The Other Side of the Trade

Whenever you enter a trade, there is somebody who wants to take the other side.  People forget that for every buyer there is a seller.  And it matters what type of person is on the other side. 

Let’s say you sell short a blue chip tech stock like AAPL.  Who is on the other side?  Most likely the person on the other side of the trade is an institutional investor, because for such a huge stock like AAPL, most of the end user volume is coming from funds managers or investment banks.   Sure you have the HFTs skimming profits, but they aren’t a long term factor. 

Now let’s say you short a low float, small cap stock that is up 100% on PR hype, or even a chat room pump.  There are so many of these kinds of stocks that I won’t even mention the name.  Basically your typical pump and dump play.  Who is on the other side of that trade?   Probably retail investors.  There may be a few hedge funds and quant shops that specialize in short term trading on the other side,  but the majority of the volume will be retail.  

Who do you want on the other side of your trade?  Institutions are far from being great investors, but they are much better informed than retail investors.  Retail investors make a lot of mistakes, which become magnified when trading volatile stocks.  Here is a list of some of the most common retail mistakes:

1.  Chasing the latest hot stock, buying into a PR or chat room pump believing the hype.  
2.  Minimal knowledge of fundamentals, don’t read or understand the SEC filings.  
3.  Looking for fast, quick gains, playing on much shorter time frames.
4.  A good trade is  a trade.  A bad trade becomes an investment.  Holding on to losers and becoming bagholders after the pump.  
5.  Poor at risk management.  Not cutting losers, liable to get margin calls and blow up.

Compare this to the most common institutional investor mistakes:

1.  Herd behavior and group think, but on a much longer time frame than retail investors, which makes it tough to fade.
2.  Can’t take excess downside volatility, due to client/bank demands.  Often stop out of positions when they go against them, even if fundamentals of stock haven’t changed.

Retail investor mistakes are much more common and more fatal when they happen.  Trading is about taking advantage of opportunities.  Opportunity comes when the other side makes a mistake.   That is why its easier to make money trading small caps than big caps.   And definitely much easier than trading macro like stock indexes, bonds, and FX. 

In macro, its dominated by the institutions.  That is why its much harder to beat that game.  The biggest advantage of trading futures vs small cap stocks  is leverage.   The next biggest advantage is liquidity.  You can trade more size and get in and out much more easily without moving the price.

When retail investor numbers are low, like they were from 2008 to 2016, then its better to trade futures.  But when retail investor numbers are high, like it is right now, its better to trade small cap stocks.  

We made an all time high yesterday and quickly sold off intraday, and gapping up strongly again today.   I sold longs on Monday and have been on the sidelines, mainly focused on individual stocks.  I don't expect to do much unless we get a big move either way from current levels, either an overextension move higher towards SPX 3800, or a dip down to SPX 3620. 

SPAC Boom

When the ducks are quacking, Wall Street comes to feed them.  And they are happily feeding them.

That chart was made 3 weeks ago, showing 208 SPAC IPOs YTD, it is 248 now.  so 40 SPAC IPOs have come out during that time.  Those 3 weeks, had more SPAC IPOs than any year from 2009 to 2017!   That is an average of 1 SPAC IPO per trading day in 2020, with the vast majority coming in the 2nd half.  

And why are they excited to buy these IPOs?  Here is the IPO performance over the past 10 years vs. the S&P 500.  The outperformance in 2020 is 1999-esque. 

And these SPACs, with their "blank checks", have to buy something to justify their existence.  And when you have so many SPACs competing to buy up companies that are the most popular on Wall Street, that probably means one thing:  overpaying for a lot of horrible EV related companies.   The counterargument could be that they could just not find a suitable company to buy so they'll return the money to investors if they can't find anything worth it.  Are you kidding me?  They'll buy any two-bit EV company, even if its run out of a garage.   Just like in 1999, when you have a sector that is suddenly hot and in demand by investors, supply is created one way or the other.  Either through SPAC acquisitions (now) or IPOs (1999).  

The important thing to remember about an IPO boom is not the amount of supply created by the initial issuance of shares, but the torrent of lockup expirations that happen 90-180 days later, bringing out even more supply than the initial wave of shares.  

Eventually, the hot demand for these EV and ESG names ends up creating a lot of bad supply, as in overpriced, hyped up, and unprofitable concept stocks that always sound great when there is no pressure to be profitable because all the revenue is supposed to be generated 3 to 5 years in the future, when supposedly everyone will be buying EVs and dumping their gasoline/diesel powered cars in a firesale to used car dealers. 

This EV boom is in many ways more ridiculous that the dotcom boom in 1998-2000.  At least with the internet, it was actually a disruptive technology that had a huge effect on businesses.  But EVs?  Really?  Are people's lives really going to change because they have an electric car instead of an ordinary gas powered one?  With the internet, the imagination could run wild with all the possibilities, and yet, not that many companies benefited.  With something far less consequential as EVs, its hard to imagine it changing much of anything. 

Electrics cars are a solution seeking out a problem that doesn't exist.  Last time I checked, electricity was mainly generated by burning coal and natural gas, and those create greenhouse gases just like burning gasoline and diesel.  Energy efficiencies are similar when you consider that while battery powered cars are more efficient than internal combustion engines, a lot of energy is lost in the converting coal/natural gas/renewables into electricity.  And the additional electricity demand from EVs will be mostly coming from coal, which is the cheapest, most abundant, and dirtiest.  So no, its not going to have much of an effect on greenhouse gases.

The parallels with the dotcom boom and the EV boom are eerily similar.  After a long bull market, that lasted 18 years (1982-2000) and at least 12 years (2009-2021?), investors throw caution to the wind and start to speculate like crazy on the latest hot technology.  This ends up creating a lot of IPOs to supply the demand.  From 1998 to 2000, IPOs were considered guaranteed big money profits for those who could get in at the offering price, as the IPO pops on the first day were huge and IPOs outperformed the broader market. 

And the speculation eventually spilled over to biotech and semiconductors in the later stages of the bubble in early 2000.  Recently, biotech stocks have been on fire, especially the speculative small cap names that retail investors are heavily involved with.  Semiconductor stocks have also done very well this year, and have easily  outperformed the Nasdaq composite over the past 3 months: 

The only question is what stage of the bubble are we in, using the 1998-2000 comparison.  Well we are definitely past the December 1998 stage when internet stocks were the new stock market favorites and IPOs were just starting to ramp up hot and heavy.  But I don't think we are at the December 1999 stage when almost all the people I knew who were investing were over the top bullish, Fed was tightening, and economy was roaring at the time.  

The Rona has probably extended this bubble by 12+ months because it just resulted in a flood of liquidity, as M2 has gone parabolic, with the combination of a Fed spewing tons of liquidity which is being spent by the government in the form of monster stimulus packages.  So I think we're probably in the middle of 1999 stage of this bubble, which probably means that there is still another 6 to 9 more months of this craziness before we hit the peak.  That timing coincides with the 180 day lockup expiration supply that should all come around the summer/fall of next year.  It should also coincide with the peak of the vaccine distribution and opening up of the economy, which will bring a euphoria of economic optimism along with a very overextended stock market.  

The crowd is already quite optimistic as it is, but when most of the Rona worries go to the rear view mirror, and investors start to talk more about pent up demand and excess savings, that would probably result in the irrational exuberance that would be the bell ringing at the top.  Until then, bulls have the edge. 

The Bull Case

I am long term bearish on the stock market, but there are a few things that are favorable for longs.  

1. Money supply growth.  This is the biggest positive for the bulls, and it is unlike any rate of M2 growth when the stock market is at an all time high.  Usually, when stocks are at all time highs, the Fed is not doing a lot of QE and signaling that it will stay at zero rates for years.  From March to June, M2 was growing at a 65% annual rate, and while it is slowed down from June to December to a 14% annual rate, that is still very high, higher than anytime from 2010 to 2019.  When money supply grows much faster than the demand for goods and services, it goes to asset markets, the big 3:  real estate, stocks, and bonds.  If the supply of those 3 don't go up enough to meet the demand, then prices have to go up, regardless of valuations.  

