Thursday, June 30, 2016

Covered Short

The bounce is just too strong.  If we were going to have another pullback, we needed to stay under SPX 2070 but the market just blasted all kinds of resistance levels.  The only way to explain it is that Brexit was an event that was on the calendar months ahead of time, so the investment community had time to prepare for the fallout, making the fallout in equities smaller than most expected.  And also the resolution to the upside much quicker than expected.

This game is about positioning, who needs to buy, who needs to sell.  The daytraders and HFTs provide the squiggles intraday but the big movements are driven by the institutions and their need to keep up with the S&P and not fall behind.  I took the loss on this badly timed short and will watch from the sidelines for the next trade.  Over the next few trading sessions it could go either way, and I don't have much conviction.  But I am leaning towards more of a rally in the coming days, up to the SPX 2100 level.  That should cause bonds to pullback towards 10 yr yields of 1.60% if the SPX does indeed retake 2100.  The chop continues, even with Brexit.

Wednesday, June 29, 2016

Shorting this Bounce

I have started to add some short in the S&P on this gap up, looking to add more short if we can push higher during the regular trading session.  It should be a choppy bottom, so there should be another dip before any kind of firm bottom takes place.  With the long 3 day weekend coming up, I don't think you will see too many fund managers trying to load up at higher levels from here.

If we continue to squeeze higher today, we could hit SPX 2060, which should cap any upside.  I am looking for a retest of SPX 2000 on the downside in the coming days.

Beyond this week, we should probably stay within a SPX 1980 to 2060 range.  It probably resolves higher as investors realize that all Brexit has done is eliminate any chance of Fed rate hikes and opens up the potential for a QE in the coming months if the S&P weakens again.  Ultimately, a Brexit is actually more bullish than a non Brexit because it guarantees more cheap money from the central banks.  And that is all that matters in this distorted financial world.

Tuesday, June 28, 2016

First Bounce

Today is the first bounce after the plunge.  Of course, to frustrate the daytraders, you got most of the bounce during Asian trading hours and most who go home flat totally missed the buying opportunity.  That is why you have to always be willing to take overnight risk if you want to catch the more predictable trades.  And it is always easier to predict a gap up than a gap down.  Always.

The numbers don't lie.  Overnight gains have been the major source of the gains over the past few years.  I made a blog post about this market behavior in 2009.

Especially when traders are worried about overseas risks, you have a tendency for the market to gap up strong if the world doesn't end.  And usually, the world doesn't end (except for a few times in 2008!).

The first bounce after a steep plunge is usually shortable, but I will not be shorting it because of the "bad" news.  If we had gone down 120 SPX points on no news, I would be much more comfortable shorting a bounce.  Since everyone has a reason to short because of Brexit, even if it is the absolute wrong reason, it makes the odds less favorable for shorting.  Still, if I had to put on a trade, I favor the short side on a bounce towards SPX 2015-2020, expecting a move down to 1980-1990.

This Brexit is one of the very few times where a known big bad event actually surprised the crowd in a negative way.  The more I watch CNBC, the more I am glad these aren't the people doing important things, like building cars, factories, power plants, etc.  The incompetency and wild conjecture on this Brexit issue is alarming.  Clearly the scientific method is almost completely absent in the world of finance, which leaves a lot of room for edges in the markets.

Expecting today's bounce to fade and we should retest yesterday's lows and probably bust through them before the week is over.

Monday, June 27, 2016

Perfect Scenario Eliminated

This Brexit has really ruined the setup that was I really looking for:  a final euphoric pop on no Brexit, which would have provided a awesome opportunity to go all in short, and then have a plunge lower when the market realized that the fundamentals were horrible.  Now you have the market totally prepared for more weakness, even though for the absolute wrong reasons (because of Brexit, not fundamentals).  I cannot recall a similar scenario in recent history, where we dropped on such hyped up meaningless "bad" news from a 52 week high, and the drop was deserving for other reasons than what everyone thought.

