Thursday, August 31, 2017

ECB and the Euro

Draghi and the ECB crew are sending out smoke signals on the strengthening euro.  They don't like it.  These trial balloons, through their favored news outlet, Reuters, tries to keep the euro strength in check while they try to buy time for upcoming ECB meetings.  Remember, Draghi promised plans on QE tapering in the autumn.  Which means he has to say something on the topic either in the September or October ECB meeting.  The news on worries about a stronger euro means they are likely to punt tapering into the October meeting, backing themselves into a corner, making a decision over the next 12 months based on how the euro and financial markets trade during autumn.

It just reinforces my view that the central banks are turning into micro managers who react to short term market movements to make long term monetary policy decisions.  Of course, it is not a two sided coin.  If the economy is strong, then the central banks are slow to remove stimulus.  However, if the economy is weak, then the central banks are in a mad rush to provide immediate stimulus and jawbone the markets higher with phrases like "whatever it takes", etc.

This is why the bond market refused to selloff this year even as the S&P kept making new highs.  It sees an ECB reluctant to remove monetary stimulus, and a Fed that is increasingly worried about inflation being too low.  The Fed should be much tighter with the current loose financial conditions and rising stock market but it picks and chooses weak data to support their dovish bias.  This feedback loop keeps stocks rising and the bubble going, until fundamentals get so bad that the stock market can no longer ignore it and it comes down under its own weight, like 2015.

I see another 2015 scenario coming up in the next 6 months, and its going to be an uglier version this time, just because of the extra excesses and overvaluation.  But we've still got higher to go before that happens, so there is no rush to put on a long term short.  Shorter term, it looks like this market will retest the SPX 2470s narrow trading range that we established in August.  I expect the market to go back down to the solar eclipse lows of 2417 sometime in September ahead of the debt ceiling debate.  So there may be a short opportunity coming up soon, in the 2470s.

Tuesday, August 29, 2017

Too Much Liquidity

The S&P is barely down 0.5% in premarket and gold and bonds have already gone wild.  The sharp up moves that happen to bonds or gold when there is even a sniff of risk aversion shows how much liquidity there is in this market.  Even with the Fed tightening.  Remember, all that money that the ECB and BOJ are printing has to go somewhere.  And it definitely isn't just staying in their domestic markets.

It is the main reason why it is so hard to make money shorting the S&P 500, the final boss.  You need to have bonds react less bullishly to risk aversion situations in order for stocks to go down and stay down.  Otherwise, these down moves are fleeting, as the bond proxies in the equity market keep the equities afloat, and when the dust settles, you just have lower bond yields and stocks going back to their pre-selloff levels.

Looking out over the next couple of years, bonds are going to be the place to be when the equity rally flattens out and starts the topping process.  The bond market remains resilient due to the ample liquidity and steady retail inflows.  Europe and Japan are just too weak economically to get away from their NIRP and QE policies.  They will be there to be the marginal provider of liquidity to keep markets buoyant.  I would not be surprised if the ECB follows the SNB strategy and starts to buy equities for their QE program during the next downturn.

I am waiting patiently for the market to get closer to my buy levels, which are between S&P 2410 to 2420.  We nearly got there during European hours, but we've rallied quite a bit from those lows.  Trying to keep this S&P down is like trying to keep a beach ball underwater.  Its buoyancy still amazes.

You still need near perfect conditions to short this market, and with the level of caution out there despite being so close to all time highs, shorting is just not a high probability trade.  It is still a dip buyer's market, and I will continue to use that old, beat up playbook because it keeps working.  Sure, it is going to be a bit less effective than when the playbook was less well known, but it's like going from a 80% win rate to a 65% win rate.  Still high enough to make confident bets on the long side.

Friday, August 25, 2017

No Thrust

After the strong rally on Tuesday, when the S&P closed at 2452, a crowd of bulls came out of nowhere to declare the end of the pullback and a march towards new highs.  As I mentioned before, that is uncommon even during this long bull market.  The first big rally day after a pullback has usually been met with some skepticism or expectations that its a one day wonder.  Then we promptly managed to have 2 small down days before today's pre Jackson Hole gap up.