2. Monopolies and oligopolies.  Over the past 40 years, competition for almost all industries has gone down and profit margins have gone up.  Nothing from the US government is signaling a change in policy.  There is no desire by politicians to do anything to hurt the stock market, which means they won't want to break up monopolies for fear of hurting the SPX.  Which leads to number 3.

3.  Fed and the government want a higher stock market.  It is clear now that the Fed has thrown away any fake concerns about asset bubbles.  They don't care about financial stability.  Powell tried to fight the stock market and he took the loss when he caved big time in January 2019.  Since then, Powell has followed the standard Fed playbook of acting like turtles and doing nothing when bubbles are getting bigger, and acting like rabbits and immediately bringing out the bazooka at any sign of a weaker stock market and/or even a sniff of a weakening economy.  Powell now knows that he's only liked and given good reviews when the stock market is going up.  SPX is going up = good monetary policy.  SPX is going down = bad monetary policy.  So naturally he will do anything to make the stock market go up.  

Note that I mentioned nothing about the Covid vaccine or the pent up demand for travel and services.  Those are positives for the real economy, not the asset market economy.  A lot of people confuse the two and that is the biggest reason for macro bets that go bad. 

Rona Part 2?

 Going into the end of the year, what else, but the Rona to provide the last bit of volatility for this crazy stock market.  You just had your casual 120 SPX drop from Globex open to the premarket lows, on nothing more than some fears of a Rona variant that is causing a little panic out in Europe, again  (remember late October Europe 2nd wave fears?).  And they agreed to the $900B stimulus deal.   And they also pumped the financials on Friday after hours on the Fed pouring more gasoline on the inferno by letting the banks buyback stock.  

So a classic bad news following good news situation, where they aggressively sold the positive news, and Europe joined the sell party thanks to Rona fears again and you get a panicky plunge from 3680 to under 3600 in just over an hour.  

This is NOT your typical post crisis bull market, it is a hyper volatile chase for performance, as the hedge funds are at 99 percentile net long exposure along with mom and pop pouring money into equity funds after the all clear post election.  

So how to play this?  With Christmas and New Year's just around the corner, any post opex hangover that you see today will not last for long.  Those that want to sell size and reduce risk have probably already done so earlier in the month.  The yearly performance is strong, so its hard to get fund managers to de-risk in a panic over worries about being down on the year.  This looks like a decent buy the dip opportunity, with strong support below at SPX 3600, and above that, SPX 3630-3640 area.  Also, gold and bitcoin are strong, so you don't have much collateral damage here.  I did a little buying in the premarket and may buy more during the regular session.  Not looking to hold for long, maybe a few days to catch a relief bounce.  Will definitely sell before the end of the year.  

In an optimistic market, you get these occasional plunges lower to trigger all the sell stops from fast money longs, to cleanse the system, for the next move higher.  The first couple of dips are worth buying, when the dips start to become more common, it gets more and more dangerous buying the dip.  Right now, we're not at that danger zone.  The market still hasn't given enough opportunities for latecomer bulls to buy, so it should still be relatively safe to buy.  

It is interesting that they use computer jargon to describe these Rona mutations, they are calling this new virus a variant that is 70% more contagious.  At this point, the market is still expecting the vaccine to eliminate all future Rona fears so it will probably look past this little hiccup in the road to normalization.  Now if there was a problem with the vaccine showing serious side effects, that is a more serious issue, but this just looks like another Rona scare that eventually goes away and is quickly forgotten.

Leaning long today into next week.   With the renewed Rona fears, I like Nasdaq over SPX until year end.

Pump and Dumps in a Raging Bull Market

In a strong bull market, there are fewer opportunities in the index futures market.  When institutional investors are comfortable and have made a lot of profits, they trade much better than when they have been losing and are starting to feel the pain.  Much like a poker player usually playing better when he's winning than when he's losing, investors are similar.  It is psychological, because poker players, just like investors, don't like sitting on losses and want to make something happen to reverse their situation, and that means either playing too loose or aggressive.  For traders, its overtrading and betting too big to make up for losses quickly.

Even though the VIX is staying above 20, this isn't a typical high VIX market.  Since most institutional investors are sitting on large profits, they feel less of a need to trade, they sit on positions, and they make fewer irrational decisions based on fear.   When institutions make irrational decisions based on greed, those are harder to fade because they have staying power, and they are willing to hold on to positions for months at a time.   

That is where the big difference between retail investors and institutional investors comes in.  The retail investors in general, have a shorter time frame, and dominate the action in the small cap space.  Institutional investors, due to size constraints, usually avoid investing in small cap stocks.  

There is a clear dichotomy between how small cap stocks with a low percentage of institutional investors trade versus mid to large cap stocks with a high percentage of institutional investors.  Try this:  Go to finviz.com and do a screener on stocks that are up the most for the quarter.  Look at the stocks with almost no institutional ownership and compare them to the ones with some institutional ownership.  You will quickly see that the stocks up the most this quarter with some institutional ownership are much closer to the YTD highs (ex. CRIS, SOL, FPRX) than the ones that have almost no institutional ownership (ex. KXIN, SPI, CBAT), which have faded from their rallies much more quickly.  

This is extremely useful information for a strategy that involves shorting actively traded stocks that are up huge in a short amount of time.  A lot of these stocks up hundreds of percent in a few days are overreacting to some press release, a chat room pump, or most likely, involved in some hot sector which is latest fad in the market.  It was the Covid stocks back in April to July, the EV stocks from the summer to now, and biotech stocks starting from last week.  

Retail investors piling into the latest hot stock is the reason most of these stocks are up huge in a short amount of time.  But these retail investors don't stay for long, and if they do, they just become long term bagholders who eventually give up a few weeks later, sick of tying up their capital in a stock that is grinding lower.  So they instinctively sell quickly when the pump is over, learning from their past bagholding experiences, and their mass exodus is the reason for the dump.   

But not all pumps are dominated by retail.  Some have a lot of institutional investor involvement, and those are the stock rallies that have staying power, because these institutions have longer time frames and aren't looking to sell right after they buy.  

Institutions are also involved in pump and dumps, but they are on much longer time frames.  Just look at TSLA.  That may be the biggest pump and dump since the ones we saw in 1999-2000.  But it is a long term pump, so you can't really fade that, and expect a positive outcome, unless you are looking out over several months and years, and can withstand big drawdowns along the way. 

Some people may think it is odd to focus on shorting stocks during a raging bull market.  But they don't realize that it is only in a raging bull market when you get so many irrational moves higher in stocks that are unsustainable and quickly fade away.  It is only in these type of markets do you see mass retail investor participation in small cap stock speculation which create so many short term pump and dump situations. 

And it is harder to pick stocks that will explode higher, even in a bull market, but with shorting these pumps, you are already selecting the ones that are ripe to move back lower.  It is about probabilities and shorting these small cap stocks offer high winning percentages with big wins.  But there is one big downside to this strategy.  The black swan.  Some of these stocks will make insane moves that defy gravity, at least for a few days.  Causing giant short squeezes which are exacerbated by predatory algos looking to force short sellers to liquidate their positions.  A few examples:   AQXP, KBIO in 2015, DRYS in 2017, UONE, KODK, SPI, GLSI in 2020.  There are many more which I've forgotten about. 

So like a lot of trading strategies, the high winning percentage strategies are the ones that are usually short gamma.  Shorting small cap pumps is basically a short gamma strategy, as these stocks can sometimes go up thousands of percent before the eventual dump.  So unless one can manage risk and position size properly, its not a long term winning strategy, due to the potential blowup factor.   I would only recommend using only a portion of one's capital for this strategy, as 1. risky with black swan risk and 2. don't scale up well as most of these pump and dump stocks have low floats. 

