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.

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