We probably need to spend at least a day in this lower range, SPX 2010 to SPX 2040 before we can push down further, but lower prices seem imminent, with SPX 1980-1990 a level of good support, which should hold the first time down.  It doesn't help that there is a long 3 day weekend next week, which will make fund managers reluctant to add much to their equity positions this week.

Bonds look like they will retest the all time low 10 yr yields at 1.38%.  Expect more weakness over the coming days.  There will be time to buy a dip, but it is a bit too early for buyers to make their stand today.

Friday, June 24, 2016

Too Early to Buy

It is tempting to look at past precedents when looking at a huge gap down of 4% on the S&P as an automatic buy.  But in the past, when you had those huge gap downs of 3% or more, it was after a recent period of weakness, NOT strength.

We were just at an all time high in the ES futures overnight before the UK vote results came in.  That is not a situation where you are going to be able to pick up bargains on a 4% drop.  This muddies the current situation and there are almost no precedents where you are at near an all time high and suddenly gap down 4%.  My gut feel is that we will be trading lower in the coming days, testing the ES 1980-1990 area, an area of support during the chop in January and December 2015.  Considering that we are in a buyout blackout period, I do not expect much sustainable buying right away.

The market will have to find a level where dip buyers will come in aggressively.  Even though this Brexit news is way overblown, due to the weak fundamentals, I just don't think this is the level that buyers will make their stand.  Wait for sub 2000 before looking for short term buys.  At ES 2028, it is no man's land.  If we do get any kind of rally towards ES 2040-2050 area, I will be looking to either short or buy bonds if the 10 year gets towards 1.58-1.60%.  The bond bull market will continue.

What a Fakeout

Everything before these Brexit vote numbers came out hinted at a remain, especially the S&P and GBPUSD.  Sometimes it is better to be lucky than good.  Didn't expect this, and I am taking the gifthorse and closing out my position.  I am not going to go long, but if we can panic down a bit more over the next few days, I will buy long for a quick trade.

It will get interesting over the next few days, even though this Brexit itself is almost meaningless there will be those who panic out of sheer price action, unable to take losses, i.e., hedge funds.

Thursday, June 23, 2016

Adding to Shorts

The no Brexit rally is well underway, even before the results come in.  The betting market has spoken, and most of the relief rally is already over with.  The market always looks forward.  It is already jumping the gun on a relief rally and barring a miracle Brexit, there will probably be a little bit more upside into tomorrow.  It is where I will be adding to shorts.  I overplayed this one, I should have just sat back and waited to short it all around ES 2100 which was what I was expecting after the no Brexit vote passed.

The relief should be short term after this Brexit vote, because there is nothing to look forward to.  In fact, this Brexit issue has taken attention away from the weakening fundamentals.  It will be back to reality by next week, which is where the real volatility should start picking up.  This pre Brexit anxiety was just a sneak preview to upcoming selloffs.  Just like the Grexit last July and the FOMC rate hike in December was the prelude to volatility the following month.  This should be the setup that hooks in the bulls and gets them trapped on the next selloff.  I am expecting the next drop to not be so benign.  But like the past 18 months have shown us, it takes a lot of choppy trade near the top before you get the full blown move lower.

Tuesday, June 21, 2016

All Brexit All the Time

It is fascinating to see the sole emphasis of the global markets on Brexit, like it is the key to the future of the global economy.  It is actually quite reassuring to me from a longer term view.   I know my edge is still there when I see this kind of irrationality.  This kind of market behavior.  It reinforces what I believed all along:  deep down, most investors and traders are herd animals, even if they say they are contrarian.

