Wednesday, June 21, 2017

Bonds Will Be the Signal

The relentless rally in the long end of the bond market continues.  The Treasury yield curve is aggressively flattening ever since the market interpreted Yellen as being hawkish.  Let's not pretend like the Fed actually watches the real economy.  If they did, they would be doing nothing.  They would have done nothing for the last 3 years because nothing has really changed.  No, they look at the stock market and the stock market is telling them to tighten.

I am waiting for one of two things:
1) VIX rising with the market.
2) Bonds selling off when stocks are flat to down.

We are not getting either at the moment and that makes me reluctant to short.  Market tops can seem to last forever.  I've learned that a market gives you many opportunities to short a top but few opportunities to buy a bottom.  So there is no rush to short and miss out on the top.  There will be plenty of time to get in there and blast away at the short side at good levels.

I will be taking a blog break for the rest of the week.  Will be back next week.

Monday, June 19, 2017

Still Waiting to Short

It is getting closer to the right conditions to short but I continue to be cautious.  10 year yields are still too low, and I would like to see the put/call ratios come down a bit before I proceed.

I am surprised at the healthy gap up post opex today, as usually post opex during the summer is equity negative.  I figured there would be some more nervous hands coming into this week after the dip in tech stocks and with a hawkish Yellen.  It almost seemed like too good of a set up to short.  I'd rather short when there is a lot of good news, not when there is worry.  Last week, I could feel that investors were a bit worried.  It showed up in the market data statistics.

It's looking more like there needs to be another test of the highs in SPX before we can get another move down.  I will wait wait it out at least another day or two, and reassess the situation.   The last thing I want to do is short too early in this dull grinding up  market.

Friday, June 16, 2017

Fed Normalization

The crowd has interpreted a lot from the FOMC meeting on Wednesday.  The consensus is that the Fed is hawkish and barring a big correction in the stock market and/or lower inflation, they will remain on the war path towards "normalization".  I put quotation marks around normalization because I think ZIRP is the new norm, and should not be considered extreme policy anymore.  This isn't the 20th century.  In the 21st century, ZIRP should be considered the baseline.  NIRP should be considered accomodative, and PIRP (positive interest rates, even 1%) should be considered tight.

I believe the crowd has overreacted again to the Fed.  In the statement, they stated they are monitoring inflation closely.  Codeword for they are worried about not reaching their inflation target.  Or Fed speak for they will probably not hike in September.  The Fed was boxed into a corner this meeting.  The Fed funds futures were pricing in a 90+% chance of a hike, and of course, they will hike if the market prices it in.  They don't want to spook the market in either direction, but especially in a hawkish direction.  What if the Fed funds futures were pricing in just 50% odds of a June hike?  Then I think they would have gone their normal dovish route, and not hiked rates.

You had the 5-30 yr Treasury yield spread shrink from 109 bps to 102 bps since the meeting.  The bond market is pricing in more hikes into the belly of the curve, and saying that will lead to lower long term rates.  I believe this is an overreaction.  Despite what the dot plots say, the economic data is telling you that the Fed will have a hard time pushing forward with normalization.  The Citi Surprise index has been dropping like a rock.  CPI, retail sales, and NFP have been lower than expectations.  It seems like the rate hikes are starting to work in slowing down credit growth.

Don't even get me started on balance sheet normalization.  The hints they are giving are of a turtle like pace of reducing repurchases that you will likely see another recession before they can even reduce the balance sheet 10%.   Then in that recession, what took them 2 years to reduce will be made up in 3 months of QE.  It is like worrying about how you will spend all your stock market gains in 20 years when the S&P goes to 10,000.

Right now, the stock market still doesn't show any overt signs of weakness, but its a matter of money flows into equities, a FOMO trade gone into overdrive.  But the signs are starting to creep in that the equity uptrend is near an end:

- The suddenly spastic one day dumps that happened on May 17 and again June 9.
- The lagging Eurostoxx despite continuous heavy inflows.
- Crude oil trading at $45.
- 10 year yields rising yesterday despite S&P being down 15 points intraday.

Just like 2015, it is not going to collapse without giving the dip buyers a few pullbacks to snap up.  Then suddenly the next pullback turns into a trench, like August 24, 2015.  I see a similar situation here.  I see the pullbacks becoming more frequent, the resistance above more defined, and then the bottom falling out into a panicky selloff down to SPX 2260-2280.

Wednesday, June 14, 2017

Pent Up Demand

The release of pent up demand in the bond market has been explosive since the March FOMC meeting.  From election day in November till the March FOMC meeting, allocations to the bond market were either moved to cash or the stock market.  You have to remember that since 2008, most of the inflows into financial assets have been to bonds, not stocks.  This is a secular trend that will last for many years, as the developed world population ages, and goes towards less risky assets.  It doesn't hurt that you have had massive QE in the US followed by Japan and Europe.

People don't want to stay in cash for long, they need to get longer in duration and down in credit quality to get yield.  That is why corporate bonds are so popular, because it provides extra yield without having to take bigger risks as with equities.  All that demand that was postponed because of fears of massive tax cuts and infrastructure spending have been for naught.  Now that bond investors feel less fearful of a big rise in interest rates, they are piling back into bonds.

I have not been bullish enough on bonds this year, although I did manage to capture much of the move higher from March to April.  I missed the second wave higher in May/June.  The though process was simple.  I didn't think stocks would go down much, if at all, and would likely grind higher or be range bound in a tight range, at worst.  Therefore, the upside in bonds would be limited and since bonds were overbought, I thought it would give me another opportunity to buy at lower prices.  But bonds started to go up with stocks in late May and early June, and the plan went awry.

This little episode over the past month was a big missed opportunity.  Also there was a  sudden surge in the number of speculators getting long 10 year Treasury notes, and I viewed that as a contrarian signal.  It is a contrarian signal only if the market itself is not in the middle of a strong trend.  When in the middle of a strong trend, the market will go where it needs to go, with or without speculators along for the ride.  Right now, bonds are in the middle of a strong trend higher.

One can come up with reasons, such as underperforming economic data or the dissipation of the Trump trade, but the main underlying reason is the demand for fixed income at this time and at these levels.  It reminds me to never lose sight of the big picture when trading.  You want to put on trades that you are comfortable holding long term, not just short term.  It helps to avoid trying to capture every little squiggle, even those opposite of your long term outlook.

We have an FOMC meeting today, it should be a boring one.  The Fed is still not in a position to be overtly dovish because of the strength in the stock market.  But that is the direction they will be heading towards, because their dot plots for 5 more rate hikes till the end of 2018 is grossly misaligned with the pricing in short term interest rates markets.  And just like 2016, I expect them to come back towards the market's point of view, which means they will have to talk more dovish going forward.

I am getting more interested in shorting the S&P now that we've retraced the down move from Friday.  Usually opex week during a futures expiration month is bullish for stocks, so I will wait to see what Yellen says, and will hope that there is a pop higher which I can short with confidence.  I will be leaning short for the rest of the month as long as we are above 2420.  A move to 2400 is probably right around the corner.

Monday, June 12, 2017

Volatility Rising

These are just baby steps, but volatility is coming back.  I haven't seen that kind of out of the blue Nasdaq selloff since October 2007.  What I mean is that the Nasdaq was rising steadily, everything was fine, and without warning, it just dumped a load, not at the open, when it usually would happen, but during the middle of the trading day, after S&P had hit an all time high.  And on no news.

It's funny.  Nothing bad happened on Thursday after the Comey hearing.  And when the supposedly scary news about the UK vote leading to a hung Parliament (whatever that is) led to a small spike down in futures, it rallied all the way up till mid day US trading hours on Friday.  And then the dump on no news.  A perfect way to trap those who waited for the all clear sign to buy.  They were greeted with nasty little selloff to head into the weekend.


I don't want to make too much of one day, but we've been seeing a lot of volume go towards stocks that are going down and not that much volume go to stocks that are going up for the past few weeks.  And the ones that are going up got stopped in its tracks on Friday.  The selling pressure was building underneath the surface, as the indices showed that everything was fine.  Energy trades like a dog with fleas.  Similar to summer of 2015.  You know what happened soon after.

Fast Money on Friday was complacent, and viewed the Friday selloff as a one off move, nothing meaningful.  They seemed to want to buy the dip.  I disagree.

I've been cautious with putting on shorts but Friday was a clear signal that it is time to be less cautious to short.  I still want to wait for a couple of rally days before I short, but I won't be waiting for all time highs anymore.  A move to SPX 2435 would be enough to get me interested.

Bonds are not acting that strong considering the recent equity pullback.  It could be combination of 3/10/30 supply coming up, Fed meeting on Wednesday, and more bullish positioning by speculators.  I see limited upside and downside for bonds at the moment.  Looking out beyond the next few weeks, I would look for a continued move lower in yields as the economy is just not as strong as most traders believe.  We are late cycle in the economic expansion, and the Fed is putting the final nails in the coffin with their belated rate hikes, which should have started in 2013.

Think stocks rally from here into the FOMC meeting on Wednesday, but not playing the long side.

