Friday, April 29, 2016

Getting Interesting

You are finally seeing some more volatility.  That was quite the late day selloff yesterday, a hint of things to come as we are at lofty levels and should go lower over the coming weeks.  This happening while oil is making higher highs, now trading at 46.50.  The overseas markets have started to roll over.  Expect higher volatility going forward and set lower buy targets.  Higher oil prices are not enough.  We are just back to where we were in November with oil prices.  It is not a game changer.  It looks like a big range in oil, from $30 to $50.  We are getting closer to the top of that range.

As I write, we are making new lows in the S&P futures.  It is no longer a buy the dip market, but a short the rip market.   It is sell in May and go away. Play accordingly.

Thursday, April 28, 2016

Markets Demand More

The global financial markets have been conditioned and repeatedly been reinforced with the belief that the central banks will do whatever it takes, and to quote Mario Draghi, "believe me, it will be enough."  Well Mario Draghi was completely wrong.  Judging by what the European markets are doing since he embarked on QE and negative interest rates, it has not been enough.

The market is not just believing what they say.  Usually, way more than often than not, the central banks deliver what they promised and more.   They habitually "beat" market expectations for stimulus by providing just a little more, much like companies that give out earnings guidance which they can beat by a few pennies coming earnings time.

The BOJ is learning the hard way that they need to placate the markets all the time, and can never disappoint or they will pay the price in the form of a much stronger yen, immediately.  Really, a little more than half was expecting something from the BOJ, and they didn't deliver.  That may not crush the market in a normal, non-conditioned market, but this market is hooked on free money and want more.  Always more.

The BOJ and the ECB have set the bar so high with their repeated dovish actions that it is almost expected that there will be something new anytime the equity markets have shown even the slightest bit of weakness or the currency has shown even the slightest bit of strength.  The expectations are sky high.

The equity markets are extremely vulnerable here.  It goes beyond looking at sentiment at this point, because neutral sentiment is the new bullish sentiment.  Just getting sentiment to neutral sets ups this fundamentally flawed market for a possible huge breakdown.  People forget that in August before the big dip, most people were leaning neutral to bearish.  Same situation at the end of 2015, when most people were expecting a mediocre to bad 2016 and they got it in spades in January.  It is time to be a bear.

Wednesday, April 27, 2016

Short's Time Coming Up

The market is getting tired, but has been very resilient despite bad earnings from the big tech names.  It helps that oil is grinding higher and supporting energy and commodity names.  I am hearing about a renewed credit pump in China and feverish speculation in commodities there.  It is really stunning to see these newbies in China jump from bubble to bubble.  The last bubble is their real estate market, and it is only a matter of time before that one goes bust, and with it massive financial panic.  

Got the Fed meeting today and it is going to be uneventful.  Yellen laid out her cards not just once, but twice in March.  At the FOMC March meeting and several days later in a dovish speech which seemed like it was written in mid February, not late March.  The statement should be almost the same as the one that was deemed so bullish for the financial markets in March, with a few tweaks to acknowledge that the stock market is stronger than before.  Really, you just have to look at the S&P 500 and that gives you a good idea of where the FOMC is at when it comes to monetary policy.  Since we're about 60 points higher than when the last FOMC statement was released, you can expect something more positive about the economy.  

The shorts should finally have there time to shine over the next few weeks.  We've cleared out a lot of weak hands on the short side over the past 2 months, and although you are not getting the full commitment from longs as you did last year or 2014, they have mostly added their equity exposure and won't likely add more unless you see the earnings outlook improve.  And that seems extremely unlikely.  The economy has rolled over, and it is going to take a massive stimulus to bring it back to 2014 or even 2015 levels.  That makes me bullish on bonds here, and more willing to short the S&P.  I have closed out my S&P long and will now look to position for the next few weeks where I expect weaker markets.  

Monday, April 25, 2016

Buy this Dip

Putting on a small trade in long ES with this dip here.  We should be well supported with the Fed and BOJ coming up on Wednesday.  We also have some more earnings this week, and it looks like we are seeing selling ahead of bad AAPL earnings.  Very short term time frame for this long, as I will look to get out by Wednesday.

Saturday, April 23, 2016

VIX in May

The spot VIX, currently at 13.22, while the May expiration VIX futures is at 16.2.  This 3.0 spread between spot and the front month is extreme.  Normally the spread in an uptrending market is closer to 1 - 1.5.  The VIX traders are very reluctant to sell VIX even with realized volatility much lower.  Usually these are warning signs that the market is about to get more volatile soon.