Sure, no one in the investment community likes to admit that they are part of the sheep herd, but these media induced frenzies like Brexit or Grexit are grabbed on to like they are linchpins for the global financial system.  These story lines are treated like they are fact, when they are just massively popular opinions and conjectures.  They lead to overreactions on the downside and the upside based on how the event is projected to play out.  We got a big change in opinion over the past weekend that Bremain is much more likely based on the opinion polls.  If you looked at the odds makers, they were always giving a bigger probability to Bremain, despite the poll numbers saying the opposite.

When the polls and betting odds run counter to each other, I always favor the accuracy of the betting odds.  People who put their money on the line will always be more accurate than results of any polls.  That goes for Brexit, as well as the bond market predicting the number of future Fed rate hikes much more accurately than the Fed's own rate hike projections.

So we had investors jumping the gun yesterday, believing that no Brexit is pretty much in the bag, rallying stocks and selling bonds.  This is your basic front running ahead of an expected event.  It doesn't mean I expect a sell the news reaction, but it just makes me more confident that the day after the Brexit resolution will probably be a top that can be shorted.  I have noticed a lot of complacency during the last pullback, even though there is nothing to really like here about the stock market.  With the stock buyback window closed and mediocre earnings lined up for the middle of July, there should be a bunch of profit takers lined up to sell any kind of no Brexit pop.  I think next week you get back to market weakness.

However, unlike what many think, I actually believe the volatility will start to get more serious after the no Brexit event is over, because the market has reached buying saturation, which I could see in the investor position and higher call volume before we got before last week's pullback.  Don't forget the equity meltup and TINA talk that we had by pundits on CNBC just 2 short weeks ago.

I am still short, and will likely keep the position unless there is a dip down to the SPX 2070 level.

Thursday, June 16, 2016

Brexit Reinforces Idiocy

The financial community knows nothing.  I thought Grexit took the cake when it came to so-called financial pundits making a mountain out a mole hill.  But this Brexit issue might be even more idiotic, if that is possible.

I guess it gets boring talking about the same old same old central banks pushing on a string.  There is only so many times you can talk about the Fed and the ECB and the BOJ without repeating the SOS over and over again.  But yeah, that is the most important thing in the market.  By miles.  On the level of importance, I would put Janet Yellen's lunch menu before a Fed meeting as being more significant than the Brexit vote.

Last time I checked, the UK uses the pound, and their interest rates are much higher than the EU.  Can you really say the UK is part of the European Union?  Will Draghi be buying Gilts anytime soon?  No.  But I am hearing talk about a Brexit leading to a break up of the European Union.  Or a financial crisis.  Or a recession. That is laughable.  I am sure most people didn't even know that the UK was part of the EU, much less a member that could cause a break up of the whole EU construct.  Any trade deals that evaporate because of Brexit will be replaced with another deal.  Making trade deals is not rocket science.

This Brexit is absolutely the biggest red herring I have seen because the market really does have a lot of problems but no one is thinking about them right now.  It's all Brexit, all the time.  Everyone knows there is no earnings growth.  Most know that US stocks have high valuations.  But you also have diminishing level of stock buybacks, increasingly worse global demographics, and stagnant productivity growth because there are no new technologies that really matter from a big picture perspective.  Smart phones and LCD TVs don't increase productivity.  The incremental benefit of faster computers is providing diminishing returns.  I can use a computer that I bought 8 years ago and be totally fine trading with it.  I definitely could not say the same thing 8 years ago.

So if Brexit is so meaningless, why am I shorting?  Because we got way too complacent last week, while at the same time being at the 2100-2120 resistance level, with no real reason for being positive other than the Fed being on the sidelines, which most bond traders knew anyway well before the Fed meeting.  I am just looking for singles and doubles with the S&P.  It isn't a great market to trade at the moment.  Unfortunately I missed the home run trade of long bonds because I was too patient waiting for the absolute perfect levels to get in to ride the wave higher.  Not capitalizing on this bond super rally is my biggest trading regret this year.

Staying short until either close of today or Friday.  Don't want to overstay shorts.  Just wait for my downside levels, and if they hit, I am covering and waiting for the next chance.  S&P 2044 is very much possible by Friday.