Friday, June 9, 2017

That Elevated Quickly

Wow.  Not very common to see a massive Friday afternoon Nasdaq selloff after hitting an all time high earlier in the morning.  What's even more interesting is that usually bonds would be screaming higher on this kind of equity selloff but its only been able to work its way back to unchanged on the day.

The weakness in the bond market while equities were flat was the tell.  This stock market is heavily dependent on low rates.  When there is any kind of bond market weakness, the air is just too thin up here above SPX 2400.  Not enough oxygen to keep the pumps going when money becomes even slightly more expensive.

That is why you will not see a big bond selloff to say 3% 10 year because then the wealth effect central bank game would be up.  And there is no way central banks are going to throw in the towel at this point.  With the world up to their eyeballs in debt, any significant move lower in bonds is enough to pressure equities lower.

After today, Nasdaq is officially on my short watchlist of macro markets.  The hot money is in Nasdaq, and whenever the hot money starts to crack, it grabs my attention.  This down move (with bonds not going up) only strengthens my conviction that we are topping out this month.  Get ready to short any rallies next week.  Best to put on a short during opex week, as post opex and corporate buyback blackouts (from Monday June 19) could be painful for longs.

No Worries

Well Super Thursday (ECB meeting, Comey hearing, UK vote) is past us with nothing but quick little dips that were all buying opportunities.  Same old, same old.  Now we are making marginal new highs this morning, and I can only say that this is feeling very toppy here, with very low put/call ratios and without much acceleration once we reach new highs.  The market looks overbought and exhausted, running on fumes.

I am trying to hold back on laying out the short till next week, but it is very tempting to start here with SPX trading 2442.  Bonds are finally starting to selloff and that is a good sign here that the move higher is not going to last long.  It seems like CNBC optimism on bonds did the job in forming the top for this move.  I expect 10 year yields to trade 2.15 to 2.25% for the next several days.

The second half of the year should trade very differently than the first half.  The complacency is so thick you can cut it with a knife.  Expecting a lot more volatility in the second half, as these kind of up moves in emerging markets and Europe are signs of investors reaching for more beta and catch up plays.  A bad sign for the intermediate to long term.

Wednesday, June 7, 2017

Bonds vs Stocks

Was looking at some CNBC videos yesterday, as there is plenty of downtime in this sleepy market.  You rarely get CNBC pundits talking about bonds.  It is a stock focused network, and rightfully so, because talking about bonds is pretty boring.  Stocks are where the action is.  But you had a lot of talk about bonds yesterday.  If you look at the chart of the 10 year yield, you can guess that it was bullish talk about bonds.


The interesting thing about this bond market move over the past few months is that stocks are also rising.  This happens more often than people think, as stocks and bonds are not as tightly correlated as believed.  Just looking at what happened from 1995 to 1998 as the 10 year was downtrending as stocks skyrocketed.  Same thing for the 2009 to 2012 period.

Since CNBC is talking about bonds, one can guess that the up move is over.  Yes, probably in the short term.  But I actually believe that bonds will rise in the intermediate to long term, looking out more than a few months.  It is getting clearer that the bond market overreacted to Trump's election and it was sell first, ask questions later.  The reflation trade has mostly been hype, as inflation hasn't upticked like many expected, and growth has been mediocre.  And this is supposed to be the easy part of the cycle, as inventories are re-stocked, after destocking to lower levels in 2016.

I have said this before, but all else being equal, a strong bond market is a positive for the stock market.  The amount of leverage on corporate balance sheets has been increasing steadily, and anytime they can borrow at lower rates, it is a bonus.  Some may interpret the bond market strength as a sign of future stock market weakness.  That is what I heard from a couple of CNBC guests yesterday.  But its more often the opposite.  In any case, using the bond market to predict the stock market is not very reliable.  But if you had to make a guess, bond market strength is better for stocks than bond market weakness.

The put-call ratios have been quite low the last few days.  That's usually a short term indicator of weakness.  Sure enough, we got a little bit of weakness on Tuesday.  I still don't think its the right time to short just yet, as I'd rather play it conservatively on the short side.  Next week could be a good time after the Fed shows their hand.  There are some events tomorrow, the ECB meeting, UK vote, and Comey hearing.  Usually the market comes away higher after those type of events, not lower.  So expecting a rally tomorrow and Friday.

Monday, June 5, 2017

Economy Slowing Stocks Don't Care

The initial economic thrust off of the 2016 mini dip in economic activity is running on fumes.  The inventory restocking cycle off the destocking in 2016 has mostly played out.  The economy is now running closer to its natural level, with no pent up demand.  You have seen that playing out in the economic surprise index over the last few months.


This shows you Wall Street getting ahead of itself in projecting increased consumer/business confidence into stronger hard data, and that hasn't panned out.  Also, you are getting the usual lagged effect of the few Fed rate hikes appearing in the economy.  Yes, even going from 0.5% to 1.00% is meaningful to the economy.  I continue to believe that the neutral interest rate for the economy is closer to 0% than PIMCO's new normal 2% that they often espouse.

The higher global debt ratios amidst a slower growing economy requires lower interest rates.  Otherwise, you get a scenario like Europe post 2008, pre NIRP, when you had really slow growth because the interest rate levels were too high to support such an indebted economy.  Now that NIRP has worked its way deep into the Euro financial system, it has boosted growth to levels that are long term unsustainable, but feels good while they pump.

In the next 12 months, you will see the other side of the complacency, as fear and worry will makes its way back into the markets with a vengeance, as the value buyers will only be willing to put in bids if you get back under 2000 in the SPX.  There is a lot of air underneath, it just doesn't feel dangerous because of the super low volatility.  But when the hedge funds and the index fund fans start seeing minus signs in their asset holdings, they will get nervous, like they always do.

Itching to get short, but will probably wait till the FOMC gives another dovish hike and inadvertently pumps this balloon even more.  SPX 2450-2460 area looks like a strong sell zone.

Friday, June 2, 2017

Tailwind from Rising Bonds

The market is enjoying its Goldilocks scenario.  The bond market is rising as the stock indexes hit new all time highs.  This weak nonfarm payrolls number is only making it better.  The bad news is good news theme continues.  The stock market wants low rates, and this NFP number is helping to continue that trend.

The last thing this market needs is a hawkish Fed as the economy is just mediocre, and with fiscal stimulus getting pushed back further into the future.  This nonfarm payrolls number all but guarantees that the Fed will tone down on their hawkish talk, and although they have pretty much committed to a rate hike in June, it probably puts them off the table in September and probably December.  And if the stock market tops out soon, as I suspect, then June could be the last rate hike of this cycle.

At the end of a long bull market, you would expect the crowd to be fully on board, and enthusiastic about stocks.  But a mediocre economy and deep scars from 2008 prevent that from happening.  It could be one reason why this bull market has lasted so long, because there hasn't been a huge burst of equity inflows by retail to exhaust the buying power.  It has come in small increments, along with heavy inflows into bonds, helping to keep the bond market strong, which in turn supports the stock market indirectly.

How does this bull market end?  The most obvious way is for the economy to get weak enough that corporate profits start dropping meaningfully, more so than in 2015/2016 when oil was going down.  A financial shock from China wouldn't really be a big enough hit to the US.  It would have to be more internal in nature, such as the US economy entering recession.  It will happen eventually, but until then, you will not get a bear market unless you see a bubble form and then pop.

I just have a hard time seeing a bubble form with the economy just not strong enough to lift investor psychology into buying stocks with reckless abandon.  So that means we can have 5-10% corrections, or even 15% corrections like late 2015/early 2016, but not a downtrend into a full blown bear market.

SPX is above 2430, I see perhaps 1% upside and then we should chop into a range from 2450 to 2400 for a while.  That is my not so confident forecast, as the low volatility makes it harder to predict market direction.

Wednesday, May 31, 2017

Marginal Highs then Flush

They are piling into a few large cap stocks and driving up the averages.  The Nasdaq 100 looks bubbly, but the Russell 2000 just chops around.  This happened for a couple of years in the late 90s and also a bit in 2007.  Usually Russell 2000 underperforms when stocks are going down, not up.  Also bond yields are trending lower despite rising stocks.  This has been going on for almost 3 months now.

The macro signal takeaway from this action is that the US economy is not as strong as the media advertises, so investors are piling into the few stocks that have decent growth, although very overvalued (FB, AMZN, etc).  This is very late state bull market price action.  It backs up my thesis that we are in a 2015 like environment, where the market chops around near the top and gets heavier and heavier until it eventually crumbles.

There is still room for this thing to go up a couple more weeks, perhaps as much as 2%, but the odds are favoring shorts more and more as the days pass.  Hard to pick a top in this bull, so you have to have nearly perfect shorting conditions to enter short.  I would wait for another week or two, if the market is closer to SPX 2450, then you can short with confidence, knowing that the upside will be extremely limited at that point, and vulnerable to a cascade lower.