You can basically treat this Jackson Hole event like a non press conference Fed meeting, important, but not that important.  And usually the market gaps up on Fed days.  I don't expect any fireworks at this Fed meeting, I mean Jackson Hole conference, because Yellen will not want to be too dovish despite the weak CPI numbers, because of the weakening dollar, and Draghi doesn't want to be too hawkish because of the strengthening euro.  In that battle, I expect a stalemate, with the market left to go on its own path, which I believe to be a choppy pullback that stays between SPX 2455 and 2410.

The market is currently not too focused on Trump's words about a government shutdown if he doesn't get border wall funding.  But if there is one thing about Trump, he doesn't like to back down from confrontation.  Add to that the debt ceiling debate and there are negative catalysts waiting to be focused on at any sign of weakness.

Since we are near the upper end of that SPX range, I would favor either cash or a small short.  As for bonds, I would favor being long for the next few days as the SPX goes to the lower end of that range.

Wednesday, August 23, 2017

Flip Floppers

Well it didn't take long for equity investors to go from fearful to greedy.  The equity put/call ratios have fallen drastically from last week's levels, going from .78 and .82 on last Thursday and Friday to .57 and .55 on Monday and Tuesday of this week.  By the way, Monday was actually a flat day so investors were already starting to get bulled up before yesterday's big up move.

What is quite telling is the nontrivial gap down that we have in the SPX, right after we hit the June highs around SPX 2455.  Based on my social media read, traders seemed quite confident that yesterday was the start of another thrust higher off a panic low, which is quite a change of attitude from previous panic lows.  The crowd has finally started to catch on to the pattern that has repeated itself since the 2016 presidential election.  Buy any 1-2 day dips and be rewarded instantly, and for several days.  The market tends to repeat a pattern until it gets recognized by the majority of traders and then the pattern usually stops working.

Yesterday's rationalization for the strength was talks of tax reform.  It is quite surprising how fast the White House and Congress have regained their credibility after previous failures on health care.  Also surprised how fast everyone forgot about last week, when Trump's comments made everyone think tax reform was dead.

Congressmen have been bought and paid for by all the lobbyists and special interest groups, which is the main reason you haven't had any tax reform in 30 years.  No one wants to take the brunt of the pain when it comes to removing tax deductions and loopholes, and if there are no removals of tax deductions and loopholes, you can't have tax reform.  The Washington lobbyists will not stand for it, and that will be it for tax reform.  Tax reform is not the main desire of the equity market anyway.  The equity market wants unfunded tax cuts, that will blow out the budget deficit, which favors stocks over bonds.

Apparently Trump is now threatening a government shutdown over the border wall.  If he also threatens a breach of the debt ceiling he just might get it!

I sold my short term long yesterday, too early, but I just didn't feel like the rally would last beyond the day.  In hindsight, I should have just waited later in the day to sell, even if I felt like yesterday was just going to be a one day rally.  Something I will keep in mind next time.

Monday, August 21, 2017

VIX Underperforming

Compared to the one day drop we had on August 10, the current pullback is more severe but the VIX has actually been lower.  The VIX September futures closed at 15.25 on August 10, and 14.95 on August 18, despite the SPX being lower on August 18 than August 10.  Even with further weakness today, the VIX futures are actually negative on the day.

Although this pullback doesn't look like it will be a quick snapback higher to SPX 2470s, I also don't expect a big pullback that would crack 2400.  We could have a drive down to the 2410 area but I expect that to hold as there is already a lot of put activity in the equity options and the fear is already palpable on financial TV.  Fast Money on Friday was uniformly bearish, expecting more weakness.  When that happens, its usually a fade.

I have added to SPX longs today and will look to play for a short term bounce.

Friday, August 18, 2017

SPX 2410-2420 Support

The market is getting very close to SPX support levels of 2410-2420.  That is the level that has held all summer, after the Draghi tapering scare in late June.  With options expiration today, you are seeing a lot of delta hedging happening, pushing stocks lower, along with the usual fears that you get after the market gets whacked nearly 2% the day before.  The equity put/call ratios have stayed elevated since last week, and today they are sky high.

