Monday, February 29, 2016

Got Long

The chop continues, and month end book clearing led to a wave of selling.  We are trading a new range, around 1920 to 1960.  I would expect there to be strong support around here, and a bit below at 1920.  I have added small buys in S&P futures, looking for a move back up as the market gets ready for more ECB goodies next week.

Cannot be too aggressive long here because we have out of the blue crash risk at these levels, but I like long side until the ECB meeting on March 10.   Also with German Bund yields at 11 bps, near all time lows, there seems to be very little near term upside in bonds, especially with oil looking like it has stabilized, as it heads into a more seasonally favorable part of the year for prices.

Thursday, February 25, 2016

Get Shorty

They are coming after the shorts with a vengeance today.  Once again, the morning was a bear trap and set up another painful short squeeze.  Now that we are at SPX 1950, you will stubborn bears thinking this is a great level to get short.  The only problem is that the bottom was just 14 days ago, which means there is probably at least 2 more weeks of sideways to upward price action.  It doesn't help that in 2 weeks, you have whatever it takes Mario coming up with ideas to goose up the European markets and then followed by the Fed the following week.

Oddly enough, it has been easier to profit from the up moves than the down moves.  It seems like the down moves come more randomly, while the up moves seem to always come after you get a sharp drop and excess pessimism.  I am sure we will quickly get more bulls jumping on the bandwagon, thinking this is like October of last year.  Probably when we are at 1980-1990 level, which should be a nice sell short zone.  We might even overshoot to 2010-2020, depending on how long this grind higher goes.

Even with these projections for higher prices, I am reluctant to go long, because of the poor fundamental backdrop.  But I will be an opportunistic long for small size if we get any dips.   Probably best to just stay on the sidelines until a good setup comes up.

Wednesday, February 24, 2016

Too Many Bears

The market just seems overflowing with shorts who pound down stocks with the help of HFT algos going along for the ride, and then cover in a panic when they see that the market holds it support levels.  There has been a ton of volatility over the past 2 trading sessions, and we are pretty much back to where we started on Tuesday morning.  In the process, you shook out some weak hands, squeezed some shorts, and established greater divergence between the strong markets (US) and the weak markets (oil, Europe, Japan, etc.).

Everything points to a grind higher with an eventual target of 1980.  Don't know the path that it will take to get there, but almost seems like it has to because of the number of underinvested fund managers and stubborn bears.  I am not a raging bull, but I know when to get out of the bull's way when they have room to run higher.  Let the optimists have their time in the sun.  It should last a few more weeks.  There will be plenty of time to get short at much better levels.  I am in no rush to short this market.  In fact, I have been doing a little dip buying here and there, as I don't see us crashing again for quite a while.

Not the greatest market for bears here.  Take a break till FOMC in mid March if you are one.

Tuesday, February 23, 2016

Avoid Competing with HFTs

With the HFTs ruling the short term trading patterns, you see many more intraday overbought and oversold conditions that are both irrational and deceptive.  What I mean by deceptive is that some of these intraday movements seem like a new breakout or a breakdown from an important price level, but in hindsight, more often than not, they are massive stop runs that marked an intermediate term top or bottom.

For example, on February 11, you saw a massive spike in Treasury prices that ran over a lot of shorts, both with short term and long term trading horizons.  The HFTs can sense these dislocations and can sense when big orders are about to hit the screens, so they front run them, exacerbating the moves.  Since too many pile onto the same side, you get really big moves, which reflexively causes more panic until the moves exhausts itself as the panic exhausts itself and the HFTs close out their positions for fat profits.

There are many predatory algos that specialize in front running institutional order flow in order to make quick short term high probability trades.  Ironically, the best way to prevent them from front running so boldly is to have spoofers fake institutional order flow to get HFTs to overreact to size on the order books.  The spoofers keep the HFTs more cautious when front running.  But now that spoofing is being made illegal, you get front running run amok, leading to days like February 11, when you get  massive short squeezes in Treasury futures which lead the correlation algos to short the S&P and Eurostoxx futures.

It is harder than ever to daytrade this algo driven market, especially for counter trend traders, which is why I have expanded my time frame to more swing trading, with very little daytrading.  Most of my trades now last from 2 days to 2 weeks.  When intraday price patterns were less random, I did a lot more daytrading.  But the algos are so quick to catch on to historical intraday price patterns that they have made past short term trading strategies less effective and lower probability.  The HFTs are going to be much better than you at taking advantage of intraday opportunities.  I don't want to compete in the timeframe where they are the best.  The longer the timeframe, the more favorable it is for perceptive discretionary traders over computer algos.  