With rates staying low, there is no rush to short here.  If the 10 year starts acting weaker, and yields go up to 2.4-2.6% area, then you could have a pullback.  If bonds act strong, you will see limited weakness in stocks as lower interest rates support the leveraged corporations.

It is a boring daytrading market but I see potential for a short in a couple of weeks.  Laying low till then.

Wednesday, May 24, 2017

Bitcoin and CNY

They are going out pretty far on the risk curve these days.  Bitcoin is around $2400, Ethereum, the new hot Bitcoin wannabe, is rising even faster.  Back in 2013, when Bitcoin was on the rise, the stock market was bullish and the bond market was bearish.    This time, it is a bit different.  While the stock market is bullish, the demand for bitcoins seems to be from those looking to convert from CNY to dollars, using bitcoin as an intermediary.



The Chinese demand is the big driver here.  It doesn't paint a pretty picture about the value of the yuan, and how artificially supported it is by the Chinese government.  That cannot last long term, and their capital controls are only a temporary stopgap measure, before finding the true value of CNY.  I view the true value of CNY to be about 50% less than current value of 7.  So CNY/USD ~ 14.



On the road to yuan devaluation, there should be a boom in Chinese exports as the cheaper currency should help make China more competitive again versus lower cost manufacturers.  It should be deflationary for manufactured goods, which will help consumers but hurt non Chinese producers.  This is something that should play out over the next 2 years.  The signs of Chinese weakness are already showing, as the PBOC has pumped in massive liquidity this year to keep Humpty Dumpty together ahead of the National Congress meeting in the fall.

As for the S&P, it is now day 5 of the rebound, and we are at 2400.  This looks to be close to the top, as the put/call ratios are now very low again and the drop last week almost completely forgotten.  I see good risk/reward for a short here, with a target for a move down to 2375.  Just looking for 25 SPX points, but that feels like a lot in these low volatility times.

Monday, May 22, 2017

Chopping like Spring of 2015

The big rally on Thursday and Friday after Wednesday's big drop has proven that this market is committed to trading sideways.  And just like you had the Fast Money traders nervous on Wednesday, they are back to praising this market's resilience on Friday.  All it has proven to me is that its likely to chop around until a nasty fall later this year like 2015.

As the equity market has gone sideways, the bond market has been going up.  The bond market isn't buying the market consensus view that we will be having a lasting economic recovery or a big fiscal stimulus.  Usually the bond market is right.

The big inflows into Europe and emerging markets is a warning sign that risk taking is back in style among asset managers.  Almost all of them who come on TV are pumping European stocks.  That usually happens when the primary driver of the global equity boom, the US, is viewed as overvalued, so the "clever" fund managers are buying "cheap" European stocks to get better returns.  It is working this year, but will it keep working?  I have my doubts.  The ECB is likely going to be tapering asset purchases soon, and the European economy is just not that strong, and the European stocks aren't that cheap, being priced at 15 times forward earnings, compared to 19 times for the US.  I would rather pay 19 times forward P/E for US than 15 times forward P/E for mediocre Europe.

It feels like a safe market to sell rips now, with 2400 looking to be solid resistance, and seasonal factors favoring selling here.  True, there is not that great enthusiasm for stocks, but there wasn't that enthusiasm at the 2007 and 2015 tops either.  I assumed that the lack of bullish sentiment in the 2015 summer period meant that equities could keep grinding higher but I was completely wrong then, underestimating the weakening fundamentals and the high complacency amidst a market that didn't have a sustained correction for quite a long time.  That is where we are at right now, although the late 2015 early 2016 selloffs did a lot to reset positioning to more cash heavy levels.  That has been completely reversed and we're back closer to 2015 type of positioning, with lots of interest in European and emerging market equities, and heavy ETF inflows.

I would be a seller here near 2400, to cover on dips back down towards 2350.  Play the range, we're probably going to be chopping for a while.

Thursday, May 18, 2017

Waiting to Get Long

Yes, it is the obvious trade, but it is the high percentage one.  A waterfall decline can come anytime, theoretically, but usually not this early in the chop phase.  Yesterday was savage, and it means that a one day wonder decline is out of the picture, but it doesn't mean that you will be getting an extended dip.  It was only in March when we finally stopped going up every day, and just this week when we've rejected that SPX 2400 area as being strong resistance.  For such a strong extended rally, and a really long bull market, it takes a lot more choppiness to finally go down in earnest.

I am not long yet, but I am looking for a spot to get long close around SPX 2340-2350.  I expect this dip to be brief, but upside should be limited to 2390.

Wednesday, May 17, 2017

Hit the Ceiling

And it isn't that high.   There is very little potential upside in this S&P market.  Same goes for Europe or emerging markets.  They are all near the top of their moves.  The risk/reward for longs is getting worse.

The excuses don't matter.  It's because of Comey.  Trump is getting impeached.  It will delay tax reform.  Etc.  The market got too comfortable post French election, and it needs the periodic dips to keep the market honest and the bulls on their toes.  That is how the market operates in the absence of a significant supply/demand imbalance.   The market is sufficiently high and saturated that it has trouble staying up for long without these little dips.

Although we are still getting equity inflows and some buybacks, the IPO supply has been increasing lately, and that is what weighed down on the market last week.  Seasonally, it is also getting to be a bad time of year, as we approach summer, and ahead of a potential ECB tapering announcement and another FOMC rate hike.

On the positive side, the VIX tells you that a big drop is very unlikely.  It remains very low, and reluctant to go higher.  The first sign of market stress shows up in volatility, as volatility rises along with the market.  That is far from what we currently have.  Another positive is the strength in the bond market, which is a positive for all interest rate sensitive sectors.

I am not in the "will be a big bubble" camp.  It feels more like a chop in a narrow range for a few months, and then drop situation.  So not outright bearish, but definitely not bullish.  Sort of like 2015.

By the way, the market may be inactive, but that's not necessarily a bad thing.  The less volatile markets while less profitable, are definitely more relaxing and less stressful.  One can't always be in top gear.  The active times will come again.  It is sometimes good to be able to trade less and observe and not worry about missing any opportunities.

Monday, May 8, 2017

They Bought the Rumor

The Street knew Macron was going to win, so they bought ahead of the French election results, hoping for a payoff on a Macron win.  Well, the payoff happened the few days before the election result, as fund managers were buying up Europe and shorts were covering quickly ahead of the weekend.  Now you have a bit of the hangover from that buying binge.

The market is too calm for it to go down right away, with VIX at 10.1 right now, but there is too much complacency for it to go up much either.   With crude oil and industrial commodities weak, it is easy to say that China is weakening.  That is obvious, but what is less obvious is whether the equity and bond markets really care until something serious happens.  And nothing serious has happened yet.  Eventually, China will blow up but their leadership is trying to delay the crash as long as possible.  Which means they will probably go right back to loosening the short term markets there.


 I feel like I have been repeating myself so I will refrain from putting out any more posts until there is a material change in the market.  Since a big bubble seems very unlikely, it is time to think about the next big trade in the coming months.  It will likely be a bear trade.

Friday, May 5, 2017

China Again

The source of the weakness this week is China.  Apparently, any mention of deleveraging send the rats fleeing ship.  Of course the overnight weakness in crude oil was faded.  When have we actually had sustained overnight weakness into the opening US bell?  It's been a fader's paradise lately.

Also got word that Dennis Gartman is worried about a correction.  It seems like the weakness in crude oil got to him.  It just means that we have that wall of worry which this stubborn bull will climb.  China weakness will matter when the strong indices actually flinch on it.  Right now, they are rightly ignoring it because China affects commodities more than it affects the S&P.

The crude oil weakness is another thing that points to similarities with 2015.  So I expect similar price action, as we chop near the top.  No trades imminent.

Wednesday, May 3, 2017

Not Doing Anything

There is almost no movement.  It is an investor's market.  Not even a swing trader's market, much less a daytrader's market.  They are squeezing out as much volatility as they can.  Unfortunately for bears, when the VIX is hovering around 11, you don't get much downside action.  Of course, you don't get much upside action either.  Back in August 2015, the last time we got a sharp break lower to end an uptrend, the VIX was trading around 14.  In 2014, when you have decent pullbacks in August and October 2014, the VIX was trading between 13-14.

There is almost no precedence for a sharp drop when VIX is trading at 11, or even 12-13.  It needs to be above 13 to have some precedents where you saw near term significant weakness.

This is an unusual market.  I see very little downside, but also, very little upside.  Even though VIX is at 10.7, it seems overpriced here.  It's a boring market, and we can only wait for things to get more active.  In the meantime, we wait.

Monday, May 1, 2017

Bit Like 2015 But Worse

With the way that we've been chopping around the past couple of months after a big up move, it reminds me of 2015.  I hesitate to say we will move the same way, because obviously some things have changed, but technically, and price action wise, this looks like a more subdued, lower volatility 2015 redux.  The only difference this time is that you have a potential fiscal stimulus catalyst in the form of "massive" tax cuts, which will likely not be revenue neutral.  Back in 2015, there was nothing to look forward to.  Now, there is, which makes a big difference psychologically for the equity investor.

