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.