Seems like we got overextended and overbought yesterday on the upside, and since this is a weak market, you have a hard time staying overbought, so you get immediate down days.  This did NOT happen in 2013 or 2014 after V bottoms.  Those backtesting strategies to use for this market will be sorely disappointed with the results if they use the last 10 years as their sample size.

I remain of the belief that we will grind higher, but it will not be easy to trade long now.  The up moves will be choppier and there will be out of the blue down days.  Not doing much recently, waiting for easier trades to show up.

Friday, February 19, 2016

A Grind

Usually you get more lively action on a down day (although only slightly down) but since the first hour, its been dead quiet, reminiscent of the boring trade in the 2013-2014 dead vol era.  I guess you can't always move crazy every day, but expected more action on a down day today.

Not much opportunity either way at this juncture.  I am a willing buyer of dips now, although will be playing smaller due to the tail risk inherent in this market now that we have rallied over 100 SPX points in a bear market.  Probably the best course of action is to buy any dips in Treasuries when stocks rally.  

Might be time for a vacation, will try not to force anything here.

Thursday, February 18, 2016

S&P 1940

There is a lot of psychological resistance at S&P 1940, which was the top for a couple of big bounces.  You got really close overnight with the Eurostoxx screaming higher on a weaker euro and Just get me in buying,  That looks like a buying climax for Europe today.  I would be surprised to see it above today's highs for the rest of the month.

That doesn't mean the S&P has also topped out, because it has proven itself to be much stronger than all the other indices.  I expect a pullback early next week due to post opex hangover effects.  But at first pullback off such a powerful buying thrust should be bought.  Perhaps that pullback goes towards the  1890-1900 zone.  Yeah, not that great a buying opportunity or potential reward, which is why I will likely play smaller buying dips.

Barring an unforeseen collapse in equities post opex, I expect there to be a choppy grind higher towards 1980 by March.  In March, you will get Draghi talking more QE and neg rates and Yellen giving the bulls what they want to hear by delaying and/or taking rate hikes off the table.

The big clue is the extremely strong buying this week off a capitulative bottom last week.  The usual blueprint for such action is a grind higher for 4 to 8 weeks.  The tricky part is not now, but in the middle of March, after the rally has matured and the number of bulls increase, putting the market more in balance from a sentiment perspective.  At that point, we can either immediately collapse back down to break 1800 or grind it higher for a few more weeks to marginal higher highs, like May 2001 and May 2008.  I am leaning towards the latter, but will have to see how stocks trade over the coming weeks.

Wednesday, February 17, 2016

Sold Longs

I sold my longs and I am now back in waiting mode.  The meat of the up move has been made, so the risk reward is back to average.  The action has been extremely bullish, more bullish in comparison to the thrust off the bottom in January 20.  You've also had more time elapse from the initial selloff that began at the end of last year, so more bears have taken their positions and more risk has been taken off.  That leaves much more potential for a lengthy bear market rally.  If I had to put on a trade here for the next 4 weeks, I would go long.   But I prefer to be in cash to take advantage of any potential opportunities to buy back a little lower.

Now that we've gone up 110 points from the bottom, I am sure everyone will be staring at the double bottom made at S&P 1812 and think this is a repeat of last fall.  Fat chance.  Although I am not looking to short here, I am no raging bull.  The S&P has proven itself to be strongest, so if I am going to short, I would rather pick on easier prey like Europe or Japan.  Or better yet, crude oil.  You get no medal of honor in trading for beating the toughest opponent.  Money made shorting crude oil spends just the same as money made shorting S&P.

The most promising trade in the coming months will be the long Treasury trade.  We are still in the middle of that trend, and it looks like its going to be a monster.  Those all time low 10 yr yields in 2012 of 1.38% will be challenged.  With a weakening economy and the Fed out of the picture, there is no barrier to this trend.

Tuesday, February 16, 2016

S&P Balloon Under Water

It is like trying to hold a balloon underwater.  This S&P when it is under 1880.  The huge buy programs out of the blue last week at key technical points in the charts was  PPT like.

The buying forces are resilient, even as you saw the savage selling in Nikkei and Eurostoxx.  Reinforcing the theme that the SPX is the equivalent of a battleship compared to the dinghys and sailboats that are the Nikkei, Eurostoxx, and Shanghai.  It will take the equivalent of a thermonuclear bomb to destroy the SPX, while a little scud missile can take down Japan and Europe.  A 22 caliber can take down Shanghai.