The equity market always thrives on hope, and carrots in front of it.  The carrot is that massive tax cut.  That is the only thing better than 2015.

Fundamentally, aside from that, everything is worse, not better than 2015.  Worse valuations.  Worse demographics (getting worse slowly year by year).  Worse economic situation in China (more debt, more pressure on yuan).  And most of all:  worse monetary policy (higher interest rates, tighter, potential balance sheet/QE reduction).

Something to think about when considering trades over a longer term time horizon.  If you are long equities, be quick to take profits at this level.  If you are short, and can hang on to the position, then you will eventually get paid.  Don't forget the big picture, and remember betting on a bubble to happen is betting on an outlier event that usually doesn't come.

Friday, April 28, 2017

Longer Time Frames

In a slow market like this, the best trading strategy is to extend out the time frames.  If you are moving size, daytrading doesn't work anymore.  Sure, those trading up to a few thousand shares will be able to get in and out without alarming HFTs into action.  But those trading bigger size face slippage problems when daytrading in low volatility HFT infested waters.  Only with higher volatility, can one overcome this size handicap because of the bigger profit potential.

In general, it is better to focus on trading individual stocks in a bull market and trading the indices/futures in a bear market.  Some may disagree, but it is a good habit to look for new markets to trade, to find pricing inefficiencies and patterns in places that are less familiar.  That way, if you can find edges in more markets, it gives you more opportunities, which is helpful in slow markets like this.

This reminds me of a past post, where slow times reinforce the need to make as much as possible during active times:   Feast or Famine

It in times like these where I am reminded of the importance of making hay when the sun shines.  You absolutely have to kill it and be greedy when the opportunities are there because once they are gone, it will be hard to make anything when markets turn bad/dull/unpredictable.  A good post on Elite Trader made in August 2007 (a GREAT trading market) that still sticks in my memory:


jdeeZERO05: can't ask for more volatility than this. I crushed my profit target already, i'm going to the bar. this fucking rules.

RM: Quitting early after a big gain is the second worst trait a trader can have. No offense, but you'll never be rich.

jdeezero05: have fun giving back your profits, not my game.
...
to me it makes sense to learn to crawl before you even attempt to fly. 20 YM points a day is my goal. When I've hit that I'm done. If i got a hundred on the week I've been done. 15 point stop, if I get down 40 points on the day i'm done. 120 points down for the week, i'm done for the week. Haven't had that happen yet with this style management yet though. 5k account, 1 car. This morning though, I rode the trend, tried to jog for the first time. Could be done for the week if I want. The remainder of this week has no emotion at all. Market is going to have to entice me with the highest probability setups I can get to risk what I made today, all the pressure is off now on the week.

To me this is exactly why most traders fail. Good look getting "to the moon" when you can't even crawl without falling on your face. Not saying thats your situation, but giving me that advice is just shit advice, no disrespect.


RM: A surefire recipe for permanent piker status if I ever saw one.

For some reason I'm in the mood to do you a favor and take the time to explain what you're doing here:

My job is to collect strands of beads off the streets of New Orleans. I need to collect 500 strands every year to make a living, so I figure I just need to collect 10 strands every week.

The past few months have been tough- I've had to work pretty hard to collect my 10 strands/week. However, this week is Mardi Gras, so there are currently beads all over the place for the taking. The streets are flowing with a massive bounty- beads are literally everywhere! I've already managed to collect my 10 strands within the first five minutes of Mardi Gras week. This is great! I've already made my weekly quota, so naturally I'll now be taking off the rest of the week. Beads crunch under my shoes during my walk home, but I don't bother to pick them up. Why should I bother? After all, I already have my weekly quota in hand, so the pressure is off. Time to hit the bar!



Wednesday, April 26, 2017

Bull Bore Continues

The energizer bull market goes on and on.  It is a bit tiring to see the same old action, predictable as it is, even when one is on the right side.  But you can't force the market to behave the way you want.  The market will do what it wants to do.  And right now, that is to bore everyone.  

I sold S&P into the rally yesterday, and I am back to a neutral view.  We could pullback a bit, here, but probably only a little bit.  If we did, it would just set up a rally in the first week of May.  The VIX is actually probably overpriced here even at 10.7.  It is that dead of a market.  Think more boring version of the first half of 2015.  

I have a bit stronger view on the bond market, which is negative over the next few weeks.  In June, we are likely to see a ECB tapering announcement and FOMC rate hike and balance sheet taper talk.  Plus, we've seen heavy inflows into bond funds so far this year.  Lastly, you will start to see more concrete tax cut plans coming out (not vague tax plans like today) over the summer, another thing that will weigh on bonds.  Trump has lost some credibility with his poor execution, but he seems determined to jam through a budget buster of a tax cut through Congress.  

Monday, April 24, 2017

Lessons from the French Election

The way to become a better trader is to learn from experience.  Usually the memories last much longer if money is on the line.  The stock index futures and the euro rocketed higher on the news of the expected, Macron 1st, Le Pen 2nd.  On the surface, that makes no sense.  Isn't the market supposed to price in the expected outcome?  Yes, if the other outcomes are such low probability or low impact that they don't factor into the overall positioning ahead of the big bad event.  But this time, the fear of a Le Pen Melenchon 2nd round battle was enough to get investors hedged up by either selling index futures, buying bond and gold futures, selling the euro, or selling the French OATs.

The Brexit vote and the Trump victory had a lot to do with this.  Both were considered unlikely events and they both happened.  This led to investors' distrust of the opinion polls leading up to the French election and the fear of Frexit under Le Pen or Melenchon, who was surging in the final days.  And with the general propensity to sell the supposedly risky asset ahead of the event (a.l.a. Treasuries ahead of a FOMC rate hike announcement, stocks ahead of French election), most of the time, there is pent up buying demand after the event is over, regardless of the outcome.  It is only logical that those who already sold ahead of the event, probably don't have much to sell after the event.

The French election has been considered a risk event for months now.  The buildup was not as great as I expected, with Syria and North Korean distractions, but it did heat up in the past several days.  That in itself told me enough that there was a decent discount being built into stocks due to that uncertainty.  Now that most of the uncertainty is over, although there is still round 2, the markets aren't dumb. Macron is an extremely heavy favorite over Le Pen in the next round because the lead is so sizeable and well beyond the margin of polling error.

It gets harder now.  The easier trade was to get long ahead of the event.  Now it is more even, although I would still favor the long side.  I am not expecting much from Trump's tax announcement on Wednesday.  It will be very general, at best.

Friday, April 21, 2017

Chopping Up Both Sides

There is no clear one sided trade.  It is a choppy mess, but this is what it takes to get the market to bottom if it isn't going to have a scary flush lower.  If they can't scare them out, they will wear them out.  It seems like we've been in this slow weak grinding distribution phase for weeks and weeks.

Investors are trying to resist the easy temptation to get bearish due to geopolitics, French election uncertainty, and weakening economic data, but it is wearing them down.  There are only so many false hopes and rallies that you can have before the bulls just give up and say they will sell and wait it out.  Based on the ETF and mutual fund outflows, it looks like we're at that point.

Eventually, perhaps in May, when corporate buybacks come back and the French elections are over, you will get that push back towards 2400.  Until then, I think the rallies will be contained within the same range that we've traded since the beginning of the month.

Slightly bullish here, I am long some S&P.  The odds favor the bulls here, but they aren't overwhelmingly favorable.

Wednesday, April 19, 2017

Now They Are Talking

They are finally worried about the French elections, with round 1 just a few days away, and round 2 in just over 2 weeks.  I thought the worries would come up sooner but the market was caught up in Syria and North Korea and didn't have time to worry about France.

However, the market keeps finding those intraday bids just when you think the bottom would fall off equities for a change.  Yesterday, we had that intraday dip down to 2333, and the offers were snapped up by the dip buyers like hungry hippos.  Again.  As I mentioned before, there is an army of dip buyers waiting for weakness to buy stocks, and willing to sell back on a 20 point pop.  It keeps happening.

There is still a lot of complacency out there, and who can fault them.  The market refuses to go down more than a few points here and there.  There is no real sustained selling that would put fear in the minds of the buyers.  The put/call ratios don't signal any kind of fear.  Fast Money traders are calm.

Despite the small drop in the S&P, we had a huge rally in bonds.  The shorts look like they are finally capitulating in full force, and they are the last marginal buyers in these type of situations.  I see very little upside in bonds now, with the last major event, the French elections, about to conclude in a couple of weeks.

I have no edge in predicting the French elections, but I do know that odds are high that there will be a lot of buying when all is said and done.  France will stay in the euro regardless of who is their president.  That is why I started buying late last week and will look to add longs on further weakness which I am hoping for.

Monday, April 17, 2017

Geopolitical Fear

There is nothing more scary to the retail investor than the prospect of war.  You don't get big headlines with talk about Fed balance sheet reduction.  So the big fear was that North Korea was about to do something big over the weekend.  Well, they showed off a new rocket, and then launched one that went nowhere.  It must have been a fairly embarrassing weekend for North Korea, as they just failed in their display of military might while Trump and the crew dropped the mother of all bombs in Afghanistan, mostly to show off.

