Wednesday, July 27, 2016


The range over the past 10 trading sessions has been 2153 to 2173, or less than 1 percent.  That is one of the tightest ranges I have ever seen over a two week period.  It tells you that the market has found a level where it feels comfortable at when optimism is high.  The question is what the range will be when that optimism goes down.  The optimism can hardly go higher from here.

We have a Fed meeting today and expectations are for nothing to change.  You know what I feel about the Fed.  I have been adamant that they will do nothing, lean dovish, and try to pump the markets higher for political reasons.  The notion that the Fed is apolitical is hogwash.  The Fed chairman is appointed by the President and approved by Congress.  They are also up for renomination every few years.  That is why you had that out of the blue, wacky, in your face QE from Bernanke in September 2012 even though the economy was fine and S&P at post 2008 recovery highs.  He wanted to goose the market higher into the presidential election to help his guy, Obama.

With a Fed that will be dovish till the presidential election, there will be no big downside catalysts.  The bears can only rely on the rally exhausting itself and pulling back based on overbullish positioning.  August also tends to bring weakness when there has been a summer rally.  So all signs point to a pullback over the next few weeks.

Initial signs of intraday weakness over the past few days are probably a warning sign that we will be going down soon.  If we do dip, I expect initial support around 2125-2130, the area of the highs in the  S&P in 2015.

Friday, July 22, 2016

Don't Give it Back

Unless you are a high frequency trading firm, it is just not possible to make money every single day.  There will be many days, usually when the market is in an uptrend, where the market is hard to predict short-term.  Trying to predict those daily fluctuations is like gambling.  Sure you can win, but the expectation after transaction costs is negative.

Know your strengths and weaknesses.  My strength is my aggressiveness and willingness to go on offense when there is a high probability setup.  My weakness is my aggressiveness and overconfidence.  I try to go on offense even when the odds are only slightly in my favor or even just a coin flip.  So from the heavy tuituion I paid through my losses, I know that I should be less active in these relentless uptrends.   I don't want to give back my hard fought gains during good trading markets in these slow, low energy markets.

I am not bold enough to buy into an uptrend that I know is likely to go on short-term, but eventually give back its gains in the medium term.  I want to limit most of my trades to ones where both the short term and medium term outlook are favorable for my trade.  For example, if I make a short term short in the S&P 500 at 2165, and it goes up 10 points to 2175 in the next trading day, I have greater conviction to hold the position and profit later when my medium-term S&P outlook is also bearish.  

It is one thing to lose money based on your analysis being wrong.  That happens, because no one is right 100%.  But if your analysis was only for a short term trade, and your medium term outlook was the opposite, then you probably shouldn't have even put on the trade in the first place.

Right now, my analysis points to slightly higher prices over the next week, but then choppy trading action for August, and eventually a pullback down to 2040-2060 area in October.  So I will be looking to put on a short sometime soon, but want to wait till next week, probably after the Fed gives full confirmation that they are on the sidelines, looking to pump the market higher, and rooting for Hillary.  S&P 2085-2090 looks like a good spot for a top from a price perspective, from a time perspective, July 27-29 looks toppy.

Monday, July 18, 2016

A Sleeper

This is going to be a snoozer.  It always is when you have a strong uptrend and retail isn't actively involved.  At least when retail is involved, you will get irrational violent moves in random stocks and themes of the week.  Now it is just a FOMO central bank induced rally.  About the 100th iteration of that.

It takes a different mentality to go from being on offense:  aggressive and aiming for large gains to being on defense:  reluctant, passive, cautious, and playing not to lose.   When you have a good read on the market and fund managers are acting emotionally with some fear, then you get good volatility and more predictable moves.  I have always believed in VIP:  volatility improves predictability.  When fund managers are calm, making gains, and feeling very little pressure, the market will be slow and harder to predict.  The institutions make fewer mistakes and there are less openings to strike.  It is when the institutions are losing and feeling the performance pressure that you seem them getting fearful and making a lot of mistakes leaving good opportunities for those who are not under any of those kinds of institutional pressures.

Remember, in the equity large cap/futures/FX space, the drivers of the price action is 99% institutions.  So they are my primary opponents.  If they are playing their A game, it makes it much harder for me to make money.  Right now, they are calm and making few mistakes.  That is why my type of trading will not do that well during this time.  I often have a bearish lean (usually long bonds or short equity index) so this is definitely not my type of market.  Know your bias and if you are leaning bearish, it is probably better to come back in about 2 weeks and try again on the short side.

Going to be posting less as this market is sleepy and boring.  Not much to analyze in the daily action.  