Overall market is acting like its 1999, slow grind higher with dips quickly bought, rampant stock speculation, and optimism staying high.   Based on the time of year, starting from mid December, its really a no shorting time period because you rarely get any meaningful selloffs, and the risk reward is poor for shorting the indices.  So I will probably not be trading from the short side in SPX for the next 2 weeks.  All the action these days is in individual stocks.

Walking the Tightrope

Throughout my trading career, I’ve had a few close calls.  Not just losing a lot of money, but real danger of losing it all and going negative.  

I was trading only stocks at the time, and I only had one strategy.  Shorting pump and dumps.  It was a high percentage strategy, winning percentage was over 90%.  And the wins were not small, around 10-20% on average, over 1 to 2 days. 

Winning percentage over 90%,  aggressively using margin, and 10-20% average gains add up quickly.   I didn’t know why more traders weren’t doing what I was doing.  There were some, and most of them were making a good living off of it, but most of the traders out there were long, and short sellers were viewed negatively.  Just looking at the Yahoo message boards at the time, you could tell.  Most of these retail traders/investors were looking for the next big move higher, not lower.  

It seems like shorting is just not natural for most traders, rooting for a stock to go down to make money.  Its like betting on the don’t pass line in craps.  Most craps bettors bet the pass line.

When I was trading back in my earlier years, I was reckless.  If I was winning most of the time, why not make as much as possible and bet big?  I had no money management, no risk controls.  It was a balls to the wall type of trading, and it led to spectacular rises and even more spectacular crashes.

Going all in was not something that I did only for the best setups, I did it almost all the time.  If only had I known back then how extreme volatility in the account is bad for long term returns, I wouldn’t have bet so big.  And probably would have a lot more money now. I wrote about this several years ago.  I didn’t even think about the Kelly criterion, about the probability of losing my bet.  Or even the thought of having cash as providing optionality for averaging into a bet at a better opportunity if the move goes against me.

In February 2000, I shorted a multi day runner called Metrocall (MCLL), a paging company that was suddenly now a wireless internet play.   Investors stretching their imagination to pump up a stock.  It was common back then.   It went from around $1 to over $5 in a few days and came up on my scans.  I knew it was a dinosaur paging company that was eventually doomed so I started shorting the stock around $5.25, with plans to add more if went higher.  It was a crazy time, moves got wild, so even the aggressive short seller I was didn’t go all in right away.   The next day  the stock gapped up and started trading in the 7s, and I decided to add more, going almost all in, giving myself some room to weather a spike towards 10 if it happened, but I expected this to be the final pump day and expected a dump coming very soon.  It grinded higher into the close that day, closing near 10, putting me in a margin call.   I was in the middle of the maelstrom, and all I knew was just to hang on and hope it didn’t go much higher.  

The next day, I was in a full blown crisis situation.  MCLL gapped up above $11, and I was all in.  I knew it was eventually going to go way below my average short price, I just had to weather the storm.  The short squeeze and momentum daytraders piling into the stock took the stock all the way to $13 in the morning, and now my account had a negative balance!  I had blown up completely.

I was expecting a phone call or an email from my broker about the margin call and my negative account balance but they didn’t contact me.  The stock went over $14, making my account balance even more negative, and I was getting bigger and bigger into debt to my broker.  The volume and price action was frantic on MCLL, but it eventually settled down as the stock ran out of momentum and fell back down to close around $11.  I breathed a huge sigh of relief as it looked like I dodged a huge bullet.

I was going to get another margin call, but at least I had 2 more trading days for the stock to go down so I could hold on to the position.  I had no other money outside of that brokerage account so sending in funds was not an option.

Back in those days, most online brokers used primitive end of day risk management systems, and you actually had 3 full trading days to meet your margin call.  You could push the boundaries of using margin and even hold on to positions despite losing a lot and becoming deeply under margined.  They only liquidated you after the 3 days were up and you were still under a margin call.

Luckily, MCLL gapped down the next day under $10, and the selloff that I expected to play out 2 days before finally happened, and I covered about half at a more manageable loss and kept the rest and covered a few days later near break even. 

If I had put on the same trade in 2020, I would have been liquidated on the way up near the peak and my account would have been in tatters.  Or worse  they discover it late after my account went negative equity and liquidated me.  That actually happened a few years later, although that’s another story for another day.

That kind of all in trading eventually caught up with me and I did blow up a year later, and again and again after that.  I still have to fight those outlier black swans every now and then, even though I don’t ever go all in on my capital on one trade anymore.

We are getting the big gap up off of the small down day on Friday, on no particular news, or is it Mutual Fund (now ETF?) Monday?  I did cover my small short on Friday for a small gain, as I wasn’t super confident about the trade and took the gift of a dip to cover.   No edge at these levels in SPX, just focusing on individual stocks where the action is these days.

A Full Blown Casino

The daytraders are having a field day with this market.  They are pumping and dumping tickers left and right.  It was EV stocks in November, and the flavor of the month in December is biotech.  It only takes a few hot runners going up hundreds and even thousands of percent in a day to get the retail punters super excited about a sector.  How about this chart for a spike to the moon?  Just a casual 2400% move higher in one day. 

These are the type of moves that get daytraders coming back for more, trying to find the next $GLSI.  Today, they have crowded into another small cap biotech, IMMP, up a casual 180% as I write.  

You had craziness like this in 1999 and 2000, with one sector being hot, and then suddenly, out of the blue, another sector becomes the one that all the traders chase after.  In early 2000, suddenly biotech became the hottest sector on the planet for a brief couple of months.  In 2000, it was from internet stocks to biotech stocks.  It is eery how similar the baton is being passed from the long running hot EV stocks to the suddenly hot biotech names.  

There are no fundamental reasons for the rise of biotech.  It is all based on price action and momentum, and hoping to find the next big mover going up hundreds of percent in a day.  It is lotto fever in the stock market.  That is why so many retail investors are buying calls to try to hit that home run, that one trade that makes several hundred percent in a week.  

It is dangerous to play in these waters, especially if you are playing the hottest names.  I am sure quite a few traders blew up on GLSI, both on the short side on the parabolic move higher, and then halt fest move lower from over 150 to 50 in an hour.  

The quant funds with their algos are all over these stocks, manufacturing short squeezes, and then panic dumps from the longs on the other side.  It is casino capitalism.  A bull market that seems to have lasted forever has finally sucked in the retail crowd.  A 1999-2000 deja vu moment in time, where optimism is through the roof, volatility rises, and crazy moves happen.  

This is an unstable state of the market.  This level of speculation usually doesn't last long.  Dumb short term money is driving the markets now.  The smart money don't create these crazy moves in stocks.  The dumb money does.  Eventually, money transfers from the dumb money to the smart money.  When the dumb money goes back to being just a bit player in the stock market, without the ammo to create these wild, crazy charts, then we'll return to your staid, boring 2012 to 2017 type of market.  Until then, make hay while the sun is shining.  

Golden Age for Pump and Dumps

Don't take these markets for granted.  Retail investors won't be staying around at this kind of volume forever.  Back when I was trading in 1999, I thought those kind of crazy markets would stay around for longer than it actually did.  By late 2000, most of the crazy moves in individual stocks was gone, as retail investors were getting pummeled in their tech stocks and risk appetite dropped off a cliff.  

Back in the old days, only the crappiest of companies that couldn't easily get through the IPO process resorted to being bought out by SPACs.  Now, SPACs are all the rage, a quick way to raise money to buy private companies and take them public.  Of course, the ones who are upstream get the easy, almost risk free money, while the ones downstream, the retail investors and ordinary mutual funds absorb the risk of buying two bit companies at absurd valuations.  

After a long bull market, what was once avoided are now embraced.  Profitless companies going up on Wall Street hype are the hottest stocks.  TSLA in 2020 is the YHOO of 1999.  The internet stocks of 1999 are the EV stocks of 2020.  The big difference is that unlike in 1999, the insiders of these junk small cap companies weren't doing secondary offerings and filing huge shelf statements to dump as much stock as quickly as possible.  The float basically stayed the same and most of these companies didn't fully utilize the pumped up stock prices to raise a bunch of cash.  It made for some unbelievable short squeezes and momentum runs that didn't get hit with a bunch of company issued supply. These days, the insiders of these small caps have gotten wiser, and issue as much stock as they can into the higher prices and better liquidity that daytraders and momo traders provide.  