You got a sell into the close on Thursday ahead of the 3 day weekend on those geopolitical fears.  With nothing eventful happening, you get a small gap up, and with Europe still on holiday today, I don't expect any big moves.  More weak economic data took Treasuries to that 2.20% 10 year level, which put a lid on the up move.  I am keeping an eye on a possible short in the Treasuries as geopolitics is one of the better risk reward fades.  As I've said many times before, war is bullish for the stock market, and not really bullish for the bond market.  Uncertainty is the only reason people buy bonds on geopolitical tensions.  It is not based on any true fundamental basis.

I am in accumulate mode for equities, and will add more if we go lower.  French elections uncertainty is still there, but Le Pen seems to be losing her momentum and have had weak debate performances.  By mid May, with the French election uncertainty out of the way, we should be seeing a higher SPX and lower bonds.  It is still a strong uptrend in equities, and the past few weeks has been a pause to shake out weak hands in financials and other hot money sectors, and to consolidate the big post election rally.
Bullish for the next few weeks.  In the short term, we could have a little more volatility, but I would view dips as buying opportunities.

Thursday, April 13, 2017

Leaning Long

It is going to be difficult to get any kind of panic in this market just yet.  The uptrend in the equity indices is too strong for any panic to occur just yet.  It takes time to form a top, and the best strategy until this market changes behavior is to buy the dips.  The market has had ample time to selloff more, but it refuses.  There seems to be an army of dip buyers waiting to pounce on any weakness.  That is why I have given up on the short side for the time being, waiting for the bulls to get more positive.

I got out of my bond position on the strength yesterday, expecting 2.20% 10 year yields to be a resistance area that bonds will have a hard time busting through.  I can definitely see a reversal in yields back towards 2.60% if the French elections go as consensus expects.   The French elections are the wildcard, but it seems like regardless of who he gets elected, France is going to have a difficult time getting out of the euro.

The equity put/call ratios have been elevated the past few days, VIX has been moving higher, despite the low realized volatility.  There may be one last down move, perhaps down to SPX 2320, which would be a buying opportunity.  I don't see 2300 in the near future unless Le Pen wins French election round 1 by a big margin.  Over the next few weeks, expecting a grind higher from these levels into May.  2015 seems like the best template for this market, choppy at the top, but grinding higher until you get that big crack lower.

I am leaning bullish, and have nibbled a bit on the long side.  Will add more long if we get that move down to 2320.

Tuesday, April 11, 2017

Selling Picking Up

The VIX is one again a prescient predictor of upcoming equity weakness.  The VIX acted stronger from Friday when the SPX was still chopping around breakeven levels.  Yesterday was also another day when SPX was trading slightly higher to lower and VIX rallied anyway, in front of a 4 day trading week (Good Friday is April 14).  And then you have today.

The dam burst and VIX is now the highest since November.  The French elections, Trump uncertainty on foreign policy, no signs of tax reform imminent, etc.  It finally caught up to the market.  The intraday dip buyers have had a field day the last couple of days, with sharp rallies intraday.  I don't think that will happen today.  Put/call ratios remain fairly low for such a weak day.  Looking for more selling.  SPX 2330 is a support level, below that you have the lows from 2 weeks ago at SPX 2320.

It's too early to buy the dip, but I am planning out a BTFD strategy as I write this.  Probably will start with some buys from 2325 down to 2300, if we get there.  Looking to exit long in Treasuries at that time as well.

Monday, April 10, 2017

Focus on French Elections

The next big event are the French elections coming up in April 23.  That is round 1, and it looks like Le Pen will be favored to take 1st place in that vote.  It could put a little scare into financial markets if she wins more of the vote than expected.  If the US elections give us any clues, it is that you cannot underestimate shy voters of radical candidates.  The weak global economy has left behind a lot of obsolete workers.  It is not purely a US phenomena.  It could mean a higher vote numbers for a far right candidate like Le Pen.

We are stuck in a small range, but vigorously moving back and forth in that range.  The VIX futures for April have been strong recently, even though S&P hasn't gone anywhere.  It looks like French election risk is starting to be priced in.  The next step is for the S&P to go lower.

Bond moves on Friday are a bit puzzling, it should have been trading much stronger on a weak nonfarm payrolls report and mediocre equity action, but it traded lower, significantly.  The 2.30% level was defended again, and the bears won this time.  I am still expecting a break of that 2.30% level, as the French elections near.  Buying Treasuries looks like a good swing trade for the next couple of weeks.

Overall, fairly boring market.  Not much opportunity these days, so won't be looking for much if I do put on a trade.

Friday, April 7, 2017

Knee Jerk Reaction

As soon as the news came out that US bombed Syria, the SPX plummeted, and gold, oil, and Treasuries rallied.  People forget that World War II is what helped boost the US economy coming out of the Great Depression.  Or how about the Iraq war in 1991 and 2003, both which led to big rallies in stocks in the coming years.  Not that there will be war, but if there is, its actually better for stocks than if there was peace.

The clearer heads are prevailing at this hour, as the SPX has made back all of the knee jerk losses and oil has retraced most of its after hours gain.

If there is one thing we've learned in 2016, is that the market is much more efficient and quicker in going to its natural level.  The markets are smarter.  It may have a knee jerk reaction to news, but it doesn't stay at that irrational level for long.  That is what we saw on election day in November, and yesterday after hours on Syria.

The retail chicken littles will have a field day being bearish because of Syria, and they will be wrong again.  Not that they matter, because they don't have enough assets to matter.  Of course you have the Fast Money crew get all beared up because of this, and they will also be wrong again.  In the end, those that are using news headlines to guide their trading decisions pay the price.  It is boring stuff like Fed policy that really matter, not the splashy headlines of military attacks or Trump quotes.

I am getting more convinced that any fear based bottom made this month will be shallow, and will lead to new highs by May.  The stock buyback blackout period lasts for another few weeks, and then corporations will be back providing support to their stocks.  We've still got a few more months to go in this bull market, even though its the final stage.  I have switched my bias to a buy the dips mode, and will have to have almost a perfect scenario for me to short the SPX.

Wednesday, April 5, 2017

Beach Ball

The bears have tried to keep this thing underwater, and it is just so hard to do it.  The buyers just lift the offers effortlessly.  The down moves come grudgingly, with high put/call ratios and the crowd getting bearish on any pullback days.  It is a horrible market for those who thrive off of volatility.

The ultimate top is still ahead of us.  With tax cut goodies coming down the pipe, in some way, shape, or form, the market can smell it, even if the media tries to take bulls off the scent trail.  Trump will get his tax cuts, come hell or high water.  Unlike health care, which he could care less about, he wants those tax cuts for the rich.  He wants to eliminate the estate taxes.  And the Republicans never met a tax cut they didn't like.  Revenue neutral is not going to happen.  The deficit will be blown out big time, and that is exactly what Trump wants.  A deficit financed stock boom.

The market is not worried at all about those French elections.  It is surprising, considering the results of Brexit and the US elections last year.  Anyway, it is looking more like a long chop period, like 2015 before you get a change in trend.  This could take 2-3 months of chop before we drop.

You have to be careful with SPX shorts in this market, despite the small cap weakness, the SPX has hung above support levels around 2350.  I wouldn't want to get short until everything lined up:  complacency, low put/call, overbullishness, and technically extended.  We have some complacency, but I don't see any of other 3 things.

Bonds are making higher highs and higher lows as we get closer to that important 2.30% 10 year level.  Many people are eyeing that level for a change in trend.  If we break through, you will see a lot of stop loss orders flood in and that could take us quickly to 2.20-2.22%.  I remain bullish, but with an eye on the exit on the next multi-day thrust higher.

Monday, April 3, 2017

Already Breaking Down

The first day of any quarter is usually a day when a torrent of automated money flows go into the stock market, helping lift the indices.  Today is not following the script.  And when a market doesn't follow a bullish script, it usually means there is a motivated seller out there.

I don't know why they would decide to dump stocks today instead of on Friday, at the end of the quarter, but the market tone is getting more risk averse, but with stubborn bullishness out there, it takes time for the market to finally make a firm bottom.  Last Monday was likely not a firm bottom, that can be relied on as a signal for a lengthy rally.  Today goes quite a ways to prove that point.  It is going to be messy this month, at least till you get enough weak hands to sell stocks and transfer them to strong hands.  That usually takes lower prices, and some fear.

What would be the fear event?  The obvious one to me would be the French elections, with Le Pen still having roughly a 20% probability of winning, according to the bookmakers.  But I am hearing that Le Pen supporters are quite passionate on social media, and they seem to be more motivated voters than the Macron/Fillon supporters.  I am sure the worries and risk aversion will increase as we get closer to the elections, probably peaking about 1 or 2 weeks ahead of the vote.  So perhaps sometime next week.

