limited.  We have the put/call ratios spiking, but the VIX is still relatively calm, at 27 considering the relentless selling.  If we can get the VIX above 30, and the S&P closer to 1870-1880, that will be a very good spot to get long for a move back up towards 1980.

Recognizing a greed point is harder because the bounces are much more variable in size and length than the selloffs.  Sometimes in a more bullish environment, you can get bounces that last for 5 or 6 trading days, which can be killers for early shorts (November, December), or they can be 1 or 2 trading days, which can be quite profitable for early shorts.  I really have a hard time seeing a big bounce of 5 trading days but it is something that cannot be ruled out.  That makes it tough to put on size on the short side with conviction, even when the trend is down, just because of the short squeeze factor.

With the gap up today, and the distance that we are from any kind of consolidation points (1980-2010), the market should take a pause and consolidate around these levels, of SPX 1910 to 1940, for at least a day.  I doubt that is a long consolidation.  After this consolidation at this new lower level, I expect more downside to the final destination of 1870-1880, which should happen this week.  That is the normal and most likely scenario.

If we end up with a more bearish scenario, which is much less likely but definitely possible, then you can consolidate at that new 1870-1900 level and then push down even further in an all out panic move to the October 2014 lows of 1825, probably by the end of the week or the beginning of next week after the MLK holiday.  Remember that in 2008 you had one of the most brutal back to back gap downs after the MLK holiday post opex, where fund managers had to hedge by selling futures like mad, as the puts in January had already expired.

Any attempts at upside today towards ES 1930 should be easily repelled by the bears.  Remain with a short bias till we break 1900.

Friday, January 8, 2016

Bull Suit

A Molotov cocktail crashing into my bull suit.  I have taken off the bull suit because it caught fire due to crash.  Expecting ES 1880 by Monday or Tuesday.  Keeping powder dry when the fund managers panic en masse.  A vicious market for longs and counter trend traders.  Capitulation coming soon.  We are not there yet, the levels are still too high for value buyers to come in.  Need to test those August lows to bring out the value guys.

Scary part is the market is still very overvalued.  Scary market.

Short term Bullish

I am wearing a bull suit at the moment but it is only a short term rental.  Not going to wear it beyond a few days.  By next Tuesday, I will remove the bull suit and consider putting on a bear suit.  I don't think the down move is over.  Yesterday was the crescendo of part 1 of the selloff.  Today is the remnants of that selling pressure and we should get a reasonable bounce soon.

I want to emphasize that I think it is still too early to put on long term positions here unless you are willing to sit through another selling wave next week.  But the trading odds slowly favor the bulls as the selloff continues and more bears join the sell side.  Remember, we are still in the heart of corporate buyback blackout period, which has the been the main source of equity buying power for the market for several years now.  Plus, ahead of earnings season, I doubt that you will see a big bounce that sticks.  The crowd seems to be scared to death of AAPL earnings coming up later this month.

The put call ratios are finally getting spiky and that is sign of a short term selling climax.  I don't want to mention China because it is a bunch of nonsense and fundamentally, the Chinese stock market is meaningless and the yuan devaluation hurts Asia much more than it hurts the US.  It isn't even that meaningful to Europe, although China does affect Germany more than the US.

Not bullish on oil here, even though I am bullish ES for a bounce.  Oil is deadly on the long side.  Stay away.

Thursday, January 7, 2016

Short Term Oversold

Not a bull by any stretch, but usually when you get a third big gap down in 4 days, usually that is capitulation.  We got capitulation overnight as we got down as much as 53 points on the S&P futures.  I am not expecting this to be THE bottom, where we go straight up, but it will provide a floor for a few trading days.  Beyond that, I expect another selling wave to overwhelm the market and take it to the SPX 1880.

Nibbling buys on ES today.  Anything is possible, but it looks like short term capitulation and odds favor a bounce here.  China is not that important to the US market, and it seems like the fear is getting a bit overdone here.  Still, we've not had enough selloff days for this to be the low of this move.  The selloff still has several more days to go till we hit the absolute bottom.

Wednesday, January 6, 2016

Waterfall Decline Probable

You get waterfall declines when investors are bearish, not when they are bullish.  I rarely call for big declines because they are hard to predict.  But the setup with so many dips over the last few weeks, showing equity weakness, with the market making lower lows now in a seasonally bullish part of the year and still not seeing the big fund outflows is bearish.  The inflows into the oil ETFs have been ridiculously high considering it goes down almost every day.