To name just a few companies that have issued tons of stock after retail traders pumped up their stock prices:  NNDM, KNDI, XPEV, SOLO, AYRO, IDEX, SRNE, IBIO, HTBX.  

All of these stock offerings after PR pumps or even chat room pumps just give the short side that much extra edge.  Especially for those holding swing and longer term positions.  The downside of holding short positions in these pump and dumps is that the short borrow interest rates are usually extremely high, anywhere from 50 to over 200% annualized.  A stock could go down 10% in a month and if the short borrow rate is 120%, the short position in the stock would just break even.  Back in 1999, there was no short borrow fee, so it was a great time to just hold long term short positions and ride down the pump and dump plays.  But with so many hedge funds shorting and clearing firms trying to profit off of their customers, these firms are charging some ridiculously high short borrow rates to just hold a short position in a lot of these junky names.  

 But it is these same hedge funds that are the willing buyers of discounted stock in these stock offerings that a lot of these pump and dump companies utilize to raise cash.  So there are pros and cons from having so many hedge funds out there.  

As for stock indices and bonds, its a tough game right now.  When the SPX grinds higher and makes new highs, its tough to chase and go long, but also usually not a great time to try to fade the trend because its not easy to short the tops.  And the tops usually last longer than the bottoms, so there is a smaller time window of profitability for short positions, even if you do get close to shorting the top.  Still have a small short SPX position, but not looking to get aggressive, and willing to take a 2% pullback and look to cover there.  

Stimulus S.O.S.

 Here we go again.  Yesterday, the politicians had to throw in their word on a fiscal stimulus package before year end, and now the market is floating higher on stimulus hopes.  S.O.S.  Of course that is on top of the continuous vaccine pumps that we've had for the past 3 weeks.  Don't know if the stimulus will actually get passed, but I don't think it really matters, the market is expecting a stimulus bill passed sometime early next year when Biden gets in, so its not really a big deal whether it gets passed or not. 

Looking back at 2020, it was just a giant bear trap that killed the bears.  2021 just may be the giant bull trap that kills the bulls.  There are clues in the market that tell you that this rally is a bit different than those in the past.  Normally, after a capitulation low, and a 5 week rally to an all time high, the VIX goes down way below 20, and usually below 15.  Instead, the VIX has stayed above 20, even with realized vol much lower than implied vol.  You really haven't seen this kind of VIX action since the late 1990s/2000.  

You also haven't seen the same kind of dispersion between the Nasdaq and the Russell 2000 since the late 90s when like this year, Nasdaq was the strongest and the Russell 2000 was the weakest.  Only in the very late stages of the bubble in early 2000 did the Russell 2000 finally start to keep up with the Nasdaq and even outperform.  

That is what is happening now.  They say that strong breadth is positively correlated with future stock returns.  Yes, if coming off a bear market and or deep correction when valuations are not expensive.  Right now, we are at extremes of overvaluation in stock market history, so strong breadth is more of a sign of a euphoric topping phase to these eyes.  Time will tell, but the excessive money printing doesn't always go to the stock market, but can go to the real estate market, or even go to the bond market.  

Most of the excess money supply in Europe has gone to the real estate and bond markets, as the stock market has gone nowhere for the last 13 years there, while real estate prices have risen strongly. 

It has been 5 weeks since the October 30 bottom in SPX, which is about your standard 4-5 week rally off a capitulation low, before you start getting into more choppy trading and more range bound prices.  Lot of "good news" lately, and optimism seems a bit overdone here, so I took a small SPX short yesterday morning to try to pick the top of the range.  Not a great setup, but ok for a small position, just to keep me interested in following the indices and ready when better things show up.  Still mostly focused on individual stocks, where the action has cooled off a bit, but still some opportunities there.

Classic 3 Day Parabola Pattern

 When trading based mainly off of pattern recognition, with a foundation of fundamental analysis, there is an optimal amount of movement, or craziness.  Too little movement and not many opportunities show up, too much movement and you get into the danger zone, the edge of the cliff where the equity curve can drop off the edge like the head of a sperm whale, when moves go further than what was imagined.  

For example, the Nasdaq in 1998 and 1999 had the right amount of craziness and movement, but the Nasdaq from December 1999 to March 2000 was a parabolic move that blew up mean reversion strategies and short sellers along with it.  

Right now, in late 2020, we are near the maximum range for optimal price movement for trading the short side of parabolic moves in individual stocks.  A little bit more craziness, an extra day of parabolic price increases, a few more bold retail traders, and you push the needle past optimal movement to the stop loss zone and max pain regions.  

The trade in PLTR last week is a perfect example of the optimal level of craziness for shorting.

You had the classic 3 day parabolic move up, with day 3 bringing on huge volume with lots of excitement among retail.  If you look at the reddit wallstreetbets forum, you can get a great sense of what the fast money is chasing.  It is a great source of short ideas.

Another one, which I missed, just because MRNA is not really a classic daytrader stock, until the last 2 days, when its acted like one.  So totally missed the boat there, but if I was paying attention, I would have gone in short yesterday morning.  It was almost a carbon copy of the PLTR trade from last week.  Huge opportunity missed there.  

Despite what looks like easy pickings in the above 2 cases, sometimes you don't get such clean price patterns and the associated euphoria near the top.  Sometimes the patterns can get extended out and overall, the upward price volatility during this bubble phase has to be respected.  Going all in short because a trading opportunity would win big 90% of the time, leaves one exposed to the 10% probability of a black swan happening, with prices going beyond what was planned for.  

I don't use hard stops, and most strategies that use hard stops have deteriorating performance, but that doesn't mean there are points in a price spike where something unusual is happening and its better to cut losses, to avoid a possible downward spiral of forced short covering and further price squeezes.  But the art of short selling is knowing when to cut the loss to avoid blowing up, and knowing when to just hang on through the maelstrom to get to the other side, when the storm clouds clear up.   And avoid covering near the top.  

Overall market looking toppy yesterday, with lots of call volume relative to puts, and also weak bond market which gives index shorts a higher probability.  May get in a little short today or tomorrow.   

Retail Investors are Back

 The return of the retail investor is the biggest change I see in the stock market in 2020.  After getting burned after the dotcom bubble burst and after the horror show of 2008, they were mostly sidelined, but the masses have re-embraced the stock market.  It has taken 20 years to get back to these levels of call option speculation, especially in momentum stocks and daytrader favorites, such as TSLA, NIO, and a fairly new entrant, PLTR, which is the hottest stock among the retail investor crowd these days.  

 The excitement over concept stocks, with questionable long term business models are popular again.  On Wednesday, as PLTR was going parabolic, it had the highest option volume of all stocks, more than TSLA, more than AAPL.  And it was mostly in calls, as these millenial investors usually only bet on stocks going up.  

There are opportunities that arise when these bettors pile into call options after a parabolic up move.  The options prices become over-inflated and the options market makers starting jacking up the premiums to make it all but impossible for these retail punters to make money buying calls.  It happened in late August, and it is happening now. 

The basic strategy in these mania markets is to wait for the retail traders to push up the prices of their favored names to extreme overbought levels, and take the other side of the trade, usually in the morning when they usually enter their trades.  That is why you see frequent big gap ups in the daytrader favorites, as they are short term players and usually buy in the morning and sell later in the day.  

A similar phenomenon happened back in the dotcom bubble, when the internet stocks made most of their gains from big gap ups, as retail traders were excited to buy in the mornings.  Playing these momentum stocks is probably safest by buying near the close and selling at the open, capturing the gap up move that usually happens in these names.  It was one of my core strategies back in the bubble days, when internet stocks would make crazy moves.  

