Friday, May 27, 2016


This isn't just a BTFD market anymore.  It's also a STFR market.  A fader's paradise, if you have deep enough pockets to wait for the reversal to play out.

We got that rally that ALWAYS comes when you get spikes in the put/call ratios like you did last Thursday.  It just happened with more force than I expected.  But we've been consolidating downwards and digesting the massive gains from Feb-Apr, so the market was due for a rally that lasted more than a day.

The fundamentals are horrible.  The buybacks have been cut back.  The Fed has been chirping about a possible rate hike in June.  The stock market is like Alfred E. Neuman, what me worry?

It truly is astonishing how resilient this market is, and how deep the distrust in this market is.  Almost everyone calls this rally fake, because the earnings are telling a different story from the share prices.  No one ever said it would be easy to slay this S&P 500 monster.  It truly is the final boss, and despite repeated hits, it keeps coming back like a zombie moving forward.  But I believe the final boss is close to being slayed.

With heavy short covering as shown below (NYSE total short interest divided by total volume), you are getting rid of the short base which is what has been driving a lot of these short term rallies.

I am very close to jumping into the bear camp after this rally has got rid of most of the weak shorts, and provided better prices to start a short campaign.  Next week should be ideal to start shorting and riding the wave lower that is likely over the summer months.  Anything around 2100 is a premium selling zone which provides a great risk/reward setup, with perhaps 2% risk to 2140, and 15% profit potential back down to 1800.

Monday, May 23, 2016

June 2011 and July 2015

Whenever one sees a market that attracts a lot of bears, it is natural for contrarians to get confident that the bears will be wrong and start buying stocks.  Yes, that usually works in the short term, from a 2 day to 2 week time frame.  But if you look beyond that, having a lot of bearish sentiment isn't necessarily a sign that stocks will rise.

Two cases that clearly show this are June 2011 and July 2015.

In the middle of June 2011, you had a lot of investor nervousness about Greece, the debt ceiling, and overall European sovereign credit.  The market was more bearish than now, even though the market had only gone down about 5-6% from recent highs.  After the bearishness dissipated, you had a sharp rally back near the previous highs, which consolidated for a few weeks and the next pullback led to a waterfall decline of 20%.

In early July 2015, you also had a lot of investor nervousness about Grexit, which is amazing considering how insignificant Greece has shown to be over the years.  Anyway, you had a 4-5% pullback and a lot of bearishness.  Perhaps about the same as now, and just like in June 2011, you had a sharp rally back near the previous highs, a consolidation for a few weeks, and the next real pullback led to a waterfall decline of 15%.

In both 2011 and 2015, you had a few month consolidation near the highs after a huge rally.  While we haven't had a huge rally since 2015, you could argue that it has been a huge consolidation before the next big waterfall decline.

With the high US equity valuations and the lack of earnings growth, uncertainty over the US election, and China, there are several good reasons to be bearish.  This is one of those times where being a wise guy contrarian (I'm bullish because everyone is bearish) could lead to serious losses over the next few months.

I am short term bullish, looking for a final short squeeze rally up towards 2100, probably after the Fed doesn't raise rates in June, but medium term, looking out over 1 to 3 months, I am very bearish, as this market looks like it is forming a massive top with no positive catalysts other than QE4, which will only happen if the stock market drops big beforehand.

Thursday, May 19, 2016

June Rate Hike?

The Fed flip flopping on rate hikes is killing whatever little bit of credibility they have left.  It is not some wild fluke that the futures market is pricing in only about a 30% chance of a June rate hike and less than 80% chance of a rate hike by December.  The Fed presidents can yap all they want, but unless they deliver on their promise of 2 rate hikes this year, they have no credibility.

Every time the stock market has a correction, suddenly the rate hikes get delayed, based on every excuse except a stock market correction, even though the real reason is the S&P going down.  Last September, they were scheduled to hike rates and many were expecting it before you had a monster drop in late August, which changed the whole story.  Finally, they reluctantly hiked rates in December because they were promising to the whole time and the stock market had stabilized above 2000 at that point.

With the market not completely pricing in a June rate hike, don't expect the Fed to surprise the market.  You will either have to have Janet Yellen telegraphing a rate hike beforehand or you will not get that June rate hike.  If I had to place my bets, I would bet that Yellen punts again.

With a Yellen punt, the S&P should embrace that news and rally back higher, perhaps for a last visit towards 2100 after the FOMC meeting in June.  Right now, the pessimism is a bit too extreme and we should go sideways and rally a bit to work off that bearishness.  Anyway, big picture, almost everything points to weakness so keep that in mind when taking swing trade positions.

