Thursday, March 31, 2016

Investors Paradise

All you need is easy money.  It makes all the investors happy.  The unhappy ones are the ones holding cash or hoping for a crash.

Stocks going up and bonds going up.   What else is new.  We've seen this for the last 7 years.  Contrary to popular retail trader belief, a strong bond market is a long term positive for the stock market.  Bonds benefit from easy money much more than they benefit from any flight to quality or fear trade.  The risk parity paradigm is much more important than the flight to quality paradigm when assessing the stocks and bonds relationship.

Janet Yellen finally took off her balanced Fed chair disguise and showed her true colors.  She is another Bernanke.  She wants a higher stock market.  She wants a higher bond market.  And she will do it regardless of the loud but powerless Fed underlings who talk like hawks but agree with Janet when its decision time.  She even admitted that lowering market volatility is positive for economic growth.  In a rare admission to the truth that most perceptive investors already knew:  she is a stock and bond market jockey trying to keep volatility low with implied Fed puts.

Short term, this is a great thing for the markets.  Long term, it just sets up very high expectations for Fed QE bazookas during market weakness, and future tantrums if the market doesn't get what it wants.  The Fed has sold out to the financial markets, determined to give them what they want.  Easy money.  As long as they do, the markets will be fine.  If they ever decide to go away from this market supportive easy money policy, there will be a crash with blood on their hands.  In other words, they will stick with the easy money policy until you see hyperinflation.

Been watching CNBC Fast Money to look for clues to see what the traders think.  They are still bearish, but not so loud as before.  Before you had Brian Kelly screaming for everyone to go to cash, saying he's short stocks, long the dollar.  He's still yapping his bearish stocks, bullish dollar call, but not screaming anymore.  He's been totally wrong for the last 50 days.  You will hear no mea culpa from him.  It will all be swept under the rug, except in the brokerage accounts for the poor souls who actually followed his advice and lost money.

Still seeing lots of denial about this rally.  This makes me reluctant to short this thing.  The fundamentals say short equities but the market tone and sentiment says long equities.  Tough call.  Prefer to see fundamentals and other factors line up on the same side.  When you have both bullish and bearish factors at play, usually its best to wait.

This is paradise for investors.  And jail time for traders.  Long days with nothing to do.

Tuesday, March 29, 2016

Scared to Go Long

Although I have been predicting higher prices in the coming weeks, I am reluctant to act on that with any conviction.  I am looking beyond the next few weeks, and picturing a market that will likely resume a downtrend after equities consolidate.  I am looking for a bullish consolidation, meaning that we should get higher highs and higher lows for the next few weeks.

But I don't want to play that because the upside should be limited, maybe up to 2100 at most, and since we're already at 2055, that's 45 points of upside, at most, and a reasonable downside potential down to 1940.  That is 115 points from here.  Although the odds are probably much higher that we go up 25 points before we go down 25 points, I don't want to risk being caught long with a big gap down while I am trying to squeeze out the last 25 points of this up move, while risking a potential big selloff out of the blue, like we have seen before, such as that Aug 2015 opex week, or that first week of January.

Janet Yellen rammed the shorts today AGAIN.  I will never understand what shorts are thinking when hoping for a selloff on the Fed expecting a hawkish tone.  That is not going to happen unless you get a stock market bubble.  That's right.  A bubble.  The only thing that will get the Fed to act hawkish is a bubble.  And we are so far away from that right now that you don't need to worry about the Fed taking away the punch bowl.  They will not hike this year unless the S&P breaks out above 2100 and stays there until their September meeting.  I give that about a 10% chance of happening.  So you have about a 90% chance of the Fed doing nothing or possibly cutting rates/doing QE again.  I like those odds (mine of course) when I am betting on bonds.

This year reminds me a lot of 2012 and 2014 in the bond market.  You got a lot of weak hands out of the bond market last year with all the rate hike/normalization fears.  Same bond market fears happened in 2011 (when oil was going parabolic) and 2013 (tapering).  The blood of last year's bond holders is feeding the move higher this year.  Expect new all time lows in 10 year yields before this "equity correction/bear market" is over.