We are getting close to some decent short term buy zones here and I have gone in small buying the dip.  It is very possible that we see another push lower down to 2410, where I plan to add, but I want to have a bit of longs on hand just in case we pop right back up from these levels.

The financial media's infatuation with Trump and the political headlines is helping to push prices lower and bring out the fear, the right ingredients I am looking for when buying.  Funny how all of a sudden the market got scared that Gary Cohn was going to resign, as if he was the messiah for this stock market.  Tax reform will not get done, it will mostly likely be tax cuts with no reform if anything does get done.

This market has rewarded dip buyers over and over again, it is just a matter of how big of a dip to wait for before buying.  This dip should be a bit bigger than last week's, but not by much.

Thursday, August 17, 2017

Another Delayed Reaction

You would think with all the algo trading and computers pumping out orders all day, the reaction would be nearly instantaneous, but we've had delayed 1 day dumps, both on "bad" political news, last week North Korea, and this week Charlottesville.  Both are irrational excuses to sell, but frankly, the market is at irrational levels, so it was waiting for any type of psychological trigger to get the ball rolling downhill.

During this month, after my bearish tilt, the only real profits I made on S&P trading was on the long side, holding over the weekend.   It just goes to show you that trading from the long side has been the easier money, and continues to be so.  Of course, this kind of market will not last forever.  But the consensus among the investors that I hear from is that a 5-10% correction is due, and that it is a buying opportunity.  But the feeling I get is that we'll only get a 5-10% correction as the market gets volatile and is forming a top.  You saw that starting from the fall of 2014 going to summer of 2015, leading to the sharp drops in August 2015 and January 2016.

The way the crowd reacts to a pullback reveals a lot about the future direction.  I did not expect such a fuss over a 40 point pullback last week, and the market promptly rallied off that 2440 level.  Even as we bounced back earlier this week, investors weren't buying in and the rally earlier this week felt more like a short squeeze than anything else.  That can explain the strong price action ahead of the FOMC minutes yesterday, as shorts didn't want to hold a position ahead of possible dovish news.

So you have high equity put/call ratios on just a small dip in the market.  It usually means the downside is limited here and is a positive for the bulls.  On the other hand, the terrible breadth and potential negative catalysts (debt ceiling/ECB meeting) in September favor the bears.  I expect the kind of choppy trading like we had in March and April ahead of the French elections, this time ahead of the debt ceiling in September.  So probably a little bit lower, than chop back up a little bit higher, and repeat for a few weeks till the debt ceiling resolution gets closer.

It seems that the top will have to wait after the debt ceiling, and on more positive news flow.  I now expect new all time highs sometime in the fall.  There we probably have the final blowoff top, blasting well through SPX 2500.

See little edge here.  Missed the short as I was too careful on my entry.  You can't catch them all, and I've missed quite a few short term shorting opportunities being too careful, but no regrets as they weren't great opportunities.  May go in small again and buy the dip around SPX 2430-2440.

Wednesday, August 16, 2017

Draghi Wavering on QE Taper

The big news today is sources saying that Draghi will not send a new policy message at Jackson Hole next week.  Many were expecting Draghi to send hints of a QE taper like he did a couple of months ago but he's obviously not in the tightening mood these days.  With the stronger euro, Europe doesn't look so hot anymore.  It was the weak euro after all that boosted European stocks, not improving fundamentals.  In other words, Europe is the new Japan.

Europe is stuck now with permanent low rates.  They have fallen into the low rate vortex in which monetary policy has to rely on QE to have any effect on the economy.  It is something the US barely escaped and it is something Europe will not be able to escape this time around.  The baseline fundamentals are just too weak in Europe.  All the growth sectors (basically just technology) are based in the US, and the underlying demographics and labor inefficiency make European equities a poor long term investment at these valuations.  And of course European fixed income with the negative to super low yields.

The US stock market is benefiting from the weaker dollar this year, as the S&P outperforms the Russell 2000, but relying on a weakening currency for stock market gains is unsustainable.  Eventually other countries get sick of having to take the pain from a strengthening currency and they start loosening monetary policy to combat it.