In these kind of markets, the easier fish to catch are in the stock market, and the stock indexes trade more randomly, since there is very little fear or emotional selling in the broader indices.  Over the past week, I have been focused on individual stocks and trading what is being moved by retail.  Its much easier to beat retail traders with short time frames and rather predictable tendencies than institutional investors who have longer time frames.  

Last week did seem to finally bring that euphoric mindset on Wall St, which probably means that we'll be chopping around for the next several days, and probably have a little pullback.  But I don't expect any big down moves here, there are just too many bulls out there waiting to pounce on any weakness to buy. 

The Next TSLA

Back in the old days, it used to be retail investors buying small cap stocks looking for the next MSFT.  Of course, they don't realize that MSFT was never a small cap stock, it went public in 1986, and had an initial market cap around $700M, which would be several billion in today's dollars.  Of course split adjusted, the IPO price was in the pennies, and that's how naive investors convince themselves that buying these low dollar stocks that often got public through a reverse merger are somehow going to become the next MSFT.  Same with TSLA.  It IPO'ed in 2010, and had an initial market cap of $1.7B, so it was also never a small cap stock.  

But retail investors never let facts get in the way of a good story, or a wild imagination and far fetched dreams.  Would you want to drive a car like that pictured there? (SOLO)  Imagine getting into a car accident with a SUV with that car.  And that company traded at a billion dollar valuation a few days ago, before daytraders fled the stock after Citron Research did a quick tweet bash job.

There are tons of these EV stocks, and EV-related stocks, that have gone parabolic over the last week.  These are internet stock in 1999 type of moves that we're seeing here.  It is a stronger and deeper move than the Covid pump and dump stocks this summer.  It all feeds from the ridiculous up trend in TSLA, once it was announced that it was entering the S&P 500, which will happen on December 18 at the close.  By that time, all the index funds will be buying their TSLA shares, and it is a ton of shares, from all the front runners who have bought ahead of them and will release their inventory just when those index funds need it most.  Probably right near the top of the move.  

What I noticed about the EV plays is that most of them are Chinese stocks.  The Chinese pumpers are a step ahead here, as they are selling the most sought after shares in the retail investing universe.  These companies are looking to feed the ducks with grossly overvalued paper, which are sold to dump cash into the coffers of the company, to spend it on who knows what, anything but cash spent on generating future profits, but more likely just a piggybank for the company insiders.  The corporate governance in China is probably one of the worst in the world, so anything goes.  Just look at the Shanghai Composite 20 year returns, it is way behind the Chinese inflation rate, and performing much worse than a simple investment in Chinese government bonds.  

Anyway, there isn't much interesting happening in the macro world, as is usually the case during a strong bull market.  I will probably sell the remaining longs on Friday, and look to put on a small SPX short looking for a pullback next week.  The much talked about large pension fund selling rebalance doesn't seem to have materialized, or if it has, they've done a very good job of disguising their purchases with no market effect. 

Most of my trading focus lately has been in the EV stocks, where volatility and trading volumes are through the roof.  When retail traders are actively involved, I want to be there.  Tuesday looks to have been a short term top for the EV sector as a whole, and I expect a choppy downward move for the next several days.  Unlike the past week, gap ups in these stocks will probably be good fades for the next week or so.

Omen for 2021: the EV Bubble

I will be doing a series of blog posts in the coming months detailing signs which are an omen for a monster bull market top in 2021.  Today we'll talk a little bit about the EV bubble. 

My favorite gauge of retail investor behavior, the EV stocks, are melting up.  Bitcoin has been on fire, another retail favorite.  Speculation is about as rampant as I've ever seen since the dotcom bubble.  The EV stocks are the new internet stocks.  It doesn't matter how trashy the business model is, or how self-serving the corporate governance is, retail can't get enough of these stocks. If Robinhood were releasing their investor holdings data like they used to, I am sure that the top of the recent additions list would be all EV stocks.  

I am starting to do some deeper research into this electric vehicle sector, and my first impression is that the hype is much bigger than the actual potential earnings for these companies.  The barriers to entry for this sector is extremely low, and it is already quickly being commoditized by cheaper producers from China.  There is very little IP involved, and it actually seems like its easier to develop and manufacture electric vehicles than ordinary gasoline/diesel powered cars.  

The valuations for some of these stocks, the most obvious being TSLA, but includes a bunch of questionable Chinese EV names, like NIO, LI, XPEV, just to name a few of the larger ones.  At these levels, I am almost sure they will be at much lower prices 12 months from now, but will they be at lower prices 3 months from now?  I am not so sure about that, which is why I haven't put on any long term short positions yet, but these overvalued levels are definitely getting me interested in doing the research to pick which ones look the worst, although they all look like horrible investments from just doing basic research.  

It looks like we are building a gigantic Frankenstein with retail now believing they are invincible, along with the hedge funds, as they ravenously buy stocks at the highest valuations since the peak of the dotcom bubble.  In the meantime, China has managed to export a bunch of crappy IPOs with big time valuations in the hottest sector of them all, collecting huge amounts of USD from both institutional and retail investors.  China just may come out on top after this bubble bursts, having collected hard currency for worthless shares in what are basically wealth transfer schemes, from retail to corporate management. Same thing happened with most of the internet stocks in 2000.   

Just look up Naveen Jain of Infospace to see what a corporate predator looks like, feeding the retail ducks when they quack. 

I must admit, I didn't have enough experience to take advantage of all the opportunities on the downside after the dotcom bubble burst, in 2000.  But in 2021, I have a strong feeling that I will be given a second chance to short at the beginning of an extended bear market which will confound and demoralize late coming investors for years to come.  

One by one, the signs of a classic extended bull market top are beginning to show.  The pieces of the puzzle are coming together.  It is fascinating to see that human nature really doesn't change, no matter what the new technology is, or what the economy looks like.  Greed always rears its ugly head at the worst possible time after years and years of conditioning to buy stocks, TINA (there is no alternative), and full faith and trust in the Fed, to the extent that we've never seen before.  

The Fed created this field of dreams, and if they build it, they will come.  And they are coming fast and furious.  

Still expecting a pullback down towards the SPX 3500-3520 level, but this market is taking its time consolidating and digesting all the "good news".  My spidey senses are tingling and sensing a sharp one day selloff looming.  Don't want to short, just because of the seasonal bullish tendencies around Thanksgiving holidays, but starting next week, after the holiday is behind us, I could see a back to reality and a reduction in the froth that has built up over the last 3 weeks. 

Tide is Turning

This market looks tired.  After 3 weeks from the pre-election bottom, we have gotten to price levels and positioning targets which make this market more of a two-way market, not the one way market that it has been for this month.  That, along with the likely pension fund rebalance which is estimated to be quite large, should make it harder for this market to move higher from these levels for the rest of this month.  

The put/call ratios are showing some complacency, as they never really went up during the past 2 days when you had some downside action.  We are seeing quite a lot of speculation now in the EV space, my best indicator for retail speculative fever. It is getting a bit too hot right now, and it looks like we are due for a pullback to shake out some of these latecomers.  

We got the news after the market close that Mnuchin has requested the Fed give the money back to Treasury to reallocate funds.  This just seems like Mnuchin wants one more dip into the well to pad his slush fund and spew it out to who knows where before he leaves.  I wouldn't read into anything more than that.  The Fed emergency facilities weren't being actively used anyway, thus the large remaining funds there.  And its really not about the presence of those various BS facilities, its more about the Fed's willingness to break laws to use them.  And I'm sure Biden's Treasury secretary will be a monster dove and be very willing to break laws to spew printed dollars to all their favored special interest groups.  

I reduced my ES long position yesterday, just to be able to have more ammo to buy dips on what I expect to be a post opex move lower.  But instead of buying SPX, I am looking at the NDX as a better play.  According to Mark Hulbert of Marketwatch, growth and momentum do much better than value in December.  And based on what I am seeing on CNBC and Twitter, most people are leaning towards value, so they will be offsides if tech stocks start to outperform again.  Not interested in the short side, during this seasonally bullish time period.

