Midget 110M Low Hurdle Dash

Well, they sure put a bullish spin on those tech earnings.  You lower the bar enough, a midget starts to look like a giant.  Its the midget low hurdle 110 M dash.  And the winner is:  its a tie.  A three way tie for 1st place.  AAPL/AMZN/FB are in a tie, too hard to separate such beautifully manicured earnings, delivered just in time for a last gasp rally after a 4+ months of uptrend.

Its a Friday, let's not take these tech earnings too seriously, or else you will want to rush to push the buy button.

Or this week of trading for that matter.  I thought I've seen it all on Wall St., but you now have Trump pumping individual stocks in his press conference, hyping up that Great American company, KODK.  Ok, they are no longer going to be that Kodak making film that no one uses anymore.  Its now Kodak Pharmaceuticals, after their failed venture in cryptocurrency.  I guess Kodak coin never caught on with the public.  These days, anytime you slap on a Pharmaceuticals/biotech label on a stock, you get instant revaluation.  And if its a Covid stock, triple the average biotech/drug stock.

And Robinhood has gone bananas over KODK!  Going from 9K to 123K holders of fresh, newly made KODK bags, in less than a week, ready to be held for months as insiders and institutions try to rush their sales before the bagholders move on to the next pumped up fad.

It is an insane stock market.  The rationality has been thrown out the window and its a full on rush to buy the next TSLA, or better yet, the next KODK, the next stock that goes from 2 to 60 in 3 days.  KODK was the Ferrari of pump and dumps, what's the next one?  The Hoodies are looking through every nook and cranny to find that next gem, the next turd that is given a glossy, gold plated finish to appeal to the millenial new age investor.

Well we did get that burst of buying after all those earnings came out, but overseas markets aren't as exuberant.  Europe is starting to feel the heat from a suddenly re-valued euro which is making the dollar look bad.  Who would have guessed, if you pump trillions of dollars into the system, more fiscal stimulus than any other country as % of GDP by a mile and more coming down the pike, all with freshly Fed printed dollars, it actually makes the currency go down.

Never would have thought that the European Union would look like geniuses but the US is doing a great job of making that happen.  Throwing trillions at a pandemic and hoping something sticks and the virus miraculously disappears hasn't worked.  Unless the measure of controlling the virus is a higher S&P and Nasdaq, which seems to be the measuring stick for those in government and a large part of the population.

We are almost there, that exquisite moment to short right before the crap hits the fan.  Thinking Monday will be that time, as Mondays have been the investors' favorite day to buy stocks over the last 4 months. 

FOMC Likely to Disappoint

The past 2 FOMC meetings marked intermediate term tops, April 29, and June 10.  This time, I expect it to mark a short term bottom.  The expectations of the Fed are sky high, and that leaves a lot of room for disappointment for tomorrow. 

The Fed says they don't pay attention to the dollar but their policies sure do seem to follow it closely.  If you remember, when the dollar was strengthening in early 2015, Yellen was expected to signal a rate hike at one of the spring meetings and instead, she kicked the can on rate hike signaling and the stronger dollar/weaker oil prices was the main reason for it. 

This time, you have the opposite situation, where expectations are for the Fed to remain super dovish and to continue to aggressively buy bonds.  And the most important thing right now for the Fed is that the dollar is weakening, commodity prices are going higher, but bond yields are also going lower.  That gives him room to fight against market expectations to try to slow the dollar depreciation.  These central bankers are control freaks and usually don't want any sharp movements one way or the other in the currency. 

Powell will not come out as dovish as he did last time, and that will disappoint the market.  Of course, he won't be hawkish, but being less blunt about using his "tools" and not signaling any new asset purchase policies/ yield curve control in the near future would be enough to show the market that he is taking his foot off the accelerator.  And that's all that needed for the market to selloff. 

If my prediction ends up playing out, expect a big pullback in gold, silver, and oil.  A rally in the dollar and a bump higher in 10 year yields.  The stock market will not like it, and will selloff on FOMC day.  Gold and silver are egregiously overbought and the sentiment is getting bubbly, and a sharp pullback is imminent.  A less dovish FOMC meeting would be a dagger into the heart of the newly minted gold bulls who have been buying all time highs. 