Even after the huge up day on Friday, you are getting follow through buying in the form of a massive gap up.  These are not common.  Usually after a 2% up day, you see a consolidation day the follow day, not a 1.5% gap up.  And it comes after the climactic selling on Thursday that tested the SPX 1812 bottom from January 20.  Extremely bullish price action.

Apparently there was a secret meeting that was quite well publicized between Saudi and Russia.  The production freeze is a huge disappointment.  That takes away a huge catalyst for crude oil, as the shorts' biggest fear, the OPEC production cut, is now taken off the table for quite a while.  It is now going to be a free fire zone for crude oil shorts who will get bolder.  That doesn't make me bearish on stocks, because I believe there will be divergence as equities grind higher as crude oil stagnates.

For the day, expect a little selling off the big gap up open but don't expect much.  Eventually we should test the S&P 1920 area before this rally takes a break.  I will stay long till that point.

Saturday, February 13, 2016

S&P: Last General Standing

This global bear market has been going on in stages:  first the front line privates (China, emerging markets) were the ones getting mauled, in August and September.  The low hanging fruit for the bears.  Next came the junk bonds, in December, which are the corporals and sergeants.  Then you have the small cap stocks, which are a motley crue of privates, seargents, captains, and majors.  They have been lagging the large cap stocks badly for over a year.

Now you are hitting Europe and Japan, which are the captains and majors.  Europe and Japan are more reliant on Chinese imports than the U.S.  In fact, the U.S. has the least to lose and the most to gain from a Chinese devaluation and weakening Chinese economy.  

The last man standing, are the generals:  the large cap U.S. stocks.  They are the ones that are considered the least risky on the global equity risk curve.  And for good reason:  they have adopted the most shareholder friendly policies by buying back tons of stock and their profitably has been growing while those in other countries have not.  It helps that many of these U.S. corporations are virtual oligopolies with fat profit margins that seem to keep widening.

What you saw this past week was the market being offsides betting on the strong dollar theme.  If the Fed doesn't tighten, and will have to enact a rate cut later this year, that kills the strong dollar trade.  That ignites a run into Treasuries, and for the more speculative, gold.  This weaker dollar really hurts Europe and Japanese equities, because those rallies were built on a thesis that the dollar would continue to get stronger.  But that became too consensus, and quite frankly, the dollar just got way too expensive.  Now that both value and momentum are on the side of dollar bears, you get explosive selloffs in the dollar vs euro and yen.  This is a boon for large cap US stocks, which were feeling the pain of a stronger dollar in 2015.  S&P 500 is the last general standing in this global equity risk pyramid.

When you find most macro fund managers are underweight US and overweight Europe and Japan, it just pours gasoline on the fire of US equity outperformance.  This is in the early innings, this newfound dollar weakening.  It should be a major catalyst for the moves in the coming months.  If you have to short anything, short Europe, Japan, and China.  And if you want to go long, the best one is the strongest:  S&P 500.

Friday, February 12, 2016

Gold and Bonds

The parabolic up moves in gold and bonds told you everything you needed to know about what the market thinks the Fed will do.  Nothing.  In fact, the next move is more likely to be a cut than a hike.  Today we got a relief rally from very oversold conditions, and those OPEC rumors had nothing to do with it.

Although it was quite convenient of them to plant that rumor right after the crude oil close, so that the oil traders couldn't actively sell the pop.

With today's price action to close out the week, it looks like a lot of short covering ahead of the 3 day weekend, as crude oil was leading the market all day as it was extremely strong.  I don't know how long this bounce goes but I am going to stay with the long.  These moves usually last several days when coming off a climactic bottom like we saw yesterday.

Thursday, February 11, 2016


This is what capitulation looks like.  You have fear of European bank contagion as weakness in Deutsche Bank is spilling over to Societe Generale.  The weaker European sovereign bonds (Portugal, etc.) are getting crushed.  You saw a huge spike in Treasury futures just an hour ago and you are seeing serious selling in crude oil.  Unfortunately, I am already long, buying weakness on Monday and Tuesday.  If I was in cash, I would be a buyer of this panicky gap down.

We are in the middle of the storm, and those longs that can weather it will be able profit when its over.  Based on the number of gap downs and the scary headlines, we should be very close to a tradeable bottom.