Thursday, July 14, 2016

Unreal Buying Momentum

I haven't seen this kind of equity buying momentum at a 52 week high since 2014.  It is a real change of character from the 2015 Q1 to 2016 Q2 market.  Due to the long period of basing between 1800 and 2100, and the worry built up over that time period, this breakout should last a while.

This move has definitely surprised me, and probably a lot of others as well, not because we made new all time highs, but because we are gapping up so large day after day despite having already rallied very strongly.  This is like a throwback to the 2009-2013 relentless rallies that defied belief.

Despite the high valuations, lack of earnings growth, and sluggish global economic growth, we are chugging higher based mainly on the central bank theme of easy money and low bond yields.  With a politicized Fed that wants to keep the stock market up ahead of the presidential elections in November (to favor Hilary), you will not be seeing anyone take away the punch bowl till winter.  The market is catching on to this as there has been a notable recognition among the fixed income community that the Fed is frozen here as it awaits any Brexit fallout (a total joke of an excuse, by the way) and uses China worries as an ongoing excuse to not hike.

The only people bearish are the permabears like Brian Kelly of CNBC Fast Money who has been telling everyone to go to cash since S&P 1812 and brags about being long gold and TLT during their rallies.  You are in the final stage of bull market here, but it felt like that in 2015 as well.  And look where we're at now a year later.  It is a tough market for those trading the 2015/2016 first half playbook.  The game has changed, and it is time to adjust.  Not by chasing stocks higher, but by being more careful with S&P shorts and Treasury longs.  I am not interested in playing the bull side at these levels, except for very quick trades.

We are still in the midst of an extremely strong buying thrust, so only the best short trades need to be taken here.

Monday, July 11, 2016

All Time Highs

Who would have thunk it.  All time highs 2 weeks after Brexit.  The market is getting smarter.  In the past, maybe 5 years ago, the market would have lingered at the lows for an extra week before blasting off to higher ground.  But the scarecrows have so underperformed and been taken out to the cleaners that you have the dip buying monsters waiting to gobble up any weakness.  Only when you have extreme moves in things such as crude oil or the dollar do you get enough macro waves to get the market to show real weakness.  Fake crisis like Brexit are just viewed as buying opportunities in S&P 500.

It is going to be a boring summer.  Unlike last summer, when you had a more complacent market and a longer period of topping heading into it, this time, you haven't built up enough complacency to get any kind of real weakness.  Sure, you can have a small dip here and there, but nothing really worth playing for.  It reminds me a little bit of the summer of 2012, except the market is smarter this time.  Less time lingering at lows, and more time lingering near tops, making it tough for short sellers.
The general public still is in denial because it seemed like there was going to be a big crisis just 2 short weeks ago, with the media frenzy and fearmongering over Brexit.  Now, we are at all time highs but the crowd still can't believe it.  So it will take time for the crowd to catch on and really buy in to the bull thesis.  That is what you would call a topping process.  I give this uptrend at least 2 more weeks.  From there, I will reassess.  As I have said a couple of weeks ago, now is not the time to be a bear.  If you are a natural bear, take a break.  It is the bull's time.

Friday, July 8, 2016

Search for Yield

Dividend stocks are the new high yielding bonds.  The liquidity has to find a home somewhere.  When you have the ECB and BOJ pumping trillions into the global financial markets, that money has to go somewhere.  And it's going from European and Japanese sovereign debt to US sovereign debt which then goes to dividend paying stocks.  Trickle down economics working overtime.

Everyone is desperately searching for yield because bond yields are tiny.  That is why you have bond funds going out on the maturity curve to get higher yields.  Oh, the capital gains are a nice little boost too.  Haha. A stronger market is doing nothing to the long bond's continuous rally, and of course, defensive stocks are working almost every day.   It is getting close to the inflection point because these defensive stocks and long bonds are getting massively overvalued, but they act like Teflon.  I believe we will hit a top in the long bond and utilities within 6 weeks.  It is going to be tough to catch a top in those markets but it seems very close.

Brexit is exactly what this market was looking for.  A great excuse to take rate hikes off the table and to print more money.  And you thought Janet Yellen would commit career suicide and help Donald Trump win the election by tanking the market?  Hell no.  She will pull a Bernanke circa 2012.   Bernanke came out with an off the wall, out of nowhere acutely timed QE just to boost the markets ahead of presidential elections to ensure his guy, Obama, would get elected.  This time, Yellen will be printing for Hillary Clinton, hoping that a boost in the stock market will seal the deal for her candidate.