Too Much Good News

A PFE pump on Nov. 9, a MRNA pump on Nov. 16, and another PFE re-pump on Nov. 18.  With all the positive vaccine news pumps coming out lately, it's become too much of a good thing.  Its made investors complacent, and the market got a little bit ahead of itself.  That PFE vaccine pump on Monday, November 6, looks like it was the short term blowoff top for this move, as the market hasn't gotten close to those highs. 

It doesn't mean there is a trend change, but there needs to be a consolidation of the big gains since October 30, and perhaps trade between SPX 3500-3630 until you get institutions willing to pay up again to get in.  Also, we need to see the market worry a little bit more about the Rona 2nd/3rd wave.  I know the permabears have been talking a lot about those spiking Rona cases lately, but I haven't seen it as much among the more mainstream market pundits.  We probably need to see some of that bad news to get prices to levels where it is worth buying. 

Europe is outperforming, and that market looks like it wants to grind higher.  Overseas markets have been trading less volatile than the US, and grinding higher.  It is a risk on environment, and the election reset did enough to purge the speculative positioning to make it safer to play the long side.  I think this uptrend continues into year end as the institutional money gradually goes from bonds to stocks.  Its late stage bull market behavior, increased volatility, ala 1998-2000, with sharp up moves and scary sharp down moves, in a wavy, uptrend pattern, until the final blow off top.  That final blow off top looks set to happen in 2021, probably when the Rona vaccine gets distributed to the masses.

I still have a partial long position on, and will look to add on dips.    Friday is opex day, so we could get a potential flush out next week on a post opex hangover.  Will be looking to buy then if the market dips down below SPX 3520.  Worst case scenario, it could go to 3420-3440, but more likely the downside will be contained to the 3480-3500 zone.  I don't think we get there, but just in case we do, I want to have the ammo to buy at those levels.

Another Vaccine Pump

 You figured that they would have known that there was going to be another good news pump on Moderna vaccine news today, but there are still a lot of non believers out there.  Not of the vaccines, but of this rally where the market is steadily going higher as the number of coronavirus cases skyrockets in the US and Europe.  

There are STILL a lot of investors that are fearful of exploding Covid cases and lockdowns.  Lockdown is such a scary word to these people, who think that the stock market can't go up if bars and restaurants are closed.  Its almost as if these investors think the economy is dependent on people going out to eat and drink.  No, people can eat and drink at home, and with the savings that they accumulate from not going out, they can use that to buy stocks.  How about that logic?  

There was news last week that the amount of inflows into equity funds was the most since a couple of years ago.  That is the kind of news that matters to the market, not the number of coronavirus cases.  The stock market is about supply and demand, and when you are in peak buyback season, and also have a huge amount of money coming in these days after holding back due to the election fears, that is a simple formula for higher prices.  

Let's not make this job harder than it is.  Let's not look at what happened in March when virus was raging out of control and think this is a repeat of that.  Now, with hope from the vaccines, which are being pumped as a silver bullet, the market sees the end of the tunnel when it comes to the Rona and that's all it needs to know.  The stock market doesn't care about deaths, or numbers of people getting ill, it only cares about who is the more eager side, the buyers or the sellers?  And its shown since the election that the buyers are much more eager to get in than than the sellers are to get out.  

I am staying long here, might get a little pullback in the morning off the big gap up, but expecting a grind higher into November opex, on Friday.  Not interested in the short side, and after I sell longs, will look to buy dips. 

Rona Wall of Worry

Its the news that the short term bears can always point to.  It's red meat for stock market bears.  The exploding number of coronavirus cases in the US and Europe.  The fear of lockdowns.  It takes a giant rear view mirror to see all the way back to March.  Its the bear's time machine, back to the good old days of March.  It lasted for all of 1 month, but it has left a deep imprint on a large subset of investors, who can't fathom investing in stocks when the economy is so bad. 

I was one of those stock market bears, and I nearly got killed shorting from 2900 holding it all the way up past 3200, on leverage, barely able to wiggle my way out of it by covering on one of those fleeting, but scary dips that looking back, were great buying opportunities.  Bearish at 2900, and bullish at 3550.  LOL.  

I know it seems ridiculous, to be bearish in May at 2900, and then be bullish just 6 months later at 3550, but you have to trade the market that is, not the market that you want.  

The move last week, from SPX 3270 to 3510, over 5 trading days, was a big clue, as to where the market wanted to go.  And that is higher.  Throw out the extreme day to day volatility, which just clouds the longer term picture, and see the forest, not the trees.  With record numbers of coronavirus cases, and what would seem to be horrible news in Europe from the lockdowns, you have the Eurostoxx outperforming the SPX handily, another big sign that its not just the US that is strong now, Europe has joined the party.  So much bad news on the virus, yet so strong of a stock market.  That is flat out bullish.

There is immense underlying strength and risk appetite to buy equities, small cap, large cap, value, growth, international, etc.  And the key is that the election last week, was the big barrier that kept that eager money on the sidelines waiting for the uncertainty to clear, before they put in lots of capital into the stock market.  And the fund flows since last week show that there was a huge influx of money going into equity funds.  While that would often be a contrarian indicator, this time, with so much in equity fund outflows year to date, its just a sign that investors are looking to put money back to work now that the big feared event, the election, is behind us.  The motivated money is looking to buy, not sell, and that usually leads to higher prices.  

I am just playing the money flow game, and not even thinking about the overvaluation, which is extreme.  If all I looked at were the fundamentals, I would be short all the time.  But I am not playing in those very long term time frames, I am looking to catch moves over a few weeks, not a few months or years.  And the coronavirus wall of worry is what the market is climbing, and it can do so until we get to truly excessive valuations and much better economic data, neither of which are likely to happen this year.  

Staying long SPX I bought on Tuesday, and sold some Treasuries bought earlier this week.  

So Many Value Contrarians

 It's fashionable to be a value investor these days.  You would think that Nasdaq stocks were performing horribly and small cap stocks were doing great all year when you see so many "experts" come out and tout value stocks, and opine on how overbought and overvalued tech stocks are.  Here is the YTD chart for the NDX and the Russell 2000 (RUT):

The NDX is up 33% YTD, and the RUT is up 4%.  Only in the past few days have you seen a big divergence, and it is well chronicled, and the new fast money trade is to buy the Russell and short the Nasdaq, the opposite of what was working all year until this week.  

Suddenly, some positive vaccine news and the market is starting to price a hot economy, selling off bonds and bidding up financials and energy stocks.  If I had a dime for every time someone on Twitter argued for value over growth, and a dollar for every time someone on Twitter argued for growth over value, I'd have a lot more dimes than dollars.  And that's not just recently, its been like that for months.  The value bulls are much louder than the growth bulls. 

Just because you are buying beaten up stocks and underperformers doesn't make you contrarian.  Often times the contrarian trade is to ride the big up trend while skeptics say its gone too far.  This is one of those times. 

I am no raging Nasdaq bull, but if I had to choose between buying the NDX and the RUT at today's prices for the rest of the year, I would choose the NDX.  

The people on CNBC almost uniformly are bullish on the value stocks, the cyclicals, and not so bullish on what has been working all year until this week, the tech stocks.  At this point, most fund managers' base case is for a cyclical economic recovery in 2021 with fiscal stimulus and vaccine news pumping stocks higher.  

Because of the amount of risk reduction in a lot of portfolios ahead of the election, there is still some money to be deployed by fund managers who decided to wait till after they got some certainty on the election to buy stocks.  So that's what will drive stocks higher over the coming weeks, not this new found optimism about vaccines leading to a quick reopening of the economy.  That is why I bought a partial long SPX position yesterday after I sold on Monday.  

The post-election money flows are going to be a bullish factor for a few more weeks, so I want to ride that wave higher.  But its not because suddenly the economy will look great in 2021 because of the vaccines, its purely a trade based on inflows. 