Oddly enough, I am hearing very few mentions of the French elections as a reason to de-risk, which means that there is still plenty more downside ahead near term.  I am still eyeing SPX 2300 as a much better support area for a dip buy.  This market still trades heavy, despite the intraday morning rallies.  We are barely above last Monday's close, despite seemingly rallying every morning on a gap down.  The unusual thing about the gap downs last week was that Europe was relatively strong, which would usually mean a gap up for the SPX, but that didn't happen.

Bonds are trading very strong today, stronger than what would be guessed by a 15 point drop in the SPX.  The short unwind is continuing in earnest, and by the time you get to mid April, it should mostly be complete.  That is where I will look to exit bonds.

Missed the short in S&P, thought we could get a rally to short today, but the market isn't complying.  Will not force the issue and short in the hole, but do think we will be lower than current levels by the end of the week.  I may entertain buying a dip if we can get to around 2300 next week.  If we get there this week, I may enter just 1/2, and wait to buy more next week.

Friday, March 31, 2017

V Bottom Again?

After so many V bottoms over the years, the first instinct after a 5 day rally off a bottom is that we will keep grinding higher and higher.  But I don't believe that to be a likely scenario.  First of all, there is still a big risk event coming up in April/May, the French elections, which has hardly been mentioned.  That means there are few worries about it, even though it seems like Le Pen still has some possibility to win.  Next, the lack of a bigger thrust higher off the Monday close shows that there is not as much rocket fuel for this rally.   We are already flattening out around 2360-2368 SPX zone, which is the consolidation zone from pre-FOMC.  There is more resistance than people think.

I am hearing the bulls get loud again, already, thinking V bottom.  The strong intraday price action has gotten them bulled up again.  Although this rally has lasted longer than I expected, it just doesn't have the momentum of past V bottoms.  And the bull's favorite, the financials, are still trading well off their highs earlier this year.  Perhaps the market can grind slightly higher in the favorable early April seasonal period, but that should be the local top for this move, and we should retest SPX 2325 in the coming weeks.

Wednesday, March 29, 2017

Faster Tempo

The markets have changed since the HFTs and systematic trading algos have taken over the short term trading space.  This includes anywhere from time frames from a few milliseconds to a few days.  The moves don't take their time to get to their destination.  As you saw on Monday, as soon as the gap down showed signs of being bought in the morning, it was a one way street higher for a few hours, and then basically flatline/consolidate into the close.  Same thing happened on Tuesday.

What should have taken probably 3-4 trading days to go from a gap down of 2320 up to 2360, took just 30 hours.  Those that hesitate and wait for the pullback to get in are missing the whole move.  Once there is a decent sized pullback, it is likely a sign of a trend reversal.

In the era before the HFTs, not everyone reacted to the market action as quickly.  The tempo has speeded up to the point that FOMO kicks in, and the market overextends, like what you saw yesterday afternoon, and has a healthy little selloff into the close.  Yesterday's action, with that selloff into the close, reinforces the 2360 resistance area that will be hard to break through with French elections still ahead and likely quarter end rebalancing from stocks to bonds.

The best way to adapt to this new HFT world is to base your entries on price, not time.  If you are trying to wait for the right price and time to enter, you will likely miss your entry.  If you are just looking at price, then you might be entering a few hours or a day or two earlier than you planned, but that is the only way you will beat the HFTs to the punch.  It may be scary to buy on the downside of the move, but that is the only way that you will be able to get in before the upward move begins.  You have to anticipate the HFT's moves, and get in right ahead, before they go bananas front running the hedge fund herd that pile in relentless at the first sign of a bottom (like Monday morning).

High probability of another test lower of the SPX 2320-2325 zone in the next few days.  Still range bound between 2320 and 2360.

Monday, March 27, 2017

Scarecrows Aroused

Here we go.  The scarecrows are in motion today.  Nothing like a good gap down on political "news" to stoke the fear in the Trump trade.  There was a counterintuitive bounce at the close after the healthcare bill was pulled because the simpletons thought it would mean a faster track to tax cuts.  But then the media went to town on the implications for Trump's tax policies and it was deemed to be a negative, making it harder to get tax reform.  Don't buy it.  It just makes the Republicans more determined to get tax cuts.  They HAVE to get something done, or they will look totally incompetent.  Even if it means selling their soul to the Freedom Caucus to do it.

As I write, the market is already making a move higher off this reflexive gap down, as it was an overreaction.  There was already a lot of put activity last week based on healthcare bill worries, now that bridge is passed, you should see an oversold bounce.  All the scarecrows are out in force declaring the death of the Trump trade.  Even though I believe it is a bunch of hype, the Trump trade is not over.  As long as tax reform is ahead, and not in the rear view mirror, the bulls will have hope, and the stock market thrives on hope.

I would be a buyer intraday today, looking for a move higher into Wednesday.  Then we should get another test lower after the oversold bounce peters out.  SPX 2320 is a buy area, and SPX 2350-2355 is a sell area, for the week.

Friday, March 24, 2017

Mountain Out of a Capitol Molehill

Here we go again.  Another exaggeration effort by the media and the financial market "analysts".  This one really does take the cake.  If there ever was a more meaningless hyped up vote than this one, I can't think of it.  You cannot compare this with the fiscal cliff or TARP.  Those actually affected the economy, and thus the markets.  This one, even if it passes, is almost guaranteed to get shot down in the Senate.  And if it doesn't pass, nothing changes.  The Republicans will just be able to move on quicker towards tax reform.

On a "no" vote, I would buy any dip towards SPX 2325-2330, as I see it as a short term overreaction.  I would sell quickly on the subsequent bounce back because there are other things more troubling for this market.  On a "yes" vote, I would wait for the market to get back towards the SPX 2360 area and short it.

This vote doesn't change the market situation.  Investors are paring back risk, and the more important event, the French elections, is being ignored as all eyes are on the healthcare bill.  I actually expect even more weakness when the worry comes to the French elections and a possible Le Pen win.  The European scarecrows will be out in droves stirring up the markets then.

Watching and waiting, looking to fade any overreactions.

Thursday, March 23, 2017

Healthcare Bill

All are waiting for the vote on the House healthcare bill.  Fast Money traders seem confident that the bill will be passed, and that the market will rally on that news.  Of course, I would question that view.

First of all, the House passing the bill doesn't mean that the bill becomes law.  It also has to pass through the Senate, which will be a much tougher task, because there are already quite a few moderate Republican Senators looking to vote no, along with a few extreme conservatives.  And Republicans only have a 52-48 majority, making just 3 no votes enough to torpedo the bill.

I wouldn't extrapolate the results of the healthcare bill to anything on tax reform.  Tax reform will be the easier of the two to get through Congress.  In fact, the healthcare bill has gone more favorable for the Republican leaders than I originally thought.  It is a politically toxic bill, but Trump apparently has done some threatening to the lower members to jam it through.  Tax cuts will be MUCH easier to pass.  If anything, over the medium to long term, it makes me more optimistic that tax cuts will be enacted, because it shows how Republicans are hell bent on getting through their agenda, popularity be damned.

I am looking to short any brief strength we get on the healthcare bill passing the House.  Its importance is being blown way out of proportion.  I find it interesting that there are very few mentions of the French elections despite the selloff.  That just means that the bears still have that card to play if they want to make a raid on this market.  And it is an Ace up their sleeve, because the fears of a Frexit is exponentially greater than any fears of a Brexit.

Remain bearish SPX, and would short any kind of rally on the House bill passage.  I expect that rally to be very brief, most likely less than a day.  And if that bill doesn't get passed? Well, you will most likely see a fat gap down on Friday.  

Wednesday, March 22, 2017

Gap Down After Drop

Not a good sign for the bulls for the next couple of weeks to see this market gapping down after a big drop the previous day.  Usually you see a little gap up after days like yesterday.  There will be more selling in the weeks ahead, although probably an oversold bounce today into Yellen speech tomorrow.

We will probably have to make a lower low today and then there could be a quick daytrade opportunity on the long side.  There haven't been many down days to buy throughout this rally, so I am sure there will be dip buyers anxious to buy today on any weakness, for fear of missing the choo choo train higher again.

Any intraday low towards SPX 2325-2330 will be a buy zone.  Not interested in shorting today.  The S&P is tradeable again, with the return of volatility.  I give this about 4 weeks max before the rally monsters come back with a vengeance.  In the meantime, there will be daytrading opportunities.  Medium term, I don't see a lot of downside from here, perhaps another 30-40 points, before we find a level where buyers will come in to support stocks.

There was no news to drive this market lower yesterday, Trump not being able to bully the healthcare bill through Congress was forecast weeks ago.  It just happened that post opex, with many investors feeling like puts are a waste of money, decided to go unprotected.  This is what happens when they are unprotected.  Plus buyback blackout period and French election fears.  It is almost the perfect scenario for bears, till mid April.  But it will be choppy.  Dip buyers have a lot of ammo considering there have hardly been any dips the past 4 months, and they will provide support on intraday swoons.