I am not long bonds here, but I am waiting for the last gasp rally in the S&P to around 2080 which should give us a little pullback in bonds, which I will use to enter a long term position.  Right now, there is just too much froth from Yellen spewing dovishness for there to be much bond upside from current levels short term.

As for stocks:  too scared to go long, too smart to go short.

Monday, March 28, 2016

The Big Miss

Trading is a lot like golf.  It may be the best analogy that I can find that relates another activity with trading.  Like trading, it is a solitary sport.  The biggest similarity I see is the importance of avoiding disasters.   The Big Miss.  You can be the best golfer in the world for 16 out of 18 holes, but if you make a mistake and go on tilt, lose your mind, and put up a triple bogey in the other 2 holes, you will not win.  

Just like trading.  You can be the best trader in the world on 9 out of 10 days, but that 1 day out of 10, or even 1 day out of 20, where you lose your mind, go on tilt, chase losses, revenge trade, and act on raw emotion and not calculated logic will blow away all your gains, and if taken to the extreme, the point of no return where your capital is crippled beyond repair.  Remember, if you blow up and lose 90% of your capital, it takes a 900% return to get back to even.  Trading is unforgiving of big misses.  Unlike golf, they ruin careers, not just a match.

In a book about Tiger Woods, The Big Miss, the most memorable section of the book was not the accounts of Tiger Woods acting like a jerk, but how he was a calculating golfer who erred on the safe side, who would rather push a ball a little to the right rather than try to be perfect and risk a drive that takes a big hook to the left.  He was the opposite of Phil Mickelson, who always tried to be perfect, who took big risks to try to get birdies.  

Although it’s commonly thought that Tiger plays go-for-broke golf and tries the most difficult shots with no fear, it’s a false image. Tiger is, above all, a calculating golfer who plays percentages and makes sure to err on the safe side.
While it is true that you cannot win in trading without an edge, the next most important thing after finding an edge is to avoid disasters.  The best way is to trade small, not to trade with a tight stop.  The bigger your edge, the more that tight stops hurt you, not help you.  The worse the trader, the more important it is to cut losses.  The better the trader, the more important it is to trade small and avoid disasters to get into the long run.

We had a little scary dip on Thursday, but it was quickly bought up.  Still expecting new highs for the year in the coming weeks.  

Wednesday, March 23, 2016

Taking a Break

Today looks like just one of those small pullbacks before you grind higher again.  Feeling slightly bullish, but there is not much to do.  There will be much better opportunities later.  Right now, mostly watching.  Taking a break over the long weekend.  Be back on Monday.

Tuesday, March 22, 2016

More Short Squeeze

The terrorist attacks was just another bear trap.  You get another weak open which sets up a morning squeeze as the bears question why stocks go up when there is "bad" news.  There is a big difference between news that affects company fundamentals and news that doesn't.  Yellen wanting more rate hikes is bearish.  A terrorist attack in Belgium is not.  Yet we get the same traders who don't learn from past history of these attacks, which is that they don't affect the market.

The market wants to go higher.  Let it go higher.  There will be a time for a good risk/reward short but it is going to take much longer than most expect.  Perhaps late late April/early May is a rough guess at this point for a top.  But I am not enthusiastic about shorting this market.  I would rather just buy bonds on a dip as equities rally.  Back to the bore.  Same old same old.

Friday, March 18, 2016

Oct-Nov 2015 Carbon Copy

This market likes to repeat itself.  It dives after a period of complacency, forms a double bottom, as bears are all over the place, and then rallies nonstop for 1 month, crushing all the shorts and then flattens out.  We are done in the rallying nonstop for 1 month phase of this cycle.