I also have started an intermediate term position going long Treasuries, as 10 year yields are close to strong psychological resistance at 1.0% and 30 year yields at 1.8%.  I don't expect any kind of meaningful rise in interest rates like you saw after the 2016 election.  The Fed has a totally different mentality about rates than 4 years ago.  Its a transitional time for the US bond market, from going from the old normal of rate increases to fight inflation to the new normal of reducing/stopping QE to fight inflation.  

The US bond market is well on its way to follow the Japanese and European bond markets, perpetual ZIRP/NIRP, with only changes to QE acting as a tightening/loosening mechanism.  With the dependence on low rates to maintain economic growth and the sheer amount of debt outstanding, they just won't be able to raise rates without crushing the financial economy, which is all they care about.  So the era of interest rate changes in US monetary policy is basically over, in my view.

Rona Vaccine Pump

 You knew this was coming.  The vaccine pump.  It was about as well telegraphed as the Trump election fraud speech last week.  But the market is still going bananas over it.  Its not the news that's important, its the reaction to the news.  Another trading maxim that has a lot of truth to it. 

And despite what I would consider expected news, we still got an absolutely monster gap up and pump on the announcement.  This after 4 straight huge up days last week.  The crowd wants to speculate on stocks.  They were just holding their fire until after the election was over.  Now that it's over, the ammo is oozing out in torrents of gunfire.  The speculators are coming out and buying up as much beta as they can before the next guy feels the FOMO.  

In the old days, they just called it greed.  I guess FOMO is just greed with immediate urgency.

The FOMO is more contagious than the Rona.  This is stock market that we have.  Its not your old bull market, this is your FOMO bull market and it doesn't trade the same as you would expect it to trade like it did from 2009 to 2019.  The moves are quicker, sharper, and the drawdowns are quick and nasty.  

Instead of having a stairways pattern of upmoves and flat consolidations, you are having waves of ups and down which eventually lead to higher and higher prices, as the up waves are stronger than the down waves.  

You just have to ride the waves up and down, eventually it goes higher, its riding the bubble.  It will end badly, but probably not until the economy is "good".  Sold a lot on Friday unfortunately, but still have some longs and will hold for much higher prices.

Sticky Vol

This volatility isn't calming down.  It's off the hook.  Usually after such a huge rally after a big event, the VIX would plummet and stay down.  But it's not staying down.  Its bouncing back up, and bouncing off of high levels.  It bottomed at 26 yesterday.   The October 12 top saw VIX just barely get to 25 before exploding higher.   That was understandable, as VIX was juiced higher because of the election.  But now?  

Some of these moves in the overnight market are obscene, stuff you would think that would happen after the market is down 10% and in a steep downtrend.  Its happening after 4 straight strong up days, all of which had intense up and down moves during the regular trading hours.  

I don't think its because Trump isn't conceding or screaming fraud.   Its not because of the second wave of coronavirus.   Its just a new market, an overvalued market that doesn't have a strong valuation base to stabilize it.  Like a 1999-2000.  I keep coming back to that dotcom bubble era, because the stratification of strength in the market is as extreme as back then, when tech stocks were bubbling higher while the small caps were going nowhere.  

In the late 90s, the market was in a strong bull phase but so was volatility.  Volatility fluctuated around 20 to 30 for most of that time.  Now in 2020 after the crash, we are fluctuating mostly in a band from 25 to 40.  Back in 2017, volatility was fluctuating from 9 to 15.  Market is almost 3 times as volatile as 2017!

Its not a healthy bull market for the long term.  In the short-intermediate term, from a few weeks to a few months, we can definitely go higher, but all that will do is setup a spectacular fall when the fundamentals come to bear.   No organic growth, total dependence on loose monetary and fiscal policy, and a ballooning budget deficit and overall national debt level that will begin to pressure the dollar lower, and eventually take away reserve currency status.  And those sold out politicians in Washington DC either don't care or don't think its a long term problem.  

I am still long, but I know I am just playing a game of musical chairs, so I always keep an eye out for too much froth and optimism.  From my observations of traders on social media, I just don't see the enthusiasm that one would normally expect after such a monster 4 day rally.  The bond yields are staying low, which is key.  I still see too many analysts on CNBC tout value over growth.  That tells me this Nasdaq bubble still has a long way to go.  

And its the Nasdaq stocks that will take this market higher, not small caps.  Bad breadth is not a sign of overall market weakness, as the Fintwit "experts" think, but a sign that the crowd hasn't bought into the rally.  Once the small caps start outperforming for a few weeks straight, then you will know that there isn't much time left for stocks to keep going up.  We are nowhere near that point. 

Monster Relief Rally

The market hates uncertainty.  Not just the stock market.   Also the bond market.  People hold bonds too, and they also have market risk.  Investors were coming up with all sorts of nonrelevant (in my view) reasons why the market fell so much last week, mainly the Covid 2nd wave and associated lockdowns and the lack of a fiscal stimulus deal.  Well, nothing has changed on those 2 items, yet the market is screaming higher.  I heard very little about the main reason I think markets were weak last week: the election.

The 'Rona is just not a market mover anymore.  It is too much of a well known variable, and most of the assumptions are pessimistic for the short to intermediate term.  We've had lockdowns and the markets went up.  The stock market isn't scared of a partial lockdown.  Closing down bars and restaurants just isn't that big of a deal.  So there is nothing worse to price in for that variable.  Its not really much of a variable anymore.  

To a lesser extent, fiscal stimulus is also becoming a more well known variable.  We will get a fiscal stimulus, its just a matter of size.  And I don't care how much McConnell and his crew talk about too much debt and too much money, this isn't 2010, or 2012.  It's a totally different environment for government spending, and it is embraced by both sides, although Republicans will pretend like they care about the deficit, when they really don't.  And especially because the masses don't care.  

So if those two variables are not really moving the market, then it has to be the most feared event of 2020, and probably the last 4 years.  The 2020 US election.  When you have brokerage firms raising margin requirements to prepare for volatile markets due to that event, and well ahead of time, you now you have a much feared event.  And that event is what has dominated trading flows for the past 3 weeks.  After the event, its a huge sense of relief for the market, and that means higher prices.

And even though we still haven't had an official Presidential winner declared, its looking like Biden with very high probability.  And that certainty is what is feeding the market higher.  Even when you probably had the worse case outcome of a Biden win and a Republican Senate, the market just isn't going to get down to the minutiae at the moment, its just relieved that there isn't a contested election, or mass riots, like some doomsdayers were predicting.  

The fact that we are getting such a huge rally despite there still not being a declared winner for President shows you the underlying buying pressure in this market.  You've got gridlock in Washington which is a huge sigh of relief for bond investors, and bonds are screaming higher along with stocks.  That's about as bullish a scenario as you can get.  Despite what the five minute macro experts tell you on Twitter, stock market rallies last a lot longer when they are accompanied by a strong bond market. 

Lastly, I've seen this sh*t so many times, being the bear that I am, getting my face ripped of on V bounces, over and over, that I finally learned my lesson.  9 times out of 10, the dips will be bought and act as a springboard for big rallies so I'm just playing that game.  Fundamentals will matter in another time.  Not now.  Sometimes its just as simple as buying a decent dip and just hanging on for the ride back up.

A Close Election and Event Trading

Biggest takeway from the event of the day was how inaccurate the polls were.  These are absurd misses by pollsters, with Trump outperforming the polls by a  lot in almost every state.  Rather than shy Trump voters, I just don't think Trump voters like taking polls.  They were underrepresented in 2016 and even more in 2020!  

Biden is a weak candidate, hardly better than Clinton, and he picked an unpopular vice president.  His only advantage over Clinton is that he is male.  Trump did everything to sabotage himself, refusing to budge and agree to Pelosi's demands for a big stimulus, which probably would have been enough to make him the winner.  

Looking at the results so far, with lots of mail in votes remaining in the swing states, and Biden closing in on Trump, it looks like Biden will probably squeak by with a narrow victory.  He had this election on a silver platter, with the coronavirus raging across the US and the economy in the crapper, but he's barely ahead.  