Europe is stuck between a rock and a hard place.  They are going to have a tough time dealing with a strengthening euro, and you are seeing the first signs of Draghi feeling the heat.  This should be an ongoing story over the next year as Europe struggles to normalize as the euro strengthens.

We are right in the middle of the old range, now just waiting for it to hit the top of the range to put on some shorts.  With these unvolatile markets, 5 SPX points is a big deal.

Tuesday, August 15, 2017

Sell Top of Range

Remember that 2465 to 2480 range?  It was the same old trade day after day.  Now that we're back into the range, I don't think the bearishness from last week's dip has completely gone away.  Yes, it will go away, soon, but it may take a few days.  At which point I think this market will dip again.  Look at what happened to the bond market the last couple of days.  Usually the bonds keep their bid a bit longer even after a stock rebound due to after effects of the safe haven bid.  But bonds have given back all of their North Korea headline gains.

The notable weakness in the bond market so quickly after a rebound should keep stocks in check today.  I don't see a wild run to new highs like you would have seen in 2013 or 2014.  This is a heavier market and the breadth is worse.  So I will be a willing seller at the top of the range, near SPX 2480.  Just waiting for the buyers to get complacent again and we should get towards the top of range.

Monday, August 14, 2017

Back to Previous Range

We are now back to the lower end of that eternal range of SPX 2465 to 2480.  Once again, those that panicked off the splashy headlines are now in a tough spot of whether to buy back higher or be stuck on the sidelines.  However, this time, being stuck on the sidelines is not so bad considering the limited upside here.  With the ECB tapering cloud hanging over the market this fall, as well as the debt ceiling, you probably will not be able to break out higher in September.  The two weeks left this month look like we will be chopping from 2440 to 2480.  I did get long small on Friday but have already sold into the strength today, somewhat early.

In other news, bitcoin is turning into a full blown parabolic bubble going over $4300, another sign that speculation is hot and heavy in the financial markets.  I would fade this thing if I could get easy access to shorts.

Not much edge here, but thinking at least one more trip back down towards 2440 this month.

Friday, August 11, 2017

Delayed Reaction

We had one of those delayed reactions to North Korean headlines on Thursday.  On Wednesday, when the headlines were all over the news, the market gapped down and worked its way back to nearly flat on the day, giving bulls confidence that the worst was over.  Then we got the surge of selling in the indices and an unwind in short VIX trades.  Now we are near that 2440 support that I mentioned before.  It is sturdy support and it is probably good for a bounce here over the next few days.  I haven't gotten long yet but may put in a small long position either short VIX or long SPX going into the weekend.

I am sure people think that its crazy to be long over the weekend with all the possibility of nuclear war but I am playing technical levels and the fear after just one big down day was palpable.  CNBC Fast Money were uniformly bearish and looking for a deeper pullback.  It could happen if you see further volatility unwinds, but that is low probability.  Not going to go crazy buying the dip here, but will probably go in small and look to see what happens next week.  If we go down some more, I will probably buy more.  These are short term swing trades.  Don't want to do anything long term here.

Thursday, August 10, 2017

Soldiers are Faltering

The generals are marching on, but the soldiers are having a hard time following the leaders.  The Russell 2000 peaked out in late July above 1450 and made a 2 month low breaking 1400.  That would be the equivalent of the S&P dropping over 80 points in 2 weeks.  And you can't blame a weaker dollar for this divergence.  The USD index has basically been flat over the last 2 weeks.

I am sure if we get a selloff that the mainstream media and investors will blame Trump and North Korea for it, but the broader market has been selling off for 2 weeks already.  It only has gotten more extreme lately.  Typical of late stage bull market behavior is the lagging small caps and deteriorating breadth of the market.

As much as the market has changed with quants taking a bigger share of trading activity, the underlying tendencies remain.  Investors start crowding into the winners and high growth names as they have a harder time finding earnings growth in the rest of the market.  Volatility is really the only missing ingredient for a top at the moment.  And I am sure that will not last for long as a VIX at these levels makes no sense when the major indices are so far above their long term trend lines and moving averages.  Also, the prevalence of vol selling strategies to generate income probably contributes heavily to this kind of dead market.  You can not tell me an S&P 500 that closes between 2470 and 2480 for 3 straight weeks is normal and random.  It just sets up a spring coiled to go the other way when these vol selling trades unwind.

