DB is TBTF

Deutsche Bank will be bailed out if necessary.  There was some scaremongering among the fast money crowd due to some hedge funds pulling money out of Deutsche Bank but that doesn't mean anything.  There is no way that Germany will let Deutsche Bank go down.  Even before it gets to that situation, you know the ECB will come up some kind of rescue plan because of the potential systemic risks of letting a bank with a gigantic derivatives book go bankrupt.  That doesn't mean that Deutsche Bank is a good stock to buy, because if there is a bailout, the shareholders will be diluted massively.

The market is alread starting to shrug off the Deutsche Bank fears and DB is actually up in premarket, as the fears are way overblown.  A Department of Justice fine is not going to take down a bank, as it will be settled down to a level that will be painful for DB but not put in under.

The market has been chopping back and forth as good and bad news hits the tape.  We had the OPEC production cut pre-deal on Wednesday, and then DB on Thursday.  It is perfectly symbolic of this tape.  A tape that is in a hurry to go nowhere, chopping back and forth.  Expect more of this type of action for the next couple of weeks, as October tends to bring out the fear mongers.

Sloppy Market

The action reminds me of 2015, from March to August.  Just a mess of a low volatility chop fest, but with a grinding higher bias that was quite annoying.  Of course that ended with a vol spike, but this time, the vol spike just hasn't lasted as long and its back to the S.O.S.  Low volatility, occasional one day drops like Monday that act like resets so the market doesn't go too high.  Of course those drops have very little follow through, and the selling peters out.

The market has weeded out those that sell on weakness, and has repeatedly rewarded dip buyers who build up dry powder after a couple of weeks of grinding rally.  So these dips don't encourage more selling, but are met with an army of dip buyers who have been doing well buying weakness.  That results in markets like this.  Of course, once you get saturation on the long side, you finally get a big drop in one day like you did a few weeks ago as soon as a little bearishness comes in.

Tough here, but still expecting a bit more weakness into October, despite Trump losing the debate and seemingly having no clue on policy.

Debate Jitters

This is presidential debate jitters.  Sure, we have Deutsche Bank weak but the main source of the uncertainty is how the debate turns out.  And with most events where people are negative about, its sell first, and ask questions later.

The move after the post Fed euphoria was a last gasp rally before we go down in earnest on the presidential election fears.  Mostly the fear of Trump.  I don't believe it is warranted, but a lot of people with money don't like the guy, and are scared of him rocking the boat.  So they will reduce equity positions ahead of time.

It is a tricky market, the strong rally in both stocks and bonds fooled me post-Fed and I thought we would challenge all time highs, but it was a fake out.  We have entered a risk off time period that should last till middle of October.  I don't want to get too negative because I do think that risk off period will set up a post-election relief rally that should be substantial but first things first.  We need to get people scared ahead of the elections.  Look for more weakness in the coming weeks, but not a super high level of conviction due to end of year performance chase pressures that are always looming in the background.

Fed Excuses

We got your typical positive Fed day yesterday on the FOMC punt till December.  After all, they say they are not political so it must not be because of the election.  But everyone that is a realist and not a buyer of the media hype knows that the Fed is not raising rates because of the election in November.  Nothing more, nothing less.  If it wasn't about the election, then they would be hiking already considering their "strengthening" case for raising rates.

The market ate it up.  It loves to see the Fed chicken out and it responded promptly with a quick spike and has basically gone straight up since.  It is unusual to see such a big gap up after a Fed rally day on expected non-hiking news but this market seems to always surprise on the upside.  Once again, I am surprised to see this market already blast through 2160 like it was just a tiny speed bump.

Now everyone who is underexposed to equities have to play catch up and need to buy for fear of missing another post-Brexit type rally.  Memories are short, but the crowd remembers being fooled by a scary dip only to see it reverse higher even faster.

I figured the market would be a bit more cautious about rallying into the presidential elections with Trump doing better in the polls but the fear of being left behind again is greater than the fear of a possible Trump presidency.  We got bonds screaming higher as well, and that usually means this thing is not going down today.  This central bank dependent stock market loves a strong bond market.  With 2160 being blasted to smithereens and with this screaming bond market, I will refrain from shorting this until we hit new all time highs.