Its clear that the mainstream media is losing its influence on the voting public, even though Trump is an easy target with all his character flaws, the Trump bashing is nonstop.  Even though I am no Trump fan, its clear that the major networks except Republican dominated Fox want Trump to lose.

The Democrats should have dominated this election, with the spending advantage, the news coverage advantage, and with the unpopularity of Trump among independents, but it looks like they will barely take the White House.  And be unable to take the Senate.

Looking at the market reaction overnight, you could tell a few things that one can logically deduce.  I wrote about this over 10 years ago on a blog post called event days.

Basically what happens is that many traders and investors, usually holding a long position, either reduce the size of their position or hedge it buying puts or selling futures, ahead of the event.  Many of them are fast money, meaning that they get in and out often, and have an inordinate amount of influence on the short term direction of the market.  Ahead of the event, starting from anywhere from 2-3 weeks prior, to a few days ahead of the event, they are net sellers.  When only a few days are left ahead of the event, they are mostly finished with their risk reduction and that lifting of the selling pressure and absence of fast money sellers lifts the market higher into the event.  

After the event is over, the demand to buy stocks/bonds/other financial assets is much greater than the supply to sell at that time, especially among the fast money.  And that's why you usually get a move higher after the event is over.  The greater the fear and media coverage of the event, the bigger the pre-event selling , and the post-event buying.  

This phenomena was the main reason I got long late last week.  Last week's flush out induced a lot of put activity, similar to the late June and late September bottoms, which produced multi week rallies.  So last week seems like a short term bottom and in a strong market like this, those can usually produce good rallies that last anywhere from 1 week to 2-3 months.  

Having a Democrat in the White House with a Republican Senate probably means the fiscal stimulus deal will be much smaller than many were anticipating ahead of the election, but at this point, that's so far away from the market's thinking and I can tell investors are just breathing a huge sigh of relief that the election is over and volatility can calm down again, which probably brings in more buyers, especially the vol targeting funds.  

Today is what happens when you remove a huge amount of uncertainty from the market.   One for the memory bank.

Election > Rona

For the market, the election is a much more important event than the ongoing Corona 2nd wave.  France, Germany, and now UK has gone back into partial lockdowns, but its not really as scary as the headlines make it.  Closing bars and restaurants that were probably either losing money or barely breaking even under the reduced customer traffic having to close down isn't a negative.  It probably is a net positive for small businesses to be able to receive government bailouts while they are closed instead of struggling to make money under bad conditions.  

And if this year taught us anything, its not the economy that really matters, its the reaction to the economy from the government and central banks that matter.  And this 2nd wave assures that the ECB and the Fed will probably be pulling out even more ammunition in December, and then if we get a Democrat sweep like the betting markets are forecasting, then you'll get that big fiscal stimulus which will be front run by the markets.  

While I was wrong about how far up we would go from the March bottom, that move was a strong signal that there was a lot of underlying buying power in stocks, and a crowd that was looking to speculate and take risk.  At an extreme, that can lead to a long term top, but when it is at a moderate level and rising, stocks usually go higher.  The last 2 months after the early September top have decreased investor speculation and optimism enough so that this market has room to go back up for 2-3 months without positioning getting too long.  

The somewhat panicky selling that occurred Friday after AAPL and other tech earnings disappointments may have been the final dump before the event.  With the election uncertainly likely to be gone by Wednesday, a market that is prone to speculation and a crowd that is now looking to buy means that we should be seeing a lot of risk being put on after the election results come out, no matter the outcome.  Of course, a definitive victory for the Democrats would be a more risk positive outcome because it all but guarantees a huge stimulus package when Biden gets into office, but even a Trump win would still mean a lot of stimulus would get passed, as even with Trump in office, Congressional Democrats will be looking to spend.  

Really the only black swan would be a contested election where the race is very tight, but I give that very low odds just because of the big lead that Biden has, and even if Trump declares victory when the outcome has yet to be decided, the market will see right through it and wait for the results to confirm either way.  

The amount of angst over this election seems greater than what I've seen in any election, including 2016, which really doesn't make much sense because this election from a polling perspective is the most lopsided one since 1996, and probably the most predictable.  We'll soon find out in 2 days.  

Put on longs late last week, and will hold it for a while.  

De-Risking Week

They always come up with convenient reasons for a selloff.  This time its a combination of the new lockdowns in some European countries and now the AAPL earnings that disappointed.  

Are we looking in the rearview mirror again and afraid of another Coronavirus panic episode?  I don't think any investor thinks this virus will just go away, the market will eventually ignore it, because of 1) less of an unknown.  2) lower death/hospitalization rates per case, 3) coming vaccine announcements.  If the election uncertainty is resolved quickly, like it usually is, with a Democratic sweep, then you are looking at investors looking to add back longs to front run the big stimulus deal in early 2021.  

And the polls are probably much more accurate this time than in 2016, mainly because there are many fewer undecided voters so that leaves less room for polling error.  So far, there has been a big increase in voting so far in 2020, compared to 2016.  And a high voter turnout is advantageous for the Democrats, because those less likely to vote usually lean Democrat.  So I am expecting a Democratic sweep.  It also hurts Trump that the week before the election, you have a big drop in the stock market and also rising Covid cases.  It looks like a perfect storm set up for a blue wave. 

I am positive on the market now until year end, mainly because we are entering the election oversold, with strong support at SPX 3220, and with a lot of uncertainty that will be going away in November.  Also, seasonally, November is the biggest buyback month of the year, so that usually makes it a strong month for equity returns.  

And finally, we are getting some of the weak hands out of the market this week, going into the election, as I was wary of buying because of the new fast money longs that entered in early October.  With the selling this week, I expect a lot of those longs to have been stopped out or just liquidated ahead of next week's big event.  

I think investors have been holding off on going all in until after the election, for fear of a contested election and riots and chaos.  And with the virus raging across the US and Europe, people will mostly be staying home and doing what?  Their new hobby:  speculating in the stock market.  It is a dystopian version of the 1998-2000 dotcom bubble, where bad news is good news, because it leads to more government stimulus and money printing.  

Put on longs over the past couple of days, looking for a rally starting next week that should last throughout November. 

European Covid Panic

European equities have been lagging the rest of the world for the past few months and its finally coming to a climax.  While the SPX is still above 3300, the Eurostoxx 50 has broken 3000, a big psychological support level, to make a 5 month low.  Back in the 2000s, the Eurostoxx 50 index value was actually about 3 times higher than the SPX.  Now the SPX has overtaken it and left it the dust.  

Clearly we can see that the main variable going forward is fiscal stimulus, because in Europe, there are no signals of additional government goodies coming down the pike, but in the US, especially if you get the most likely election outcome, a Democratic sweep, a big fiscal stimulus package is coming in early 2021.  

Both Europe and the US are Covid basket cases, with Covid cases raging out of control, unable to stop the virus like many of the Asian countries.  But for the stock market, the US markets are pricing in a lot of additional fiscal stimulus, but the European markets are not.  Unlike the US, Europe still actually seems to care about budget deficits, and that's limiting the amount of government spending.  While the US is already well on its way to being an MMT country and using the Argentina playbook of giving people what they want and not raising any taxes to fund it.  

I am sure there are still a lot of investors that are still fighting the last battle, as there always is, looking at the rear view mirror.  But the coronavirus is well known now, and most of the future catalysts will be positive in regards to it, because of all the vaccine announcements coming up.  

When I see tweets like this, along with the big gap down, it signals that there is some panic in the market.  Anytime you see trading tweets about riots, that a contrarian indicator.  When there is panic, there is opportunity, and I will be buying stocks today and selling vol as I expect that this selling will be short lived.  If this selling was happening in the absence of news or coming big events, then I would be more wary of buying the big gap down.  But its clear to me that the overbullish positioning from a couple of weeks ago is being pared down and that risk is being taken off ahead of the election.  By either tomorrow or Friday, most of the positions will have been reduced to sufficiently comfortable levels ahead of the big event.  That should give us a bounce from Thur./Fri. to Tuesday.