Wednesday, February 10, 2016

DB = Dead Body

You always want to know why people are panicking.  You want to have bad news when you buy, not no news.  You want to see the dead body floating on the river as a signal that what was feared is finally discovered.  It sounds confusing from a logical perspective, but in the stock market, fear of the unknown takes on a life of its own while fear of the known is contained.

We finally got one of the main reasons for the extreme weakness in Europe:  Deutsche Bank and the other group of zombie European banks.  They are huge, unprofitable, but too big to fail.  Unlike in 2008, you don't have such huge leverage on the balance sheets as back in the day, just because of the regulatory requirements, so there is very little systemic vulnerability.  But memories are short, and selling begets selling as thoughts of 2008, and 2011 are fresh on the minds of fund managers.

I built longs on Monday and Tuesday expecting a bounce in the coming days.  We are entering the shoot the majors and captains portion of the decline.  The majors and captains are Japan and Europe.  Those stocks have been massively underperforming versus US this year.  China and the emerging markets were the front line foot soldiers and they have already been shot and killed in January.  This week killed the majors and captains.  It will take time for the enemy forces to reset and reload and go after the generals (S&P 500) in their fortified bunkers.  During that reload, expect a bounce in the coming days.

But remember, the enemy forces are merely taking a break, not quitting.  They will come back again, with even more ammo, going after the generals in a few weeks.  In the meantime, play on the long side as the bears got too bold and confident this week.

Yellen is a non-news item today.  She has learned to stay on script and here pre-release pretty much tells us that the Fed is a bit more cautious but not willing to reveal their hand till March.  It was consensus.

Tuesday, February 9, 2016


It is getting panicky out there.  Europe is trading like the black plague and that is dragging down the US.  I believe we are close enough to the bottom to start buying so that is what I have done.  It is scary out there but it always is when you are close to a bottom.

Crude oil looks like it has bottomed, and that should help stocks eventually, once Europe settles down.  I am hearing talks about Lehman Bros when people talk Deutsche Bank.  That is clearly going overboard but it is shoot first, ask questions later.  Like risk reward of a long here.  Risk 30 points for 100.

Monday, February 8, 2016

Europe Capitulation

Europe has been the source of the weakness lately.  It is not China, which is what the fund managers want to blame, because they are long Europe.  It is the European banks, which are acting like garbage, with CDS surging higher, although still at low levels.  I would be a buyer of this weakness as we are in the lower end of the range, and we've got Yellen coming up later this week which should help stocks.  Even though she likely will repeat the same old lines with a comment or two about recent market weakness.

The top for this bounce move off the January 20 low is still ahead, although getting closer and closer.  After this capitulation, we should head higher, in choppy fashion into opex week ending February 19.  Usually the market makers and institutions have a vested interest in keeping the indexes afloat till opex, especially when there has been a lot of put buying.  But after opex, and with less put protection, we could see another big time plunge in this vulnerable market, taking us down to ES 1800.

The evidence continues to mount that we are in a new type of market, a much more bearish one than the one we saw in Aug/Sep 2015, and definitely more bearish than any year from 2009 to 2014.  A healthy market doesn't spontaneously combust into a big gap down after a previous big down day, like we are seeing now.  This is bear market stuff.  It is something you rarely see in a bull market.

That being said, there is a timing for everything, and the timing seems too early for a resumption of the downtrend.  So, I am getting long the weakness here, expecting higher prices in a few days.  Good risk reward on the long, although we are in a bear market.

Friday, February 5, 2016

Flattening Out

The price action is not what I wanted to see.  I closed out my positions into the dip and will just watch for now.  No bias either way.  The weak dollar is definitely helping the S&P stay afloat while Europe struggles.

The market is getting tougher to game the further out you get from the V bottom.  If we can see some complacency over the next two weeks, it will set up another good selling opportunity.  Best to just watch and wait for now.

Thursday, February 4, 2016

Stuck in a Range for Now

We have carved out the range, and it seems like more and more people realize it, as we are spending less and less time at the top and the bottom of the range.  Around 1860 to 1910.  Sure we overshot the top of the range but you cannot bet on a trend continuation at this moment.  For now, the forces are fairly evenly balanced here with the bull and bear side.  Emphasis on now, because eventually, I believe the bears will take over and take down risk assets.

The market is pricing in Fed inaction for the rest of the year.  The short end of the Treasury curve has been extremely strong, as the yield curve continues to steepen, contrary to paper napkin bond analysts.