Wednesday, June 15, 2016

Back to Short Side

I have entered short S&P again today to look for more weakness.  This selloff is not over.  We got the dovish Fed anticipatory rally and while short term Treasuries liked the dovish Fed, the stock market yawned.  Usually you get a kneejerk reaction higher with such a dovish Fed but not this time.  The sellers have taken over.  They are driving this bus.  And they are hell bent on taking it over a cliff, albeit a small one.

S&P 2040 is definitely in play over the coming days.  I would look to cover shorts in that area.

Tuesday, June 14, 2016

Covered Shorts and Looking Long

Covered the equity shorts and am looking to go long before today's close to play for a short term Fed dovish bounce.  Still expect more downside but Yellen will look to soothe the market in this period of market volatility.  She always does.

It looks like we had the Treasury blowoff top in European trade as the Bunds finally went to negative yields.  A coronation of sorts, a landmark festival for NIRP.  Draghi is doing his job.  Printing money, enriching those holding financial assets, while creating no growth which allows him to continue with mo' money mo' money mo' money.  If 1 trillion euros doesn't do the job, let's try 2 trillion.  If that doesn't work, try 3 tril.  etc. etc.  Nowadays 1 billion seems like 1 million back in the 80s.  Money has lost its value.

Those saying the thing to fear is deflation forgot to check the prices of bonds or real estate.  Or college tuition.  Or rents.  Anyway, don't want to get too off topic.   No one cares if you made money riding the backs of central banks creating a huge mess for future generations.  You don't get a medal for fighting the central banks and their policies by shorting stocks or bonds.  You can hate the game, but at the end of the day, beating the game is all that matters.

Monday, June 13, 2016

Brexit Chicken Littles

Talk about your red herring.  There so many reasons to sell equities right now, everything EXCEPT Brexit.  Who cares.  Remember, the UK has its own currency, it is not part of the EU finance mechanism.  It crossed that bridge a long time ago.  Next time you look at the Gilts and compare them to Bunds or Oats, you will see why the UK is not really a part of the EU, although officially it is.

It never ceases to amaze me how the financial community will choose the most trifle things and make them into the next potential crisis.  They did it with Grexit.  They did with numerous debt ceilings.  And now they are doing it with Brexit.  The unfortunate thing is that you can't really take advantage of this event, other than shorting after the relief rally of the Brexit uncertainty being over after June 23.  That relief buying will be very brief, because we are at the point in this rally where we will chop till we drop, not 5%, but more like 15%, a la August 2015, and January 2016.

Gotta stick with the short side till we get that waterfall decline.   Short the Fed dovish rally.  Short the Brexit non-event relief rally after June 23.  Etc. Etc.  STFR.

Friday, June 10, 2016

European Weakness & Fewer Shorts

Everyday you have the Eurostoxx underperforming the S&P.  Perhaps this is pre-Brexit vote selling in Europe.  Europe has the much weaker equity markets and has been lagging the US ever since we heard those EURUSD parity calls in early 2015.  The S&P has been able to shrug off weakening Europe and rally right off the cash open when European weakness sets up a gap down or flat open but not today.  This rally off the May 19th bottom is quite mature now, exceeding 3 weeks, with investors complacent.  So you are at that time period where the market begins to get volatile and a top is soon formed.  

Also, you have seen shorts covering the last few weeks in SPY:

We are now at the lowest short interest in the SPY over the past year.  This looks like a setup where weakness will not be buffered by short covering because the short base has been declining steadily.  The bears have slowly given up in both equities and bonds.  I remain bullish on bonds despite the increased optimism because economic weakness should finally catch up to the S&P and cause the Fed to become more dovish in the coming months.