Human nature never changes.  They are magnets for catchy headlines like Nuclear War when boring headlines about central banks are much more important to asset markets.  It seems like yesterday's bullish reversal from a bad news gap down surprised traders but that playbook has been in play for several years now, just rarely in 2017.  How soon people forget.

We have another gap down today, perhaps it is delayed North Korean jitters (I am sure that will be the rationalization if we go down), but the truth lies underneath the Dow and S&P 500.  Still feel like there will be a pullback down to 2440 but just watching at this point, as I don't like selling short when traders are nervous about war, and definitely not buying this pig unless conditions are near perfect.

Wednesday, August 9, 2017

Volatility Comes In

We've finally shaken up this sleepy market, and who else but Trump to start it up.  You would figure the guy would have lost his credibility by now but the market still takes him at his word.  "Fire and fury" at North Korea was all it took for the market to suddenly get worried about nuclear war.  If it wasn't such a complacent market, this news would only cause a blip and be over with in a few hours but the markets are still feeling the after effects.  The VIX was so low and the range so tight.  The VIX is still low, not even a teenager.

It seems like I threw in the towel on the short a few days too soon, although yesterday's fakeout to the upside looked like it could last a couple of days.  And it probably would have without Trump's words.  These type of events aren't something that you can predict, coming out of the blue.  And long term, it has no effect on the market.  It is more psychological.  If North Korea was actually a real military power, then you might have something to worry about.  A North Korea vs US war would end quite quickly and the uncertainty of North Korea would be eliminated and the market would rally.  It would probably be similar to a Brexit type market reaction, down sharply for a day or two and then a face ripper once investors realized that its a nothing burger.

The news stations on a slow August day had a field day talking about North Korea.  Talking about Trump and nuclear war is irresistible to the mainstream news media, and blasting the news was enough to get traders nervous and selloff the futures.  We are at ES 2465, which is still part of the trading range over the last 3 weeks.  All that happened was the fakeout breakout above 2480 and then a return to the range on the North Korea headlines.

I see no edge at these levels inside that tight trading range of SPX 2460 to 2480.   Leaning towards a breakdown below 2460 to 2440 but not much conviction.  I don't think market participants want to be long heading into the weekend so probably trading heavy till Friday.

Monday, August 7, 2017

Placid at the Top

There is hardly a breeze even at this high altitude.  I have never seen a top so calm.  Which means that it's probably not the top.

Volatility usually happens when you get eager buyers and sellers clashing in a surge of volume.  We are definitely not getting that here, despite the potential bear catalysts in ECB tapering and Fed balance sheet reduction.   The equity market already faced a little heat back in late June when Draghi hinted at ECB tapering but both the bond and equity markets shrugged that off quickly.  Will that same catalyst be able to provide a bigger downdraft the next time?  It is questionable because the market has mostly priced in those events already, with the Bunds going from 0.25% to 0.60% over a few days last month.

There is the China put ahead of the National Congress meeting in the fall because the leaders want to make things look good and will pump plenty of money to do so ahead of the meeting.  So you don't have many worries out there, and I don't considering the debt ceiling a real worry.  That has been more of a political spectacle than anything else.  They always raise it after acting like the world will end if they don't.

The only long lasting downdraft that I can see is if we get that global growth slowdown that I see coming soon.  It doesn't have to be a big one, just enough to affect earnings negatively and inject volatility into the market.  Even a move in the VIX from the 9s to 15 would seem like a big earthquake.  This market has gotten so used to the calm conditions that a 1% down day these days feels like 2-3%.

The calm, overvalued conditions are not what precede a top.  It is unstable, overvalued conditions which do.  Right now, we are not even close to those conditions.  Which is a bit shocking considering how overvalued the equity market is.  Yes, the weak dollar is helping the US multinationals but that comes at the expense of Europe and Japan.  So globally, there are no net effects.

I was short last week and I covered for basically break even.  I gave it a shot on the short side, but it's taking too long for the move to develop and my conviction level has gone down to the point that I'd rather be flat than a little bit short.  Back on the fence and waiting for easier opportunities.