The buy the dip trade worked so well last year except for one period (August-September), that it is an enticing trade to put on because they have resulted in quick V bottoms with near painless profits for those that bought after a few day selloff.

A strong market doesn't give you so many dips to buy in such a short time period.  The dip earlier this week seems like a trap to suck in dip buyers who think its just like the dip we had in November, or the two dips we had in December, which resulted in V bottoms erasing most of the losses.  I expect a bigger swoon lower this time.  I don't have enough conviction on that idea to go short, but it does keep me away from going long trying to pick a bottom here.

Treasuries will be the trade this year and it is unfortunate that I couldn't get a good long entry before nonfarm payrolls this Friday.  All signs point to a slowing economy both internationally and in the US.  Dips can only be bought now after extreme oversold levels.  We are not even close yet.  Keep the powder dry so you can take full advantage of any blood in the Streets in the coming days and weeks.  We should bottom in about 9-10 trading days.

Tuesday, January 5, 2016

Fundamentals Coming to Bear

The S&P 500 at current levels, 2010, is trading at a P/E of 17.2 on 12 month trailing earnings of $117.  It is trading at a P/E of 16.0 on forward 12 month earnings estimates of $126.  There was a 1% earnings decline over the past 12 months.  The earnings estimates are looking for 8% earnings growth this year.  Estimates look too positive to me considering oil is trading at $36, and doesn't seem to budge.  That will kill the earnings of energy names.

These earnings are coming after a huge expansion in earnings over this economic cycle, a big gain in profit margins, and with a big tailwind of falling interest rates.  Those tailwinds are going to be minimal going forward.  There is no more QE so that will kill any hopes of further drops in interest rates unless the economy weakens, which will hurt earnings.

Sometimes the crowd is right.  The market is overvalued, and we are late in the cycle, with credit problems cropping up and with growth slowing not just internationally but in the US.  If so many people weren't so bearish, it would be a slam dunk short at these levels but we're probably going to have to shake out the bears one last time before we can go down in earnest.

I could care less about China or Saudi Arabia or Iran.  Those are red herrings.  What matters is the price of oil, which determines whether you get a bunch of high yield defaults or not and affects S&P 500 earnings, and the growth in the US.  What is being missed in the focus on China is that the US economy is slowing and probably peaked out in 2014.

In any case, I think Treasuries will outperform the S&P 500 easily this year, and I would use any rallies in the S&P over the coming months to buy Treasuries for the long term.  1.60% on the 10 year is very doable this year once the investment community realizes that the Fed can't/won't raise rates anymore.

Short term, I expect a little bit more weakness but probably we don't get down to 1900 on this down move.  But I do expect us to test the 1980 area later this week.

Monday, January 4, 2016

In August-September Mode

They don't make it easy.  Once you get adjusted to one volatility regime and choppy market, they change the game on you.  I may be like all the other dummies who are getting bearish but I cannot ignore a market that gaps down over 30 SPX points AFTER a closing hour plunge on the last day of 2015, and treat it as same old, same old.  The VIX has been providing the warning signs over the past few days of 2015, when the VIX was stubbornly high considering the SPX level.

I am going to be careful buying dips till we reach a lower more fear inducing level.  That is probably somewhere in the S&P 1800 to 1900 range.  Honestly, like most people know, the US market is overvalued here and it is vulnerable to deep selloffs just like August and September.

What is especially worrying is that oil is actually up on the day but the equities are ignoring that and going down huge anyway.  It looks like we are on the edge of another precipice just like August even as there are a lot of bears around.  You have to always consider the market environment when considering sentiment.  If it is a bearish market environment, then it takes a lot of bearish sentiment before you can hit a firm bottom.  Remember that in 2008, investors were bearish almost all year long, and the market kept going down.  Same with 2002.  People have gotten so used to a bullish market environment over the years that this new bearish environment is a bit of a shock to the system.  I think a bearish market that sustains weakness will really surprise people the most.  It is almost taken for granted now that any deep selloffs are quickly erased with V bottoms.  I think that changes this year.

Right now, I don't have a high conviction trade because although I do believe now that we will be entering a weaker market for the coming year, so do many others on the Street.  It is a time to be careful, not only for longs, but for shorts as well.