Yield Curve Control

That is the first time I have heard a central bank explicitly target a non-short term interest rate.  They are in effect saying that they will use QE to keep 10 year yields around 0.  That effectively turns the JGB yield curve into a stagnant one from overnight rates out to 10 years.  They are now explicitly trying to manipulate all interest rates on the curve.  This has never happened before.

They are just admitting that they will not let market forces affect JGBs.  But the fact is that they are already doing this, because they are the market.  In effect, there is very little liquidity in JGBs because the BOJ owns over a third of the bonds and can keep buying.

The Fed meeting today should be a non-event.  The economic data has come in weaker lately and that provides just the perfect excuse to kick the can till after the elections.  Still expecting a short lived pop on the Fed non rate hike and then a selloff afterwards in the coming days.  I would use any pop today towards S&P 2155 to 2160 to short.

Looking Beyond FOMC

This is an event filled week, with the much anticipated BOJ and FOMC meetings, both on Wednesday.  Most of the recent volatility has been due to central bank disappointment, with the market going into a mini temper tantrum when it doesn't get that QE extension, or more asset buying, or even more dovish talk.  The expectations are now very high for monetary stimulus, so even just staying pat, like the ECB did causes bonds and stocks to selloff.

With all the mediocre to weak economic data we've received, I would give the odds of a September rate hike at about 1%.  I won't go to 0% because you never know if Janet Yellen had a bad meal and suddenly had a change of character.  So that leaves it to what she says, and like usual, it should be a bunch of noncommittal jibberish, avoiding mentions of the presidential election, even though it is the BIGGEST thing on their mind.   Of course, they don't want to sound political, even though they are.

We've got a gap up today, even though you had some bombs planted in NY and NJ.  The market doesn't care about terrorist attacks unless you get something really big, and what happened over the weekend was not that.  We are still stuck in that 2120 to 2160 range, and I don't expect us to break out of this range this week.  There seems to be some anticipatory buying on the Fed meeting coming up.  I see very limited upside till we get a better bottom below 2100.  Thinking that happens sometime in early October.  With Trump doing a lot better in the polls, the election uncertainty is rising as we get closer.  October should be interesting.

2120 to 2160

That is the range that has been carved out.  Until FOMC, we should stay within those bounds.  Thus, I am leaning towards going long around these levels.  Not going to go long for much size, as upside is limited.  Will also probably lean short if we get towards 2160-2170 level, although will wait till Fed proves again that they are market lackeys.  Should get a reflexive pop on Fed inaction next Wednesday.

The bond market is the center of attention these days.  The volatility in the 10 year yield is actually a bit lower than it was from 2007-2015, but this uptick in rates over the past few trading days has gotten the media into a little frenzy.  It is actually nothing like it was last May/June, and yet they make a much bigger deal out of it this time.  Of course, the reason is because stocks are reacting quite negatively to these higher rates, unlike the action last year.  

It does show you how much this market is dependent on low rates to fuel the rally.  Just another factor that is a long term negative for this market.  At these high valuations and deteriorating fundamentals, even a minor move higher in interest rates upsets the equilibrium.  You are getting closer to a situation where you need near perfect conditions to keep this bull alive.

Volatility is Back

After a long lull, we finally have volatility back in play.  After what was a much bigger than expected rally (I sold a bit early yesterday during regular trading hours), we now have a fairly big gap down awaiting.  Usually when that is the case, bonds are strong, but they are basically flat from yesterday's close.  This is actually a bit like May 2015, when higher bond yields were looked as a negative, and the stock market weakened when bonds sold off.  This looks like a similar scenario, where bonds are leading stocks, and not the other way around.

What yesterday's strong rally showed you was the eagerness of those who were left in the dust, underexposed to equities looking to get back to normal stock exposure levels.  Also you saw a lot of weak shorts who covered when they were getting run over intraday.  There is not much conviction on the short side, but there seems to be a "what, me worry" attitude on the long side.  That is worrisome for the dip buyer, so I will be more cautious when the next dip comes, probably willing to wait longer than usual.

A dovish Fed member yesterday afternoon gave a bump higher, but doesn't have much staying power these days as yields creep higher.  We should chop back and forth between yesterday's low and high till the Fed meeting.  I am not really interested in putting on much size here, because the conviction is not that high yet.  But I do think shorts at the top of the range are safer than longs at the bottom of the range.

There will be expectations that the Fed will do nothing and that is the right call, as all signs point to Yellen taking the easy road and kicking the can another 3 months till after the election.