If gold can get back close to the highs in the overnight session, it would be worth putting on a swing short position, with a combination of technical overbought conditions with Powell likely not placating the market as much as everyone expects.

Spending Like There is No Tomorrow

The US has sacrificed the currency in order to print up the biggest fiscal stimulus in the world, as percent of GDP.  And what did that do for Covid cases?  Nothing good, but it sure did create a whole army of daytraders pumping up stocks. 

The US has become an MMT country, on its way to being the Zimbabwe of the developed world.  Of course that will boost the stock market, just look at Zimbabwe's stock market, it is the best performing in the world over the past 10 years. 

The Zimbabwe Industrial Index, has gone from 45 to 5870 over the past 10 years.  There are no sustained downtrends when you have the government trying to print their way to prosperity. 

Until you see major resistance from the masses towards more money printing, you will not see it stop.  Even in those cases, the money printing usually keeps going on because it is so hard to stop it.  Throughout history, you have governments abusing the printing press to spend money that isn't coming from taxes, eventually leading to inflation.  Dilution of silver and gold coins with other metals, or just making the coins smaller and thinner. 

You are seeing a huge move weaker in the dollar and concurrent move higher in gold.  The markets see what the US government and Fed are doing and have decided to run.  Eventually, inflation will go much higher as the enormous amounts of currency starts getting pumped into the economy after the pandemic is over.  When you start paying people more money to not work, you will get a bunch of lazy people who will not want to work, but would rather spend that time daytrading or watching videos or online shopping. 

I expect a huge fiscal stimulus package to eventually pass after the Democrats pile on the pork to the Republican deal, making it bigger, spending more money, and putting lipstick on a pig.  The way the two sides compromise is not by cutting off parts of the initial proposal, but its to add lots of pork to take their ounce of flesh from the deal to please their constituents and lobbyists.  What always happens is you end up with a huge bloated spending bill which gets passed is much bigger than what it was initially designed for. 

And the markets love it, all that pork spending, eventually it trickles down to corporations and is a long term positive for the stock market.  Being a bear is fighting the money printing and government spending fundamentals that will not change in the near future.  This is something short sellers need to keep in mind at all times when they see the price action. 

So why short?  What I am discussing are longer term forces which are strong, but the stock market moves are based on shorter term forces as well, and those are overwhelmingly bearish, as I have mentioned in previous posts.  Which is why I am short.  Although I have reduced my short index positions today to be able to add more later this week. 

From the History Books

Looking at the tops in September 2018 and April and July 2019 SPX tops, you can see a familiar picture developing right now.  This only strengthens the conviction that the next big move is down, not up.  

 SPX 2018

  

SPX 2019 

SPX 2020

Focusing on the big picture and away from the day to day price movements will give you a clearer view of the next big move.  It is not one factor that is bearish here, it is a number of them.  

1) Fundamental overvaluation

2) Lots of complacency after a 4 month rally (low put/call ratio, Robinhood speculation in big cap tech and pump and dumps)  

3) Negative catalysts on the horizon with Covid second wave concerns with school reopening and November election with Biden having a big lead in the polls.  

4) Parabolic Nasdaq favorites suddenly topping out over the past 2 weeks.  Lots of future bagholders in the works in TSLA and other momos.  

5) Seasonal weakness starting from late July to middle of October. 

I have one leg in short, and plan on adding the second leg on the next rally if/when it happens next week, which is most likely scenario, according to my short term timing model.  I don't cover today because too many longer time frame metrics are pointing to an imminent correction.  If there is no rally next week, hide the women and children, it is going to get brutal out there real fast.  

I am expecting the Covid case numbers in the US come down over the coming weeks, which my get some bulls excited, but I don't expect that to be a bull catalyst.  Its not about the current Covid numbers, its about the future Covid cases which are the big uncertainty.  And unless its radically reduced in the US, which is very unlikely due to a large disobedient population, a large base of live virus cases will keep the fire burning, with potential for a big outbreak at anytime.   Vaccine hopes are hyped up right now, but many will refuse to take them for safety/conspiracy theory concerns, making herd immunity nearly impossible.  Plus, new studies coming out showing that antibodies mostly disappear after 3 months, and cases of people getting the virus a 2nd time a few months later.  