It is hard to buy VIX futures and make money because of the steep contango.  But the next best thing to buying volatility is to short ES.  Considering that we are in a heavy resistance area where lots of topping occurred over the past year with investor positioning on the bullish side and you have potential for a sharp pullback.  I don't see 1800 happening, but 1950 sometime within the next 3 months is very possible.

Thursday, April 21, 2016

Fear & Loathing Phase in Bonds

The bond market is like a ship.  The rising stock and oil market are like water seeping into the ship.  Up to a certain point, the ship stays afloat and can ignore rising risk asset prices.  But when you cross the breaking point, like we did yesterday with the S&P breaking out above 2100, and oil breaking out above 43, you get selling.  A torrent of selling that is unleashed and starts to sink the ship.  Once it starts sinking, there is no point of return, even if stocks go down in response to a weakening bond market, at least until you flush out the weak hands.

It doesn't mean the bull market in bonds is over.  This wave of selling/liquidation usually lasts about 1 week, and if we get a Fed that is just neutral (I doubt they will be hawkish), that will be enough to send this bond market into the final wave of selling which should be met with long term buyers and form a tradeable bottom.  I am expecting that around 1.95-2.00% 10 year yields.

Financial Nirvana

As soon as you saw the bonds get weaker yesterday, the ES uptrend stopped on its tracks and started to weaken.  The stock market needs low interest rates and a strong bond market to sustain its uptrend.  You will not see the ES going up to new all time highs while the bond market is selling off.  That is not how this risk parity world works.  When funds are long both bonds and stocks, if bonds go down, then they have to sell stocks to adjust the risk parity.  If 2015 didn't prove it, we have transitioned from a stocks or bonds world to a stocks and bonds world.  It is not one or the other.  The stock market is dependent on a strong bond market to fund low borrowing costs which fuel stock buybacks and lower interest expenses.

We are seeing stock market weakness with bond market weakness.  This is more of what you will see going forward.  The strong economy benefits the stock market theme is over.  The stock market needs a mediocre economy.  It needs the perpetual morphine drip rather than a strong economy.  It is addicted to ZIRP, NIRP, QE.  It could care less about job growth.  It wants more money.  Mo money, mo money, mo money.

At the same time, the stock market doesn't want a recession, because then stocks have lower earnings and can't do stock buybacks.

Right now we have a "perfect market" in modern terms.  A weak, but not recessionary economy with a Fed willing to print more money and keep rates near zero.  The modern day financial nirvana.

Market looks like it will flatline around 2100.  Very little upside and risk down to 1950.  But we probably will not selloff until the Fed meeting next week.

P.S.  There is nothing like losing your ass to teach you a lesson.  The losses this month have taught me another lesson.  When your short term view (2 days to 1 week) is the opposite of your longer term view(2 weeks to 1 month), do not trade your short term view!  Do nothing!  I played my short term view and my longer term view played out faster than I expected.  Trying to pick up dimes in front of a bulldozer.  I got bulldozed.  Another lesson (or reminder) in the school of hard knocks.

Wednesday, April 20, 2016

Bad Earnings Don't Matter

You got earnings misses from NFLX and IBM on Monday and you had a 10 point gap up.  Now you have bad INTC earnings and you have a small gap down.  The earnings have been bad, like everyone expects, and the stocks have sold off on many of them, but the overall market doesn't care.  It only cares about the dollar, the Fed, and what oil is doing.  It is a macro market.  Micro doesn't matter when the driver of prices is monetary conditions, not company fundamentals.

I have noticed that the contango in the VIX futures is obscene.  You have a 2 point spread between Spot month and May.  You have a lot of people who are betting on a higher VIX in May.  And unlike equity indices, the VIX futures and options trades are usually not contrary indicators.  They are right more often than wrong.

I am seeing more signs that a pullback is imminent.  The fund manager positioning is more towards neutral, the bears are still staying bearish but more in doubt lately.  I haven't heard much from Brian Kelly recently.  He has been a bear for the last 250 points.  Wrong and refuses to admit it. You will not see enthusiasm in this market, just resignation and giving up on the short plays as the days go by. Eventually, the market will be fully saturated with worn out bears and fully bought in bulls, then you can see some downside fireworks.  It will take time.  But a prelude to the downside should happen within a month.  But given the large number of skeptics of the rally, it will be tricky to play the short side along with many others who feel the same way.  I would much rather be in the minority with my views.