Waiting patiently for either the bears or the bulls to overplay their hand.

Elevator Down

That was quick.  All that work put in above S&P 2120 gone up in smoke in 1 day.  And we have a chunky gap down from the cash close to add insult to injury.  There is clearly a LOT of players offsides who didn't expect this sudden swoon.   They are the impatient ones puking today, who chased the market higher, with FOMO on their minds.  They also didn't expect Draghi to be so nonchalant and complacent, thinking the markets are fine.  Well, the markets are fine because they expect him to always bring out the big guns.  When he doesn't, the markets aren't fine.

This is especially painful for the investment community because bonds also are getting wrecked.  It is risk parity hell.  But these forced sales and panicky reactions don't last long, so I do expect a bounce from these levels in the premarket today.  It won't be a big bounce, but we should chop from here to those prices seen on Friday for the next few days.  I have done some buys in premarket expecting a bounce soon.

This is why I was so cautious about buying dips during that past 6 weeks, and mostly did nothing.  Because a selloff like Friday was a matter of if, not when.  So it was poor risk reward to buy small dips when you put yourself in danger of being stuck in a monster dip like last Friday.  At the same time, it was tough to short because the grind higher just didn't give any easy entries as the markets were overbought, but not overextended to such an extreme as to provide a good opportunity.

This selloff could have been the best thing to happen for this bull market, because it will shake any tough guy intentions from the Fed to be hawkish at their September meeting.  With Trump gaining in the polls, and Hillary fainting, literally, Yellen and her crew will not want to rock this boat anymore before the elections.  They will want to be supportive of the market.

Don't forget, there are plenty of investors that were left in the dust on that post Brexit surge higher that didn't chase and were looking to get back in on a dip.  They will be the buyers over the next few days.

USS CB Battleship Sinking

The USS CB (central bank) ship is running into some icebergs.  First it was the hawkish words from the Fed at Jackson Hole.  Then rumors of the BOJ pulling back from buying more long term bonds, wanting a steeper yield curve.  And then yesterday, with Draghi not delivering on more QE promises because Brexit was a huge nothing-burger.

That is what it takes to finally crack this boring market.  The old saying that the first pullback after a long rally is usually buyable.  I agree.  I haven't bought anything yet, but if the ES can get to the break out area at 2120, I will be interested in buying for a move back higher on a Fed that will delay their rate hike till after the election and if the S&P is above 2180.   Remember, the Fed doesn't like to talk tough if the S&P is weakening.  They also have some excuses with weaker than expected nonfarm payrolls and ISM numbers.

The bond market is trading with the stock market these days, with a highly positive correlation.  That is not common for extended periods of time.  The market has sniffed out that corporations need low interest rates to continue issuing corporate bonds at will in order to do wild and overvalued acquisitions and stock buybacks.

I am waiting for one more push lower next week, and then will enter into some buys.  Finally the bit of action which I have waited for.

Test of Patience

There are no called strikes in investing.  Unlike baseball, you can take as many pitches as you want and you don't have to swing.  But it is hard to just sit there in front of the computer and do nothing when your job title is trader.  It is excruciatingly boring in the stock index futures space, and it is not much better in the bonds or commodities.

You need to have investors losing money in order for them to take action.  Right now, most investors are up on the year, and near their highs.  They are comfortable and calm.  There is no rush for them to make any moves, to either catch up or to protect their gains.  Most are just content to follow the indexes as tightly as possible and not do anything rash to get fired.

When investors are cool and calm, it makes for a difficult environment for traders.  These are just not the type of markets that I can make decent gains in.  And I don't want to play bigger just to squeeze out some gains in a nonvolatile market.  The markets have been churning, but not moving enough in one direction or the other for me to find good fades.  I guess buying the small dips have paid off consistently for the past several weeks but it is like picking dimes in front of a bulldozer when the indices are overvalued and at all time highs.

Just trying to be patient here and just watch and wait for the right time to strike.  As Trump has been catching up to Clinton, we should be getting some presidential election nervousness in the coming weeks.  Perhaps after the FOMC meeting is out of the way and the Fed confirms that they are all talk, no action.  Anyway, I think we should get a healthy pullback of at least 3-5% before the election, just a matter of when it happens.  Perhaps a more dovish than expected Fed in September 21 will be the final blowoff for this rally and I would use that to short.  In the meantime, I wait patiently for something to happen as the paint dries.