Monday, May 16, 2016

Lack of Volatility

Those that are using support levels to try to get long or resistance levels to get short have had very little time to buy near the lows or short near the highs.  The market spent very little time under ES 2040 and also very little time over ES 2070.  That is what happens when you have the majority who think the market is range bound and are looking to buy the bottom of the range and sell the top of the range.  It is frustrating for those of us waiting patiently to get in and missing buying opportunities and selling opportunities by looking for perfect entries at the bottom or top of the range.

This will not last for long.  There is just too many potential negative catalysts for this market to stay this quiet.  Lots of uncertainty, such as Brexit, the election, and overall weak earnings and potential crash in China.  The only positive catalyst I see is QE4.  And that will only happen if the market goes down first.

This is definitely not my type of market, but I know things will change and get more volatile.  The VIX curve is in extremely steep contango, which is a good indicator of future volatility.  Perhaps end of May/beginning of June will provide the last good shorting opportunity in S&P before the market embarks on a downtrend.

Friday, May 13, 2016

More Chop

We are just going up and down and building up more bearishness.  Not much to say about the action other than it looks like a normal pullback after a monster rally.  We should rally again if we trade like we usually do but things seem a bit different this time.  The crowd is getting wiser to the fact that we are no longer in a bull market, but in a sideways range bound market.  Thus, you see more bears even though we are close to all time highs.  But it is justified because this market hasn't shown that it can go much higher when it goes towards 2080-2100.

Not much has changed over the past 2 weeks other than investors loading up on put protection.  The downside should be limited till May 20 monthly opex.  The upside should also be limited so expect more choppy trading.  I am not really interested in buying dips except for quick trades.  Just want to wait for the next rally to put on longer term shorts in S&P and longs in Treasuries.  Target area for selling short is around SPX 2080-2100.  Waiting patiently to short the rip if/when we get there.

Wednesday, May 11, 2016

Shorts Squeezed AGAIN

The up move you have seen since the NFP came out below expectations is just more of what you have seen since 2009.  Shorts getting excited by several down days in a row, waiting for the big one, and then you get dip buyers and nervous shorts covering to form another quick bottom.  The difference this time to what you saw back in the earlier years of this bull market is the continuation.  You are not getting as much continuation off V bottoms as you did in 2009-2014.  It reaches prior highs, and stalls, chops, and then drops again.

It is hard to push this market up much beyond 2100 due to weak fundamentals.  We are getting even lower interest rates despite the rallies and that is helping the stock market but these benefits are marginal when valuation is so high.

I am glad to not have shorted recently because I would have been one of those squeezed yesterday.  A short squeeze out of the blue based on no news.  Now we have oil rallying hard and the market is down.  Something you wouldn't have seen in March.  This market is tired, but the bull is always going to give bears a hard time until they give up.  Based on the high put/call ratios day after day, the bears remain very willing to bet against this market.  They have not given up.  More grind and chop ahead.

Monday, May 9, 2016

Liquidity Trumps Fundamentals

In the battle between ample liquidity and weak fundamentals, you are seeing what wins out.  Liquidity.  There is too much cheap money sloshing around so it needs to find a home.  The lowest yield in 2008 for the 10 year when you were in the midst of the financial panic was 2.04%.  The S&P at that time was under 900.  With an economy that is stronger than in 2008, you have 10 year yields at 1.76% with an S&P over 2050.
The liquidity tells you S&P should be over 2000.  The fundamentals tell you it should be under 1500.  Liquidity wins.

Something is extremely wrong with this picture.  You have bond yields that are completely distorted by central bank easy money QE programs that try to goose the economy by not only manipulating the short end but also the long end of the yield curve.  And when the market gets even a sniff of a normalization in interest rates, it panics knowing that this drugged out overstimulated zombie economy can't withstand higher interest rates.

So you have a market that loves to see subpar jobs numbers, as long as they are not so bad that they signal recession.  We got that last Friday, and the market rallied all day after the initial panic selling on the weaker number.  They want more Fed goodies and ZIRP forever and more QEs.

Now what is the plan in this choppy market?  We just haven't gone down enough after such a huge 2 month rally to entice me to buy.  At the same time, so many are cautious and pessimistic that it makes me wary of a short squeeze coming out of the blue.  So all I can do is just watch and wait for an easier trade.  Probably the easiest trade is to just buy bonds and wait for a big move lower in equities sometime before Brexit vote in June.  But even that isn't a great trade, considering how much we've rallied since the FOMC 2 weeks ago.  Tough market.

Friday, May 6, 2016

2040-2060 Range

Look for some chop over the next few days between SPX 2040 to 2060.  We are having a battle between the optimistic dip buyers and the scared fund managers buying up puts left and right.  I can't say which way it will resolve, because although we are in the process of rolling over, we had such a strong rally from February to April that the first pullback is going to be very enticing for those left behind to increase equity exposure.  Also, let's not forget that stock buybacks are back with earnings season over.