Hopefully traders get excited about the phase 4 coronavirus deal coming up and bid up stocks next week as we get closer to it being passed.  Even though I am short, I want to add more at higher prices.  The longer they delay the deal, the more likely the big correction will be delayed.  Because there will be a group of traders that refuse to sell and hold on expecting a rally after the deal is passed.  But at the latest, it probably gets passed on August 7, the last day Congress is in session before their generous vacation time till after Labor Day.   

Price Action in Nasdaq

This choppy action with Nasdaq lagging is exactly the type of price action that I was looking for.  It confirms that the blowoff top last week, and retested in after hours on Monday has led a cascade lower in the Nasdaq since then.  This is how stocks trade when there is buyer saturation and the marginal buyer is at much lower levels, while the marginal sellers are looking to get out more aggressively. 

Here are a few of the things that are great signs for bears that happened this week:

1) Nasdaq short squeeze on Monday, followed by extreme lagging performance the next 3 trading days. 
2) Dollar much weaker this week and it still hasn't helped the indices sustain higher prices.  It puts a hole in the theory that a weak dollar is supportive for stocks. 
3) Low put/call ratios throughout the week until the middle of today's trading session, and then Nasdaq stocks fell off a cliff.  Still a lot of call buying in Nasdaq names, surprisingly. 
4) S&P 500 breakout above 3230, the break even point for the year, getting bulls excited, building complacency, and then rug pull today. 
5) Got the EU recovery fund deal out of the way, and not much angst or concern about phase 4 coronavirus deal.  Everyone knows a deal will get passed, so lack of worry means it is already priced in, so not a positive catalyst. 

Plan is to add to short index positions if we get a reflexive bounce next week, preferably around SPX 3270-3280.  If it doesn't get there, may just add anyway after AAPL/AMZN earnings next Thursday. 

Game of Psychological Warfare

Trading is an extremely personal activity, with no absolutes, and no correct way to do it.  You can't take a cookie cutter approach like you can with so many other academic subjects, like math, physics, or sports like golf.  Beyond the basic financial math of valuing a stream of cash flows from a bond or stock, it gets vague and value is in the eye of the beholder.  Those that say you have to be good with numbers to be able to trade don't really know much about trading.  It is more art than science.  A psychological game more than a numbers game.


Pattern recognition, which is the foundation for learning almost everything, is probably the most important skill.  But unlike other things, the patterns aren't constant, and change just when they become too obvious to the majority.  This is what screws with investors' heads, because the odds are constantly changing and indefinite. 

Probably the closest thing I can find that can match trading is tennis.  It's an individual sport, and you are matched up against an opponent who has certain patterns.  And you have to come up with a strategy to optimize your chance of winning, while also staying mentally tough, and not placing too much emphasis on the latest few points.  Also knowing when to go for a winner and when to just try to not make an unforced error.  Tennis, and maybe golf after that, are probably the most psychologically demanding sports out there.

It can be mentally draining trying to stay emotionally disciplined, and not fall into deep rooted instinctual tendencies that are counterproductive for trading.  Especially after a string of losses, or even just one big losing trade.  Why do we have a tendency to trade more aggressively after big losses to try to comeback quickly from the loss?

Its partly feeling the need to get revenge, detesting the feeling of being a stuck loser.  If I'm down 50%, it feels almost as bad as being down 90%.  So might as well risk all my money to get back to break even and feel much better about myself, with the downside being losing everything, which wouldn't feel much worse than my current down 50% state.  While its hard to lose everything in one trade with stocks, it is quite easy to lose everything in one trade with options, and even futures.

That's probably why a lot of traders that go from stocks to options, a lot of them don't go back to stocks.  Stocks become child's play after you start trading options.  Stocks are the gateway drug.  Options are the end game drug.  But since most retail traders are buying options, the odds are against them.  Options are usually priced too expensive, both calls and puts, because you are either buying insurance or lottery tickets, both of which have to pay a premium above intrinsic value.

I would never recommend anyone to just buy naked puts or calls.  The only way to neutralize the inherent overvaluation of options premium is by entering spread trades, which most retail traders don't do.  I am not really into options because of the lower liquidity and higher transaction costs and slippage, but if transaction costs and liquidity were the same as futures, I would just trade options spreads.  Its much easier to define risk and reward and safer in that respect.