This market continues to confound the fundamental analysts who focus on growth and earnings, both of which are weak.  Bigger picture, you have the same macro fundamentals as before, except an easier Fed, which doesn't really help unless they decide to embark on another QE.  Just not raising rates is not going to be enough to sustain higher prices from here.  The bulls who are looking for 2200 or higher are in effect betting on either 1.  QE4 or 2.  OPEC production cut.  I actually think QE4 is much more likely, but in order to get that, you will need to see some China panic and lower stocks to have that happen.  Perhaps if S&P went and stayed below 1900 for a couple of months, you would see that happen.  Doubt it happens with S&P anywhere near these levels.

Anyway, not much to do, but try to plan for the next big move, which I expect to be lower, not higher.

Monday, April 18, 2016

Bears Without Bullets

The shorts have lost a fortune shorting after V bottoms, and have a very depleted capital base, so they are almost a nonfactor now.  I still see a lot of 1 lot bears out there, strong conviction, but very little capital.  They aren't trading 1 lots because they are risk averse.  Its because they don't have the funds to trade any bigger.  They just can't push the market down without longs selling on the way down.  And obviously, you just saw very little selling on the "bad OPEC news".

I am much more interested in what the longs are doing.  They are the ones with the capital to deploy, they are the ones with the firepower.  They matter.  The shorts are pretty much irrelevant at this point.  But it is interesting that the longs have a similar opinion as the shorts, they believe the market is overvalued, due for a pullback, and that earnings aren't going to be good.  And I believe they are right.

It is one of those times when the majority are correct but they are positioned differently from each other.  You can be cautious but still be long.  I think that is what the majority are at this point.  It makes it tougher to trade when the majority believe the same way you do and the price action is going in the opposite direction.  Anyway, I still believe down but it is not very high conviction.

The OPEC Doha result was an expected "surprise".  I am sure most didn't expect much out of the meeting, and what people are forgetting is that the meeting just isn't that important.  There just isn't much action right now and every little thing is jumped on as if it is meaningful, just because of the lack of news.  I actually think oil will be going up over the next 2 weeks, because of the positive seasonality and the price action.

The S&P should pullback a little bit here, due to post opex forces, and overbought readings, although I am not putting any money on the idea.  Better safe than sorry.

Friday, April 15, 2016

Greed Slowly Builds

This market is slowly setting up for another rug pull.  It doesn't happen all at once, but the building blocks of a top are forming.  Tops always take longer to form than bottoms.  Greed is a weaker emotion than fear.  FOMO is a form of greed, it is not real fear.  Fear is when you are losing money and the pain increases the more you lose, until you cannot take it anymore.  It takes longer for the greed to kick in, and it dies out slowly.  Fear comes quickly and once the liquidations happen, it goes away.

All the economic data is slower than last year, yet the prices are near the same levels.  One benefit you do have is lower interest rates in the 5 to 30 year yields compared to last year, which acts as a bit of a stimulus, but it is nothing that is earth shattering.  We are talking about 30-50 bps lower yields across the curve compared to last year.  It helsp with the risk parity funds, as they can hang on to stocks more as bond strength has buffered any stock weakness.  Like 2012 and 2014, you will not get a big move lower in equities with bonds acting so strong.   In fact, I don't think you will see the market get back to SPX 1812 this year, barring an all out Chinese financial panic.  I give that about a 30% chance of happening this year.

The Chinese have responded like most governments and central banks do when the going gets tough, they pump out money and credit.  It just kicks the can down the road and makes the problems a bit worse, day by day.  In the meantime, it provides a temporary floor to their markets which investors love to see.  Everything is short term, morphine and band aids.  Long term solutions are frowned upon by the market, they want easy money and they want it often.  And usually the market gets what it wants.

The OPEC meeting this Sunday in Doha is the big event coming up.  The expectations seem pretty low, because of Iran, despite the Russian rumors of a production freeze.  It is a pointless meeting, and it won't affect the oil market long term.  Short term, there is some position squaring ahead of that meeting so if nothing happens, or there is a weak agreement for a production freeze at these higher levels, the two most likely scenarios, then you probably have the shorts come back into the market to test how much they can take the market down.  Due to positive seasonal demand forces, I don't expect crude oil to go down much, and it should bounce back from any pullback quite quickly.

This is a low volatility boring market.  It is a good time to take a break, plan for future setups, and do some reading.

Wednesday, April 13, 2016

Acceptance Phase

You can feel the change in market tone as the weeks go by without a pullback, and we grind a little higher.  CNBC is getting a bit more bullish, but reluctantly so.  They are slowly going from denial to acceptance.  It seems like they want to see all the earnings come out and then they will jump in with both feet.  A suddenly strong oil market and big rallies in China, Japan, and Europe will do a lot to brighten up the investor sentiment.  This is more of what we need to see to form a top.  You need more investors buying into the rally, adding equity exposure, pushing prices higher, to set up a rug pull later.