Tuesday, March 21, 2017

French Election Selloff

It's already started.  With 4 weeks till round 1 of the French elections, the investors are starting to get nervous.  Sure, the polls say that Macron won round 1 of the debate, and is favored to win round 2 over Le Pen by 20%, but after the Brexit and US presidential polling misses in 2016, the trust is gone.  French political uncertainty will be getting priced in quickly over the next couple of weeks, and it all starts off with days like today, finally a 1% down move intraday.  I am sure the dip buyers are salivating at the chance to buy "bargains", even though they are just at the same price they were 4 weeks ago, which was an all time high at the time.

Let's face it.  The S&P is a pig.  It is a bubble.  This is what happens to bubbly markets.  They drop suddenly for no reason.  I expect more weakness in the coming weeks so I will pass on this BTFD opportunity.

It is a pity that I missed the SPX short by a few points last week, but with my position in bonds, I wanted to be selective about shorting ES.  Oh well.  Too late to short 'em.  Too early to buy 'em.

Monday, March 20, 2017

Human Edge is Intuition

The markets are more competitive than they were 20 years ago.  Back then, there were no HFT firms front running everything.  There was more paper flow, human market makers made many more mistakes than HFT bots do now.  Even the medium frequency time frame was a lot less competitive.  The markets would take a longer time adjusting price to new information and size order flow.  Now, all the HFTs and black box programs are hyenas with a keen sense of where the kill is, scavenging away any bits of meat before others find it.  Trend moves that took all day happen in an hour, and then flat line.

If you are a size player, you cannot compete with the HFT algos in scalping and time frames less than an hour.  The slippage is too great because the HFT front runners run amok, now that spoofing has basically been legally prohibited.  The ladder provides much more useful information to the HFT predator now that the fake orders are gone.  The hand trader cannot compete in that space because of much slower reaction times to new order information.  If you are a small lot trader, you can squeeze in and out, but it is exhausting work, with the margin for error much smaller now that the HFT cops are on the beat, snapping up edge immediately.

The systematic trader has never faced so much competition in his life, with system setup getting easier and easier, and more institutions using black box trading.  The black boxes have literally turned into red boxes, from the blood of all the competition.

Ironically, the proliferation of systematic trading and algos has left the hand trader a niche that is still quite profitable.  That is if the discretionary human trader has good pattern recognition skills, a strong fundamental base for the market or stocks that he trades, and good intuition to put it all together to know when to enter and exit.  Pattern recognition is a subset of intuition, and it can really only be gained by trading experience.  But experience is only as good as how it is applied, which is what separates the profitable from the unprofitable.

A.I. and machine learning is all the hype these days, but as long as the majority of the assets under management have human discretion, they will not be able to match the skills of a good hand trader with good trading intuition.  I will always take a good human trader who understands market psychology,  investor positioning, fundamentals, and use those variables to come up with a good trade.  When traders stop discounting prices due to uncertainty, will be the day that A.I. beats the advanced discretionary trader.  I doubt that day will come.

Also, the trend towards passive funds just means that sector allocation has become more generalized, it doesn't affect a manager's discretion to change their beta exposure.  It has little effect on index futures traders.

In order to succeed these days, you have to compete in a different time frame than the computers, who excel in the high frequency space.  Medium frequency is even starting to get a bit crowded.  Lower frequency trading is the sweet spot for the human trader, who can be much better at predicting longer term moves than the bots.  This doesn't mean any human trader can beat the bots.  It takes time and innate talent to develop the skills to win at this game.  And the game changes from time to time, on an irregular schedule, making it harder.  Always adapt, but don't throw away the fundamental base that you will always need for any reliable long term predictions.

We have a small gap down after a little nasty close on Friday.  Post opex forces at work, this time towards a risk off theme as March put protection is gone.  Looking for SPX weakness this week, and next week.  

Friday, March 17, 2017

Buyback Blackout Period

We are now entering the corporate buyback blackout period ahead of Q1 earnings announcements.  This bull market has gone up mainly because of the corporate buyer, willing to issue bonds to buy back their own stock.  For most of the past 8 years of this bull market, you have had net outflows from equity funds.  The market has been able to overcome this outflow with corporations buying back a ton of stock, reducing supply enough to drive prices higher.

A disproportionate number of pullbacks have occurred during this buyback blackout period: October 2014, January 2015, January 2016, October 2016.  That covers more than half the meaningful pullbacks over the past 3 years.


Plus with the likely reduction of long equity positions ahead of the French elections, it is a near ideal setup for a short here.

Don't believe the hype that the market wants to see the Fed hiking.  The market always wants easy money.  The Fed seems determined to regain some credibility after completely failing on their forecasted 4 rate hikes in 2016.  A rising stock market has given them the perfect backdrop to keep hiking.  But eventually, the stock market will revolt and drop hard.  I don't think we are at that point yet, but it's something to look for later this year.  This economy is not as strong as the pundits make it seem.  It needs ZIRP and a rising stock market just to maintain its low growth.  If you have neither, which is very possible later this year, the economy will be in some pain.

Thursday, March 16, 2017

Rally Already Fading

All the buyers that waited to buy after the Fed hike was announced after Yellen was less hawkish than expected are sitting on losses.  That is why you don't overreact to a Fed rate decision.  Yellen was her usual ambiguous self, learning her lesson after her March 2014 press conference experience where an off the cuff remark about timing caused the bond market to have a mini panic.

The best times to buy for the Fed is the day ahead of the meeting, and to sell at the open the day after.  This is just experience, there really isn't a good explanation, other than you have a subset of traders that will always go to cash ahead of a Fed announcement and buy afterwards.  That is why you saw a feared event, a forecasted rate hike, turn into a buy the news event, as stocks, bonds, and gold all went up together, with the dollar going down.

Haven't we learned our lesson by now, after 8 years of mealy mouth commentary from the Fed?  They have vastly different thresholds for easing and raising.  It takes a lot of good news to raise, and not that much bad news to ease.  For them to have a hawkish hike, it would require the S&P to be in a full blown bubble, not just a small bubble.  It would require nonfarm payrolls and CPI to go through the roof, and that just isn't likely in this economy.

The best strategy going into a Fed announcement is to expect them to be more dovish than expected, especially if it is a press conference meeting.  The markets are always eager for the Fed to hike rates, to do something, to stop being so easy, but you can't change the animals stripes.  They are born to pump, and it requires a lot for them to stop pumping.  Their default setting is to let bubbles grow until they get so big that the market begs them to hike, just as it did a few months ago after the post election rally.

This market is due for a deeper pullback, and the setup is there ahead of the French elections.  That is all you will be hearing about in April.  2300 is very possible by April.  If I wasn't long bonds, I would probably be short stocks.  They are sort of redundant positions, so unless the SPX can get closer towards 2400, I will sit back and wait.  If we can get back towards today's highs (around 2390) within the next few trading days, I will probably short it.

Wednesday, March 15, 2017

Remember Yellen is a Dove

Despite the fears of an aggressive Fed, look back at their history.  Their forecasts have been horrible, and you can't take them for their word about future rate hikes.  The bond market sees this, and is not pricing in anything close to what the Fed dot plot forecasts for rates in 2018 and 2019.  There is a high probability that Yellen will be less hawkish than expected, so they don't box themselves into a set number of hikes and backtrack again, like they did last year.

You will probably get a small rally out of that, but the markets are going to be setting up for the French elections, which is the next big event.  Market has been trading weak ever since the all time high on March 1.  Even with all the inflows this month, the market hasn't been able to rally.  In a word, it feels like buyer saturation.  It is just not going to be easy to rocket higher from here until you get a resolution to the French elections and more certainty on tax reform.

Based on what I think Yellen will do, I would be long bonds and it might be worth a small long in stocks for a trade.  I am long bonds, but will not buy stocks here, as I expect them to be lower later this month.   2.60% seems to have held up against the bear forces and it looks like a double top and a buy zone from this paper napkin chartist.

Monday, March 13, 2017

Ultimate Top Still Awaits

I have been leaning more bearish on SPX lately, but I don't think that 2400 is the final top.  There will be more upside attempts as we get through some risk events, and more clarity on Trump's tax plan.  But we should have trouble going much higher ahead of the French elections, where you will definitely have scared European money sell ahead of time, fearing another Brexit like scenario.  Even though Brexit selloff only lasted 2 days, it was a scary 2 days.

There are some ingredients for a final top that are missing, mainly the presence of uncertainty.  Tops usually occur when there is very little uncertainty in the markets.  Oddly enough, the sooner that Trump can get his tax plan announced and passed, the sooner we will get the ultimate top in the SPX.  I believe he will get a tax plan passed, just because Republicans never met a tax cut they didn't like, and they control both houses of Congress.  They will use dynamic scoring to jam through a supposedly revenue-neutral bill, putting up absurdly optimistic assumptions for growth to meet those ends.

Only when that happens, will you have the right backdrop for a durable top.  Right now, everyone isn't buying into the rally because we haven't gotten the tax cuts.  They will be coming.  And the market will eat it up.

I am still waiting for the right entry point, the SPX just hasn't given a good short since my bad trade on March 1 when I should have just let the thing work for a few days instead of chickening out.  That is what 8 years of a bull market will do to a natural bear that actually survived.  The bears that survived are mostly chicken littles.