Lately, it is as if the investment community has finally realized that if the Fed does nothing, then the dollar is too strong as a lot more was priced in to the FX market.  Of course, the market with the most shorts, the EURUSD, is the one that goes up the most in these a-ha moments.  It has been fashionable for hedge funds to collect their 2 and 20 while they buy European stocks, short the euro, and act like macro experts.  The pain trade is a European stock implosion as the euro keeps rallying.  Remember, European stocks are cheap for a reason:  they don't do aggressive buybacks like US corporations and have no growth.

Now that we are close to the top of the range, I have re-established the ES short.  Dollar weakness helps the US but not if it is due to a weakening US economy.

Wednesday, February 3, 2016

Extreme Volatility

Wow, who would have imagined that we would go down ES 45 points from 1910 in premarket in less than 2 hours.  This kind of price action makes the VIX look cheap at 23.  I covered ES during the early morning weakness, but remain short crude oil.
I will look to cover crude oil later and get long ES if we can get closer to support at 1860.  The new range for ES appears to be 1860 to 1910 for the next several days.  I remain a long term bear and expect us to eventually test 1820 again later this month or early March.

Treasuries are the place to be.  But they will not let you in easily.  You can feel the bond shorts getting squeezed in a vice.  Treasuries will go bananas to the upside if we get that weak jobs report like I expect.

Tuesday, February 2, 2016


The only way to make big money in this game is to have both skill and conviction.  Skill without conviction leads to taking the right positions but getting easily shaken out.  Conviction without skill leads to taking big positions without edge which eventually leads to ruin.

There are a lot of smart investors, with good track records that are bullish this market.  Does that make me pause to take my short positions?  A bit, yes.  But you can't trade other people's calls unless you believe in them.  And I just don't believe in the bull case, so even if I took a long, it would be without conviction, and I would be easily shaken out if the market goes against me.  I think those smart investors are mainly long because of the pullback and the bearish readings in the sentiment polls, while mostly ignoring fundamentals and valuations.

At this juncture, I don't think you can ignore the price action, fundamentals, and valuations just to be contrarian.

I have to trade what I know, and what I have conviction in.  The trolls and the keyboard warriors can say I am wrong and come out of their hiding holes when my trade goes against me.  They only make me believe even more in my position.  I get much more worried when too many people, especially losing traders, think the same way I do.

Of course the trolls disappear when the trade goes in my favor.  Then, it truly is the silence of the lambs.  Instead of focusing on improving their trading, the trolls use all their energy to annoy and badger.  It is sad to see those who lose money trading hoping others lose as well.

The best trade of the year, long short term Treasuries, just refuses to let you in, even with a big rally in stocks.  It is like the S&P in 2013.  The BOJ really mucked it up for us bond bulls who wanted to buy a dip in bonds on a stock market rally.  I had to settle for shorts in crude oil and S&P.  I would have much rather had a chance to go long Treasuries at good levels.

Monday, February 1, 2016

Taking the Bull's Best Shot

 Last week, the bears took a beating on the news front.  First, it was Facebook ripping on an earnings beat, and then the big one, OPEC and Russia production cut rumors.  And last, but not least, the BOJ NIRP announcement.  That would make any half hearted bear run for cover and wait to see if they can reshort at a higher price or just step aside to avoid a possible V spike to the heart, like they probably experienced in 2009 to 2015.  Trust me, I have been V spiked in the heart more times than I can remember being short.  Fortunately, I am still alive to trade, but they were painful AND common.

There is a change in market tone that you can just feel.  Not everyone tries to develop that feel, but it is something that I work on so I can be more in tune with market movements.  It is not based on charts.   It is based on how long the market stays at a lower price zone, and how long its stays at a higher price zone.  The frequency of dips, and the news of the day.  The market is still going up on positive central bank news, but the effect seems more fleeting, and doesn't last long.  After all, the base case is for the central banks to provide plenty of liquidity, and the high stock and govt bond market valuations attest to that.  Also, you are seeing fewer V bottoms that last.  What I mean by this is that when you had V bottoms in 2009-2015, they would propel the market higher for several straight days, and not retrace until several weeks later.  That was a show of extreme strength.  You are not seeing that much anymore.

Now that prices are back up towards levels where you have plenty of room down to the previous lows, you have a good risk/reward short setup in a strong downtrend with fundamentals that haven't changed.  If the Fed came out more market friendly with a no more hikes this year call, then I would be more worried on the short side.  But the Fed is worried about their credibility, and thankfully, Yellen is not a Bernanke who prints money anytime the market goes down.

I got short both crude and S&P on Friday.  Current downside targets are last week's lows of 29.00 on crude and S&P 1860.