The fundamentals remain the same, you just have waves of optimism and pessimism that obscure the long term trajectory.  I believe that trajectory is down.  I could be wrong, but rich valuations, low global growth, and the lower highs and lower lows over the past year in the S&P, Eurostoxx, Nikkei point to odds favoring a down market vs an up market.  This long term view will not be shaken easily by the news of the day or short term price moves.

If I am wrong, and the market goes on to make new all time highs and spurts towards SPX 2200, then I will probably be taking some fairly big losses.  If you want to make a lot of money in this business, you do a lot of competent research, then take a view, and don't be shaken so easily by the short term fluctuations.  The key is to do competent research.  Any knucklehead can have a market view.  It is figuring out which scenario is the high probability, high return one which is the hard part.

I don't agree that you should not have an opinion and just be a slave to short term market action.  I hear the cliche, "trade what you see, not what you think."  That just tells me that you belong to the church of what's working now without any thought to fundamentals.  That is how you get killed in this business: following the crowd into flawed long term trades.

We have a healthy gap up with a surging emerging markets, Japan, and Europe.  I would be a short term seller here, looking for another pullback later in the week or early next week.  As things look better, I am feeling more bearish by the day.  After the last wall of worry, the earnings reports finish up later this month, along with the return of stock buybacks, we could form an exquisite top in early May as investor enthusiasm returns.  That is the near perfect setup that I am waiting for.

Monday, April 11, 2016

The Indestructibles

The foundation of the bull market from 2009 to 2015 is bonds.  It is what allows the bloated stock buybacks, the lower interest expenses, and the capital gains which fuel the wealth effect.  The bond market is 1.5 times bigger than the US stock market yet gets less than 10% of the attention.  It was the main reason why 2015 was such a tough year for so many funds, not the weak energy market or a small loss in the stock market.

I remember seeing bonds in August 2015 hardly going up even though you had the scariest moment in stocks since 2011.  That confused me, but only later did I realize that a looming Fed interest rate hike and Chinese dumping Treasuries combined to put a lid on any bond rallies.

That bond market has completely disappeared.  The current bond market is the strongest I have seen it since 2012, and is doing the most bullish thing possible: going up strongly while stocks are going up.

With the likely lone Fed rate hike out of the way, and with future rate hikes extremely unlikely, you have gotten rid of a big barrier to higher bond prices.  The last big worry among bond investors was a Fed hiking cycle.  Well, that hiking cycle is over.  You have the mass media dumb money in fixed income still spewing the 2 rate hikes in 2016 Fed fed drivel.  That talk will be taken back quickly and conveniently when the market needs another boost higher later this year.

A lot of people will be surprised to see how high bonds go when the financial media finally catches up with what the smart money in fixed income is increasingly betting on:  a bull steepener with the belly of the curve, 5-7 years performing the strongest as Fed funds goes from pricing in a Fed rate hike in December to a rate cut in December.  All it will take is a little panic in China, and a pullback in the S&P to 1900.  That will be the trigger for a very bullish move in bonds as the BOJ and ECB panic and go even more negative with rates, and the Fed follows suit and calls off the rate hiking cycle and drops trial balloons about rate cuts and QE4.  In that scenario, I fully expect the Bunds to go -0.2% yield, and the 10 year yield to test all time lows at 1.38%.

These inter market relationships (stocks vs bonds, oil vs stocks, oil vs bonds, dollar index vs stocks) and how they change and evolve are clues to which markets are likely to go down and which ones are likely to go up in the coming months.  Right now, bonds > stocks > oil > gold > dollar.  But oil has been gaining strength recently, boosted by the OPEC expectations and seasonal demand.  That and the weak dollar should keep the S&P from dropping sharply.  But the one thing that acts strongest and feels indestructible are bonds.  Bonds should be much weaker here with stocks rallying so much but they refuse to go down.  Very much like 2012 and 2014.  I think that there will be one, and just one, good 20 bps rise in bond yields before we make an all out move towards the all time 10 year yield lows of 1.38%.  It should be within 4 weeks.  I want to be ready to buy when that happens.  More importantly, I want to make sure I hold it and ride the move as far as it takes me.

Nothing really good to trade right now.  Stocks have transitioned from bullish to neutral.  It will take a few weeks to transition from neutral to bearish.  The neutral phase is a tough one to trade, so I am just watching now.  Just waiting for opportunities to put on bearish positions (short stocks, oil, and long bonds).