Bonds are short term overbought, and likely going to take a little breather here now that we are at 1.65% strong support for 10 yr yields and the psychological 0% barrier for Bunds.  We could get a little bounce towards 1.73%-1.75% but that would be just a great buying opportunity.  Anyway, any consolidation you see at these levels will just set up a bigger push lower in yields.  I expect 10 yr yields to challenge and break below the all time low 1.38% set in 2012.  I could see it happening within 2 months.

It is time to ramp up the short equity exposure, it's gonna get ugly soon with the biggest support for the S&P, the corporate buybacks, having their buy window closing next Friday.

Thursday, June 9, 2016

TINA Rally

It is a lonely equity rally.  The S&P is leading the pack, with the Nasdaq lagging, Europe and Japan trading weak, and emerging markets well off the April highs.  A dovish Fed is not really good news for Europe and Japan.  And it's not as good for emerging markets as most people think.  The emerging markets are held together by China, and it has been lagging badly the whole time from the February bottom to now.

There is something insidious going on in the Chinese financial market and it can only be kept under the rug for a limited time.  Their Minsky moment is coming, and the market is mostly ignoring it.  There is a WSJ article that came out on George Soros being bearish and that is quite interesting to me.  My normal reaction to these kind of articles is that the person in the story wants to liquidate into the story, like Goldman often does.  Like Jesse Livermore did when he wanted to book a winner and have the liquidity to exit gracefully.

But it really does seem like Soros is really bearish and has fully built up his shorts and can now let the cat out of the bag.  What I saw in the article is well known, but the market is mostly ignoring it right now.

On CNBC Fast Money yesterday, you had an exasperated bear who has gotten gored badly and still remaining defiant, but not shorting, instead going long gold and Treasuries.  Then you had others who were bullish, who all admitted that fundamentals don't matter right now and that it's a TINA rally.  I kept hearing TINA.  There is no alternative. These are not the foundations of a long lasting rally.  They are just hot money flows mixed with short covering.  I was surprised that no one seemed to really care about Brexit (I don't care either, but it was supposed to make traders bearish until the vote happened).

This market looks like it is in the final throes of a short covering / FOMO / TINA rally.  Add crude oil convincingly breaking out above $50 and you have an overload of bullishness.  All the while the fundamentals remain weak and the only thing that has changed is that the Fed won't raise rates anytime soon.  For all the traders out there, did we really think the Fed was going to raise in June or July?

Last thing, the VIX has remained sticky and refused to go down despite the rally over the last few days.  Usually a good sign that the volatility selling has run its full course and short vol positions are full, and equity weakness is imminent.

Bearish stocks, bullish bonds, and expecting us to top out very soon, setting up a volatile July.

Tuesday, June 7, 2016

Melt Up or Fakeout

We are now at the highs of the year, busting through the high set on April 20.  Oil is above $50.  Yet 10 yr bond yields are stuck close to the lows for the year, at 1.72%.  I know that all else being equal, lower bond yields are better for the stock market.  But all else is not equal.  The economy has been getting weaker, and finally with a bad jobs number, the public is realizing it.  It is almost as if a weak economy is good for the stock market because then the Fed won't raise rates.  But this market forgets that a weak economy hurts earnings, which is way more important than a 25 bps hike in the Fed funds rate.

From what I am hearing on CNBC and Twitter, many are looking for more upside and a possible melt up.  I would agree with that view if the market kept going higher last week and didn't trade between 2085 and 2100 for so many days.  Usually up moves that will last for months don't stop and pause for several days to catch their breath after going up for just 1 week off the bottom.  

Just look at what happened in late November/early December 2015 in the SPX to see an example of why breaking out from a recent tight range (after a big rally) doesn't always mean a continuation of the move.  You had a false breakout of a tight range on December 1, and then went immediately lower.  In December, you got a lot of chop, dips that were immediately bought, and then 3 days of rally that were immediately sold, repeated a couple of times, to eventually setup a waterfall decline the next month.  