No opinion for the week, we may get a bit of a relief rally after the Fed rate hike, but it shouldn't last long.  After that, all eyes will be focused on the French elections, and that means selling equities.

Friday, March 10, 2017

Apex of Fear in Bonds

There is palpable fear that the Fed will be hiking rates much more quickly than the consensus analyst expectation of 2 times this year.  First it was Dudley, followed by Yellen talking up a rate hike for March.  Then came the blowout ADP number on Wednesday.  Then Draghi was unusually sanguine and positive on the economic trend in Europe.  And the NFP today was strong, as many expected.  This is a perfect storm for bonds.  Now we know what that fear level corresponds to in terms of price.  2.60% 10 year yields.  That is the level that yields topped out at in December.  The paper napkin chartist in me sees a double top in yields at 2.60%.

I see very few bullish bonds here.  Most are beared up beyond belief, whether due to the chart, or to Trump's expected tax policies, or because they think GDP growth will get to 3-4%.  I believe those views are way too optimistic.

It is normal for the market to selloff into a feared event.  That is what happened with bond selling ahead of an expected strong nonfarm payrolls report.  We got that report, and yields are actually going down a bit, even though it beat consensus expectations of 200K jobs.  If they already sold ahead of the event, well, there is only two options left, if they don't short.  And most bond managers don't short.  So that is buy, or do nothing.  Sometimes trading is just a logic game, and it is not complex logic.  But it does require taking risk when others don't want to.  Some people consider that dangerous, but it's not so dangerous if the discount in price amply pays for the "risk" taken.

The risk that traders are pricing in is for a more aggressive hike cycle by the Fed.  Both for bonds and stocks.  But unless Yellen has suddenly changed her stripes, she will stop in her tracks if the equity market gets shaky.  And based on how the market is trading over the past week, and the large inflows into equity ETFs and mutual funds, we are topping out.  The Fed is considering aggressive hiking into a highly indebted global economy, into an overvalued topping S&P 500.  That is a recipe for disaster.

It is just fund managers, and now retail, chasing short term performance, with disregard for the long term.  The biggest source of alpha for a fundamental trader is to buy and sell on a long term time frame.  That is the time frame that is least crowded.  You cannot consistenly trade a short time frame or you will get eaten up by the HFTs.  For those looking on a long term time frame, the opportunity is in shorting this overvalued stock market, or going long bonds.  Both should work out on a 1 to 2 year time frame.

Wednesday, March 8, 2017

Topping Phase

Let's look at the big picture.  Over the last 5 years, SPX has gone from 1370 to 2370.  It is up 1000 points.  Over that same time period, the 10 year yield has gone from 2.00% to 2.57% right now.  If you had told anyone in March 2012 that the S&P 500 would be at 2370, they would first, think you were crazy.  Next, they would probably guess that the 10 year yield was probably at 4% or higher.  Not 2.57%.  On December 2013, the Fed announced tapering, the 10 year yield was at 2.92%.  The SPX was at 1810.  Most people would think that if the SPX 3 years later was at 2370, they would be shocked to know that the 10 year yield was actually lower at 2.57%.

So if a long equity bull market can't make bond yields go higher, I can't possibly imagine what would happen if we actually had a bear market.  New all time lows in 10 year yields is likely in that case.

Bond yields have stayed stubbornly low despite the huge rally in the S&P.  The Treasury market correlates with other bond markets.  There are a lot of foreign buyers of Treasuries, and they buy because they don't want to hold negative interest rates bonds.  Europe has been Japanized.  They are stuck in low rates now.  Their economy can't get much better, like Japan, because the population isn't growing.  It is extremely hard to grow a developed economy when the population is stagnant.  There is no productivity growth.  Smart phones and flat screen TVs don't enhance productivity.  Robots do, but they replace workers, reducing wage growth, increasing unemployment, and hurting demand.  


The ADP number came out at 298K today, and the financial media is going nuts over that number, but the trend since 2008 has been an increase in lower paying jobs, keeping wage growth low.  You have had a boom in server and bartender jobs.  Not much has changed over the past 5 years.  Economy is still stuck around 2% growth, but the big difference is that the S&P is much higher, and global debt levels are much higher.  That is a bad combination for future S&P returns.  

High debt levels cannot sustain a high interest.  National debt of $20 trillion paying 2% interest is much different than $20 trillion paying 5% interest.  If the US government had to pay 5% interest on its debt, there would be an extra $600 billion per year required just for interest payment.  And the US debt is growing about $500 billion per year.  

You are already seeing a slowing in stock buybacks, because of higher interest rates.  Trump's tax plan is going to do very little for economic growth, since most of the benefits go to the top 1% who will just save more, and put it in stocks, bonds, and some real estate.  But the higher interest rates hurts a broader group, undoing most of the tax cut benefits. 

And it's still not certain how much the taxes will be cut.  If they cut the taxes too much, the budget deficit will balloon, and the amount of Treasury supply will be overwhelming, causing the 10 year yield to go artificially high.  That will put pressure on stocks, and then the economy, and force the Fed to cut rates and do another QE.  It will be similar to the 2000 to 2008 experience under George W. Bush.  Except the debt is much bigger this time and growth even slower.  

The SPX has been weak the past few days even as the VIX has been trading lower.  This not very common, but historically it usually means there is little downside short term.  Longer term, it just means there is a lot of complacency.  I stick with my view that we are forming a long term top this year.  Some of it is due to overpricing benefits from Trump policies, but most of it just the natural animal spirits forming after 8 years of a bull market.  Investors have been conditioned to buy, and eventually, it goes higher.  Now that the valuations are even more stretched, with low growth, and interest rates rising, it makes this market that much more fragile.  

I have gotten long some bonds today, seeing good risk/reward from here with the Fed hike priced in for March, and with the French elections coming up in less than 2 months.   I also expect the S&P to pullback going into April, so any rally towards 2400 this month will be a time to short.    

Monday, March 6, 2017

S&P Toppy

After touching 2400 on the first day of March, we have been trending downwards.  We even have one of those rare gap downs after a pullback.  I looked at the news wires to see why, and apparently North Korea shooting 4 missiles into the ocean was the reason cited.  LOL.  The South Korean index went up anyway and they say that's the reason the S&P futures are down.  Where do they find these financial journalists?  It's a thankless task, because they can't just say: the market was overbought, the S&P looks like it has topped so it gapped down this morning.

Usually you see some chop before the drop, but with these bubble markets, who knows.  I still expect a rally attempt starting today or Tuesday, but I expect it to fail and go right back down.  The FOMC meeting, Dutch elections, and then the biggie, the French elections are lined up in the coming weeks and months, so I don't think Europeans will be too willing to get even longer ahead of those events.  So any rally attempts this week will be a good chance to short.  Preferably, I would like to short within 10 points of the all time high, so at least SPX 2390 or higher.  Also, it looks like the pre-selling ahead of nonfarm payrolls this Friday and the probably FOMC rate hike next week could present a chance to buy Treasuries above 2.50% yields.  We'll have to see how the week plays out, but that is the basic game plan.

For the next month, there should be a risk off tone set by the Europeans who will likely reduce their longs ahead of the uncertainty of the French elections.  That should spill over into the US, as the SPX is stretched on the upside at this point.

Friday, March 3, 2017

Stubbornly Low VIX

The last couple of days has seen some decent volatility.  One big up day, and taking back over half of those gains in a day yesterday.  Usually when you get a down day, the VIX goes up.  Yesterday, VIX opened at 12.43, set a high of 12.71, and closed at 11.81.  SPX basically was trending down the whole day.  So the VIX went down a nontrivial amount even with a SPX that dropped from 2395 at the open to 2382 at the close.

Maybe it is just noise within this narrow range that the VIX has been trading the past 3 months, and perhaps there was a lot of excess vol priced in for Trump's Tuesday speech.  But usually you would like to see VIX going higher on a down day if you are bearish.

It just makes for a trickier market, one where the anecdotal mood is not exuberant, but  the recent fund inflows are heavy.  Those shy ETF buyers are buying and staying silent.  We had the SNAP IPO and almost everyone is negative on that stock, not something you usually see at a top.

So there are mixed signals, you have heavy inflows into the ETFs, after a big rally, which is usually negative, but then you these other factors which show that the rally can go.  Nothing easy here.

Bonds continue to act heavy, going down with stocks yesterday.  Fed funds is now pricing in about 80% chance of a hike.  I think almost every analyst was expecting a June rate hike last week, now they are scrambling to adjust their rate hike expectations.  With that comes a lot of bond selling.  Plus you have lots of Treasury supply coming on next week ahead of the nonfarm payrolls report, and you have a lot of traders wanting to get out ASAP.

Lastly, when permabulls that come out on CNBC suddenly expect a correction (Tony Dwyer, Tom Lee, etc.), like they have so far this year, pay attention.  They are usually wrong.  Even though these guys have been right being bullish for all these years, they are not smart money.