Now we will have short sellers blaming the Fed for their bad trading, saying they have no credibility.  If you believe what the Fed tells you about rate hikes, then you are the sucker.  You haven't learned a thing over the past 7 years about how the Fed operates.  How many times have they "surprised" with being dovish?  Over 90%.  I like those odds when I play an unknown event.  Who are these knuckleheads who act like what Janet Yellen did is something new?  The BS unemployment and inflation targets  and forward guidance are changed to accomodate whatever easy money policy flavor of the day they choose.  Bernanke was even more blatant about it than Yellen.  They talk up the economy at the same time they keep the easy money flowing.  They talk tough about future rate hikes, but when it comes time to raise rates, they find excuses to delay.  Always excuses to give the market what it wants.  More easy money.

It is going to be a dreadful trading environment for the next few weeks, if the market plays like I expect.  Which is a flattening out of this up trend, like November 2015, and then sideways trade before the next dive lower.  Buy bonds.  They will go higher and we will be making all time lows in 10 year yields when China begins to meltdown and devalues their yuan.  German Bunds will go to negative yields.  Its almost there right now.  0.2%.  Japanese 10 years are already well into negative yields, at -0.13%.

SPX should test the 2070-2080 zone before we finally top out.  This market is not about fundamentals.  It is just one giant screw the shorts market.  One big pain trade on the short sellers.  I heard that guy, Rich Ross on Fast Money on Wednesday say he would throw in the towel on his bearish outlook and get bullish if SPX went above 2070.  Book it.

Wednesday, March 16, 2016

A NIRP World

Wax on wax off.  Risk on risk off.  We are risk on.  The Fed in their convoluted language stated that they will need to see the S&P make a run towards 2100 before they get hawkish.  Yes, it is that simple.  You think they would hike rates after those scary dips in Jan/Feb?  Of course not.  The central banks always err on the side of caution.  It still amazes me how so many come into a Fed meeting expecting a hawkish Fed when that has been the case maybe 5% of the time.

The bond market is way smarter than these so-called fixed income experts expecting 2 rate hikes this year.  Have they been on this planet for the last 10 years?  This is a NIRP world.  Get with the program.  We've gone from a ZIRP world to a NIRP world over the last 2 years.  The Fed is trying to get into the PIRP world, but going away from ZIRP is like trying to escape a black hole.  You can try as hard as you want, but its nearly impossible.  If they do, they will just destroy the financial system as we now know it.

The new financial regime is dependent on super low interest rates to function.  These central banks, while terrible with their economic forecasts, are at least wise to the fact that they are stuck at ZIRP/NIRP.  They know they will unleash a financial holocaust if they treat this economy like it is the 00s when Greenspan raised 17 times in row.  They are stuck between a rock and a hard place now.  They have front loaded stimulus into the present, and they have to keep that stimulus, otherwise they will crush the financial markets.

So what is the gameplan?  You have to buy bonds.  Anything around these levels will pay off big later this year.  The economy is weakening.  The Fed knows that raising rates will crush their Ponzi scheme.  And a weakening stock market will be the trigger, as it usually is.  Not quite a bear yet in equities, but I am getting closer.  This dovish Fed is just the beginning of the end of this bear market rally.  Need to see if Fast Money starts getting bullish.  If they do, that will be my cue to start building equity shorts/buying bonds.

Monday, March 14, 2016

Slow Times

It is days like today which remind me that you cannot have a daily profit goal.  That is death for the trader.  You are not on salary.  Don't try to make money like a salaryman.  January and February were times to make bread.  This month is the time to step off the gas and take a breather, relax, and decompress.

I was on full throttle in January and February.  I took advantage of the opportunities at hand by working harder.  I have gotten lazy this month because the opportunities aren't there.  It has been a time to relax and recharge.  You can't go full throttle 12 months of the year.  You will go crazy if you try to.  It is days like today where I can do a little research, crunch some data, and not think about any trades for the day.

Learn to enjoy days like today because they are low stress.  You won't make any money, but you won't have any headaches either.  Tomorrow should be interesting in the Tplex.  I have a feeling that we are close to the uncle point in interest rates, and there will be some puking tomorrow ahead of the Fed meeting Wednesday.