I don't want to rely too much on recent trading patterns as the main reason for my pessimism, but it adds an extra bit of information when forming a market view.  I am mainly going to look at fundamentals and daily market data such as earnings trends, valuations, investor money flows, put/call ratios, and commercial/speculator positioning.  

The majority of what I am looking at is pointing to weakness in the coming months.  Now that we have finally got rid of the bearish sentiment and complacency is here again, the market will have a hard time blasting higher with these weak fundamentals.  Fundamentals are the long term driver of markets, not sentiment.  Sentiment is useful to predict short term bottoms and a topping process, but not long term trends.  

It is always harder to pick a top than a bottom because the tops usually last longer and are a process rather than an event.  But if you are going to get bearish, this is about as good a risk/reward that I have seen this year.

Yesterday was the first time you really saw a very low put/call ratio for both the equity and index options.  Previously, most of the call volume was focused on equity options.  The market is getting too hot with speculation of further moves higher.  It seems like a combination of some residual short liquidations and FOMO for the underinvested.  Those drivers usually do not last for long.

I did get short S&P on Friday and was too early and got stopped out at 2115.  I see that we are already fading from that level.  I will look to get back into the short either today or tomorrow and hold on with a stop above the all time highs at 2035(edit 2135), with a target of 2060.  

Friday, June 3, 2016

NFP History

These nonfarm payrolls numbers are not to be taken lightly.  Sure, it will prevent the Fed from raising rates but they just reinforce the slowing economic data that has been coming in.  The economy is weaker than 2015 which was weaker than 2014.  The earnings numbers back this up, as well as the global PMIs and equity indices (all except the US equities).  That is why I have been so surprised at the resilience in this market, but the strongest indices is always the last to fall, and the strongest is the S&P 500.

These kind of weak nonfarm payrolls numbers coming after a big equity rally often kickoff a sustained selloff, like July 2011, April 2012, etc.  In fact, the most similar period that I can find to this is the summer of 2011 and spring of 2012.

I don't think this resilience in the S&P 500 will last beyond June, as the only thing that is holding up this house of cards is buybacks and cash M&A.  Now that you get a stock buyback blackout period coming up in the last week of June lasting till late July, you have a black hole of buying power.  Retail is definitely not going in.  Institutions have heavily covered shorts and have gotten back to close to their base equity allocations over the past 3 months.  This is setting up for a potential waterfall decline like August 2015 and January 2016.

I have started a short in the S&P and will hold it for a move down to 2040-2060 area.  I see very good risk reward for the short side from now till middle of July.  Time to short em.

Wednesday, June 1, 2016

Beginning of the End

We got the thrust higher off the Thursday, May 19 bottom that we hit when the put call ratios went sky high on Fed rate hike fears.  A lot of the buying power fueling the rally from that bottom has been short covering, and the short base is extremely depleted at the moment.   Usually, 2-3 weeks is about the most a short covering rally can last.  We are nearing the end of that window.

 If the market wants to go higher from here, it has to bring in longer term investors.  I just don't see that happening with the Fed preventing any kind of bubble formation with their hawkish talk.  They will keep a lid on this market because there is no way this market stays above 2100 if the Fed does a rate hike.

So with the Fed hell bent on maintaining what little credibility they have left, albeit with horrible timing, they will be the ones that keep this market range bound.  So instead of a Fed put, you have an implicit Fed written call (short call position) with a strike price around 2100.  They will talk hawkish when the S&P trades near 2100 or higher, and go for rate hikes when they can.

With the lack of earnings growth and potential negative catalyst in the uncertainty of Trump and China devaluing the yuan to stave off a financial collapse, the bears have the edge here.

The bond market pulled back on all the hawkish talk from the Fed but the fundamentals remain strong.  I would expect bonds to rally in the coming weeks as stocks pullback.

We are teetering on the edge of the cliff, like August and December 2015.  This time, the downtrend should last longer than 5 weeks.  Any shorts around S&P 2100 are great risk reward trades.