Friday, April 8, 2016

Boredom Trading

Took some trades this week that weren't all that great, but looked better than doing nothing.  Trading because I was bored sitting on my hands and wanted to stay warmed up.  I paid the price with losses the past 2 days.

Don't be like me and trade so-so setups just because you are bored.  Or if you are going to trade out of boredom, do it with tiny size.  I was trading my regular size doing these boredom trades.  When you trade these ok, but not that good setups, you will have little conviction on the trades and get easily shaken out and doubt yourself while in the trade.

It is a slop fest of a market.  Not bullish, not bearish, just about neutral.  The stock market feels heavier with each passing day, but the uptrend was so strong, these dips like you saw yesterday will be bought and supported the following day.  But the follow through is lacking because we are in the corporate buyback blackout period and everyone knows earnings are going to suck.  So most are selling rallies.  I will admit this market right now is fairly unpredictable.  I will stay out of the way until I get a better feel for the action.

Got a few paper cuts this week, which is a reminder to not trade because you are bored or want to make a day's pay with a quick trade.

Thursday, April 7, 2016

S&P Rallies while World Crumbles

The divergence between Japan/Europe and the S&P 500 is getting extreme.  It has been a straight shot higher for the S&P since the February bottom, until this Monday.  While Europe followed along for about a month, it has been hating Yellen's dovish words as it has crushed the dollar and benefited US equities at the expense of the European ones.  Now we have Draghi coming out today to try to weaken the euro and Europe still goes down.

The yen is in a furious uptrend while the S&P has been going higher, taking on the weak dollar theme confounding the equity/yen correlation players.  It just goes to show how resilient this S&P 500 is, even while it is more hated than Eurostoxx.  The hot money flows into Europe and Japan from 2014 and 2015 have all gone down the toilet this year.  There are still a lot of stuck longs who thought the yen and euro would weaken forever.  Wall Street does its best to churn out "hot" ideas which are regurgitated over and over again until the public takes them as fact.  The hot idea over the last 18 months was the strong dollar and Europe and Japan outperforming everything else.

The opposite has happened this year.  And to an even more extreme degree ever since that FOMC meeting 2 weeks ago.  It is painfully clear that Europe and Japan were only going up because of currency devaluation, and nothing else.  There are no 3 arrows in Abe's plan.  It is 1 arrow shot 3 times.  The devaluation arrow.  And the dollar was just massively overvalued when it was EURUSD 1.05, USDJPY 125.  The fair value is probably more like EURUSD 1.30, USDJPY 100.

The dollar is still overvalued, and so is the S&P 500.  And so are bonds.  And real estate.  We are living in an overvalued world, except for trash like non-US equities.  It is getting painfully obvious, even to retail traders, that this is a sand castle at the beach, waiting for a big wave to crush it.  There is no earnings growth and the P/E is 18.  Who wants to rush into that investment?   It just so happens that the European and Japanese sand castles are closer to the water.  Another big wave will come, and it will crush the US sand castle too.

The Fed minutes pump job lasted less than 12 hours.  As soon as Europe gets its hands on pumped up prices, it does a great job of deflating them just in time for the US open.  The bulls last hope for the week is Yellen yapping away on Thursday.  I don't think even she can rescue this market again this time.  Looking for more selling to continue into Friday, which should regain its fearful reputation that it had in 2015 in the coming months.

Tuesday, April 5, 2016

Nearing a Top

It will take a while to completely top out, but Monday seems to have touched the high end of this thrust higher from the Feb. 11 bottom.  We reached 2071 on ES, which equates to 2079 on the SPX, which is close enough to the upper end of the December trading range.  Also, we got a double barrel blast of Yellen pumping which changes the news angle from declining earnings to the Fed will not raise rates and keep the easy money flowing despite the big rally.

I watch CNBC and other financial news channels and they are not bullish, but they don't want to be short and are afraid of "fighting the Fed".  That is the kind of talk I want to hear when I am looking to enter the short side.  As soon as I felt like pulling the trigger, we went straight down from Monday morning to now.  Definitely don't want to chase weakness with shorts here, but it is now game on for shorting strength.  There should be a few more short rallies over the next few weeks as we build a top.  SPX 2080-2100 should contain any upside attempts, and we should see support in the 2020-2040 area.  After this, I am looking for volatility to increase again as the global economic problems weigh down on the SPX.  It should be a perfect sell in May and go away signal.

I also believe bonds should pause and pullback here, as it has also gotten frothy due to Yellen.  Seems like most investors are afraid to short bonds too.  

I would be willing to buy a bit of a bigger dip in ES, if we can get to 2025-2030, or short if we get back to 2070.