Friday, March 11, 2016

Still No Sign of a Top

As I watch the S&P 500 levitate higher, I am seeing no signs of excesses in the market.  The Fast Money crew are still skeptical of the rally, and skeptical of anything that the central banks do.  The boisterous BK on Fast Money was bearish and still in denial that he has been wrong for the past several weeks.  The others weren't too bullish either.  The put/call ratio still remains elevated.  There are definitely a lot of bears still out there hanging in there, even though they are losing money here.

We need to see bulls come back in more aggressively before you start seeing signs of a top.  Today is a step in that direction, with the post ECB bazooka bull parade.  And it was done and the euro even strengthened, which is a double bonus for US equities.
Next week we'll have the Fed doing their usual stall and delay tactics for rate hikes.  What they did in December is an anomaly.  They had to raise rates even though they didn't want to because they PROMISED TO.  There are no more promises, so the Fed will be back to their usual excuses to not raise rates.  The market will love it.  The Fed always trys to act like there are string of rate hikes ahead with their sunny economic forecasts with clear blue skies.   Yet when it comes time to pull the trigger, they find the slightest excuses to delay a taper or rate hike.  See Bernanke, Sept 2013, Yellen Sept 2015.  This time, they have a legitimate excuse, because the global economy is slowing.  Even the US economy.

In the short term, the market pushes the weak hands to the brink and forces them to do what they don't want to do, which is liquidate at a loss.  That is what is happening to stubborn shorts.  Once that cycle is through, we'll get back to fundamentals of a slowing economy and lower interest rates and weaker global equities.  In the meantime, just watching and observing for signs of a top.

Wednesday, March 9, 2016

Waiting for Draghi

There isn't much going on.  The market is getting duller, although we did see a little pullback yesterday.  It is a tough market to predict now.  We have rallied for almost 4 weeks so this rally is getting long in the tooth, but at the same time, I am not seeing investors "buying in" to the rally.  There are lots of skeptics.  It doesn't mean that we keep going higher.  Because we didn't have investors buying in in late December and yet we took a deep dive in January.

It seems like the crowd is expecting the market to top anyday now and then plummet back down to 1800.  Not saying that the crowd is wrong, because they were absolutely right predicting the January selloff.  But I usually do not like to bet on the same side as the crowd.  My view on the market is similar to what the crowd thinks, but I am not acting on my view yet because of the lack of optimism.  We had a one day pullback yesterday and the bears came roaring out of their caves.

I am expecting Draghi to bring out the bazooka tomorrow, I am not sure what the reaction will be, but I am leaning towards a bullish reaction.  He made the mistake of overpromising and under delivering in December, and I think he learned his lesson.  Look for him to do what it takes to please the market.  It should just be a short term pop, but enough to squeeze some stubborn bears.  After all, this market seems to get the most aggressive buying from short covering than from actual longs adding positions.

Leaning bullish for the rest of the week but with low to medium conviction.

Monday, March 7, 2016

Dull Market

Never short a dull market.  The shorts are getting grinded down bit by bit.  It is painful to watch, even for those in cash.  Nothing to do here.  I should have kept at least a small long position but my overall bearish view on the market made me sell.  We will probably have that bazooka by Draghi and I don't think it will be a sell the news reaction.  In fact, it might be the beginning of the blowoff/euphoria phase of this rally.

I don't want to put out a price target for the top, but it should be sometime after the ECB meeting and before March opex.  Probably around the FOMC meeting.  In any case, not much to do.  I will be taking a breather.  Its a good time for a trading vacation.

Friday, March 4, 2016

Things Never Change

It is 2015 all over again.  How soon the bears forget that when a V bottom has been made, they need to get the hell out of the way, and quickly.  The week after the V bottom on February 11, we were up over 100 SPX points from the low, but so many investors were in denial, even though the price action screamed strength.