Hard to predict this one, the fundamentals favor the bears, but the technicals favor the bulls.  Not a great market to participate in, although I would lean towards shorting rallies rather than buying dips.  Definitely no chasing now that we are near SPX 2040 support.

Wednesday, May 4, 2016

Brexit Selling

I think what you may be seeing in the coming weeks is selling ahead of that Brexit vote in late June.  I know it is fundamentally meaningless.  The U.K. has its own currency, and is a member of the EU mostly in name only.  But the media and by extension the financial community, are pushing this as an economic event, even though it is not.

So I find it quite odd that there is all this mention of Brexit as if it is a market risk.  I was even asked about it earlier this year, and I told the person it doesn't mean anything.  He was shocked at my response.  What you will see is investors sell and lighten up their holdings ahead of the event, and then buy them back, regardless of outcome, after the event.  So what you see is pullback in risk assets ahead of the event, and then a rally after the event and uncertainty is removed.

But this time, there are reasons to sell this market, at this time, other than Brexit.  The main reason being equity valuations and the lack of earnings growth.  That is the fundamental basis for the weakness.  You add a little fear and uncertainty and that just provides more fuel for the fire.

Usually the first decent pullback after a big up move is bought, but that is for your typical market.  That hasn't happened as often over the past 2 years.  It is a very herd like market, so you tend to go straight up with very few pullbacks, like we had from Feb to April, and then you tend to go straight down like you had last August and in  January.  So buying dips is more dangerous, when you have a market that is this heavy, overvalued, and plunge prone.  However, for a small trade, it is worth it to risk a small amount and buy this dip towards SPX 2040 and target a move to SPX 2070.  If we get an afternoon selloff down towards SPX 2040, I will be willing to start buying for a quick trade.

Tuesday, May 3, 2016

Calling Out Hedge Funds

Recently I am seeing more and more people coming out to criticize hedge funds.  At Berkshire Hathaway's annual meeting, Buffett came out with a blunt attack on hedge funds calling them a net negative for investor returns and stating the obvious:  they are massively overcompensated to underperform.  This is obvious for everyone who can just look at the plain facts and past records comparing a 60/40 split of equity index/bond index funds would have trounced hedge funds over the past 20 years.

The hedge fund compensation of 2 and 20 was only designed for those that could actually outperform the market and provide alpha, not disguised beta.  It is no wonder almost every two-bit Wall St. trader wants to be a hedge fund manager.  It is the equivalent of being paid 2%/year to receive a call option on 1 year's worth of trading which usually underperforms the S&P 500 or even the bond index.  If the call becomes too far out of the money (i.e. big drawdown), you can always close out the fund, return the depleted capital to investors, and start up another fund with no high water mark.  Boom!  Clean slate.

I would never invest in a hedge fund and the ones that most would want to invest in (Jim Simon's Renaissance main fund) don't take outside investors.

We are getting volatility near the top after a big move off the February lows.  The first pullback should be bought, and we are near completion of the first pullback.  I would lean on the buy side if we get to SPX 2040 later this week.

Monday, May 2, 2016

Higher Volatility

With many of the markets closed today due to May Day holidays, we are quiet.  But expect more days like Friday when you had a somewhat scary moment intraday, as the put/call ratios soared, 1% down following 1% down move the previous day, something we haven't seen in several weeks.  We have reached near buyer saturation in the S&Ps.  It has already occurred in Hang Seng, Nikkei, Eurostoxx, and Nasdaq.  The only one that was remaining untouched was S&P until late last week.  Now the S&P has joined the down party, although just a bit.

It is a new ball game.  We had the warning signs as the steep VIX contango and failure to burst through strong 2100 SPX resistance the past 2 weeks setup the end of month dip.  Now we should see dip buyers coming in and trying to buy "cheap", but I don't see too many buying the rally.  The buyers have had plenty of time to buy during this complacent period after the Fed green light in mid March.  About 6 weeks to load up on stocks after that, and the signs of buyer saturation are finally showing up.  Finally.  This is the time you can profitably buy puts on any one day rally and sell them when you get the 3 day swoons.

It is looking a lot like December 2015 when you had 3 day dips that resulted in V bottoms, but this time, I don't expect us to spend so much time up here.  Too many negative catalysts coming up, Brexit (meaningless, but the financial media has to come up with something to drum up trading volume) and the election, with more Trump airtime.  

With my bearish view on equities, I am even more bullish bonds.  Old Reliable, the bond market, it can't stay down for long with the mess that is the global economy at this time.  The ECB and BOJ aren't going anywhere with their NIRP and endless QE, and all it takes is for the Fed to finally admit that they can't raise rates and will have to do more stimulus and you will see 10 year yield plummet to new all time lows easily breaking the 1.38% mark set in 2012.  That should happen in the 2nd half as the remaining optimists finally throw in the towel.

Shorting ES around 2080 and buying bonds around 1.85-1.90% yields are great risk/reward plays.