With no rate hikes this year, and a potential for a rate cut or very dovish talk from Yellen in upcoming FOMC meetings, all the monetary forces are in the market's favor.  The BOE, BOJ, ECB are all going to print full blast due to Brexit.  Yellen will likely soon follow.  That is why bonds don't go down.  It is the magic carpet ride of free money that is at work again.   A liquidity driven low volatility rally.  SOS for 7 years.

Wednesday, July 6, 2016

Italian Banks and Property Funds

So the latest news scare comes from Europe, again.  This time, the media is in a frenzy over the Italian banks and UK Property funds.  For some bizarre reason, you had investors who were invested in UK property funds who thought they could sell them like stocks.  Real estate is considered illiquid for a reason.  It doesn't trade on a minute by minute basis.  There are no daily settlement prices.  To those who are freaking out by saying the fund managers are freezing redemptions, making the analogy to Bear Stearns funds from 2007 are really stretching it here.

Property funds are not the same as hedge funds investing in structured financial products.  And Italian banks don't have a contagion risk like AIG and Lehman.  These Italian banks are unprofitable, and need to be recapitalized.  They are not holding a mountain load of toxic debt freezing the credit markets.  Lastly, you are so far into the central bank superhero theme that an Italian bank bailout is a when, not if proposition.

Not saying this market is great, but it is not as bearish as the media make it out to be.  And do not underestimate the resolve of Draghi to come up with something to prop up the European equity markets, and thus, the US equity markets.  And yes, the Fed is out of the picture.  They will be talking dovish for the rest of the year.  The central banks still rule the world, and they have a perfect excuse in Brexit to go bananas with their monetary stimulus.

Tuesday, July 5, 2016

Limited Downside

We got the typical post holiday hangover, as the short sellers come back from holiday to take their shot at shorting this "irrational market".  You don't go up in a straight line after getting such a massive up move last week.  It is natural for the market to pullback from the buying thrust, especially now that we are back near that psychological 2100 resistance level.

With bond yields so low, that is providing another stimulus for corporations issuing bonds, who can lower their interest expenses and therefore increase profits.  Those who think low bond yields are sending a bearish signal for equities is confusing the "flight to quality" bid with the need for yield bid.  A central bank influenced bid without concurrent economic weakness helps the stock market.  No, Brexit will not cause economic weakness.  That is media hogwash.

So with these low yields, I see limited downside, and more grinding upside potential.  Nothing explosive on the upside, but S&P 2140 is very doable by later this month.  At the same time, I believe the upside in bonds is limited here because equities should be able to hold up well for the next few weeks under the current central bank money printing environment.

Friday, July 1, 2016

Medicine Stronger than the Disease

You are getting the central bank gravy train trade.  Long stocks.  Long bonds.  The market is taking one portion of the Brexit, easier money, and running with it, mostly ignoring any perceived negative impact.  The market is right on this.  Brexit is pretty much meaningless from an economic perspective, as the UK will just make new trade deals, probably better ones now that the pound is a lot weaker.

The central banks have already started to overreact on this, and the bond market is forecasting that, driving down yields everywhere.  The BOE already cut rates and for the first time ever, a UK government bond yield went negative.  The ECB will probably next in line to overreact.  And the BOJ will also likely step in as well.  And so much for that Fed rate hike this year.  They are one and done.

The bond market has refused to go down despite this face ripping rally.  In fact, we hit all time lows in 10 year yields as they plunged overnight, for no apparent reason, as equities were quiet.  You are getting close to the blowoff top in bonds, as you are hearing more and more of the crowd talk about a 1% 10 year yield.  But finding the top in bonds seems even trickier than finding a top in equities.  Tough to fade such a strong move.

Even though the global economy is stagnant, it took a Brexit to finally get all the central banks scared enough to overreact to what amounts to a pimple on an elephant's ass.  It's like treating that pimple with full scale blast of chemotherapy.  The medicine doesn't fit the disease.  What amounts to nothing, the most overhyped "crisis" I have ever seen, and it will result in torrents of liquidity flooding into the market from the central banks.

This liquidity should be enough to take the S&P to all time highs, for the first time in over a year.   It helps to still hear a lot of caution from the Fast Money crowd, still worried about the fallout from Brexit.  Never mind that the UK FTSE is back above where it was before Brexit.  They have been force fed a bunch of BS propaganda from the EU bureaucrats and the rabid media, waiting with baited breath to cover the next crisis.  It ain't coming.

Gut feel is that we get all time highs sometime this month, which should be enough to form a euphoric top.  For the bears out there, it might be a good time to take a long vacation.