The crowd got too bearish in February.  It couldn't last unless the center didn't hold.  And the center held.  I don't buy that the economy is suddenly looking fine after a few above consensus economic data points.  The overall trend is of a slowing economy.  But what matters is that the Fed is frozen, and the market doesn't have to fear Fed rate hikes and an even stronger dollar.  In fact, oddly enough, you are getting dollar weakness vs euro even though you had a big beat in the jobs number.

I know we are still down 2% for the year, but it seems like it's been much easier to make money going long than going short.  The rallies just seem so much more predictable than the selloffs.  It doesn't mean that we don't selloff, because obviously we have often.  But they seem to come without warning, while the rallies always seem to be just around the corner when you get the VIX towards high 20s/low 30s.

Within a week or two, after the ECB bazooka and FOMC dove talk are out of the way, there is nothing there to hold this market up with the stock buybacks going to their blackout period starting in late March.  There is still room aboard for late bulls and FOMO investors to jump in and buy near the top, but I am betting that not many suckers will bite this time.  There may have to be some good news, which I expect out of the ECB and the Fed in order to get the last bulls on board.

Wednesday, March 2, 2016

From Denial to Gradual Acceptance

The markets are repetitive.  They are ruled by human emotions, and as much algos rule the short term trading intraday, they are not much of a factor in longer term time frames, that stretch out for weeks and month.  Those time frames are ruled by fund managers and institutions who rarely turn on a dime from going from bearish to bullish.  It is a process.

The process usually starts with a V bottom which gets the initial fast money traders excited about a bottom being made, but uncertain if it is just a 2 day wonder or the real deal.  Even after a couple of weeks, with choppy trading caused by the lack of full commitment to the bull case, you are still in the denial phase, saying that this is just a bear market rally.  We were still at that phase until yesterday, when things changed with a emphatic break above 1950 and to levels we haven't seen since early January.

Now we are in the longest part of the cycle, the acceptance phase.  It is gradual, and takes time for the newly converted to amass their equity positions and get ready for continued rise higher.  It is at this point that the volatility dies down a bit and lulls the traders into a sense of complacency and comfort.

In a bearish market, this acceptance phase is followed by a vicious downturn that can go on for several weeks.  In a bullish market, the complacency is often shaken off with a 1 or 2 week pullback that just forms another V bottom and continues higher.  This is what happened from 2009 to mid 2015.  Now we are in what I believe to be a bearish market.  So after this acceptance phase is over, you should get hard selling.  That is what I will set up for in my next trade.

In the meantime, just playing small ball and waiting for the right pitch to hit.

Tuesday, March 1, 2016

Going Higher Till Bears Give Up

Many are still very persistent in their shorting and negativity.  I don't know why, the price action lately has been quite bullish.  But there must have been some serious trauma from last August and of course that monster dump in the first 3 weeks of January, followed by an echo dump a few weeks ago.  Yes, the economy is getting weaker but we aren't trading GDP futures here.  We are trading equities, and they are ruled by supply and demand.  When you have investors underinvested, corporations stubbornly using their cash to buyback stock, and short sellers shorting looking for another crash, the odds are that we will keep going higher.

I do believe the trend is down, but I have too much company with that view and we need time to consolidate the big down move in January.  During the consolidation and bear market rally, I have been playing quick trades, buying dips to sell the rips.  I bought yesterday afternoon and sold today.  I don't have enough conviction to hold for bigger gains, even though I believe it will keep going higher.

The potential bull catalysts in the form of the ECB and the Fed this month is enough to get a lot of shorts covering in the coming weeks.  That will probably be a better time to look for a longer term short position.  It is looking like we could get to 1980-1990 zone which I would consider shorting longer term, but I need to see what the market tone is like at that point.  If I still see Fast Money traders beared up at those levels, I will wait.  If they are optimistic, I will probably begin a short campaign.  This bear market rally feels like it has some serious legs and could last 8 weeks from Feb 11th, the long end of rally length expectations, instead of the 4 weeks which I initially thought was more likely.

Now flat and waiting for the next play.  Probably will just grind higher from here, in all likelihood.