Back to trading psychology.  From my experience, you have to be willing to take losses when your thesis no longer is valid or not working, but you can't be so willing to take losses that you don't give your trades room to breathe and time to work.  There is a fine line between being too tenacious, refusing to lose and being vulnerable to blowing up, and being too weak, taking losses too easily, and bleeding heavily from repeated paper cuts.  Trying to find the right balance is not easy, and for those that can't really do it, its probably just better to systematize everything. 

Not much action in the past few trading days, holding Nasdaq short and waiting.  Probably won't get a big move lower until after the phase 4 coronavirus deal gets passed, which is likely early August.  Everyone's bull case is still based on Fed and overflowing liquidity, but QE has been greatly reduced, still large, but definitely not an amount that guarantees higher stock prices. 

Its been 4 months since the March bottom, usually a correction is imminent after such a long up trend.  Market is ignoring the daily Covid case numbers but there is still that fear of a big jump in the fall as schools reopen.  Also looming election where Trump likely to lose and possible Democratic sweep of Congress probably keeps investors from taking on more risk over the next few months.  Just playing the odds, there is no certainty in this business. 

Nasdaq Toppy

The Nasdaq blew off on Monday, as did TSLA, the icon of this speculative mania.  It is now time to get short the bubble, as the parabolic moves signal end of trend behavior, as the smug tech investors are getting super greedy with their call purchases, overwhelming the put volume.  Now is the time to buy puts, not calls. 

The volatility is still sky high, even near the highs, as the SPX clearly can't sustain high prices for long.  Look at the big intraday reversal on Monday, as well as the immediate gap down today after the big gap up yesterday.  These are not normal bull market moves, but a signal that we have a range bound market with the market getting more vulnerable with each passing day.  This isn't like the June 8 top situation, it is worse.  You've had another 40 days for potential energy to build up for the downside move, as bullish complacency has increased despite the broader market going sideways during this period. 

I usually don't look at intraday chart patterns for longer term forecasting, but Monday sticks out with how TSLA reversed viciously along with the Nasdaq 100 after making all time highs for both.  Monday happened after the most intense parabolic rally since the dotcom bubble.  And tech stocks are so loved here, I can't imagine there being too many potential buyers of those stocks.  They are overowned and overloved. 

The number one source for market positioning and investor psychology is Robinhood.  It covers the zeitgeist of this market, and needs to be followed regularly.  There is talk that Robinhood investors are doing better than hedge fund managers, as if that's some kind of amazing accomplishment.  Dumb money can have success for short periods of time, its how the stock market casino tempts them to keep coming back and depositing more funds into their brokerage accounts.  But overall, the best stocks to short are the ones that have gotten the most popular.  Here is what has happened over the past week on Robinhood:

I've labeled EV stocks as EV, Coronavirus stocks or related plays as CV.  The rest of the popularity list is littered with either big cap tech or the flavor of the week stock plays.  This is vastly different than what topped the leaderboard in April and May, which was filled with airlines and cruise stocks.  I can only imagine how poorly the EV and CV stocks will do in the coming months, as they are saturated with Robinhood money.  Once you buy, you are a potential seller.  Being popular with Robinhood means there are a lot of potential sellers, most of them who are looking for fast money, not a long term investment. 

AAPL, MSFT, AMZN, FB, GOOG, TSLA, NFLX are the go-to stocks for institutions and retail traders when they want to invest.  They all happen to be some of the most overbought stocks in the market.  The concentration of market capitalization in this stock market tops anything we saw during the tech bubble.  And the market is overestimating the potential earnings growth for all them, as they are either such a huge part of their market (AAPL, MSFT, AMZN, FB, GOOG) that they have little room for growth, or they face lots of  potential competition which investors are ignoring (TSLA, NFLX). 

Yes, stocks will probably always maintain overvalued levels from a historical perspective, with all the money being printed, but that money can flow to a number of other assets besides stocks, as we've seen elsewhere in the world. 

I missed shorting the good news top yesterday, it was a big mistake.  With all the "good" Covid vaccine news yesterday, instinctually I should have been looking to short in the premarket.   I waited and missed the great short entry above SPX 3225.   Lately, my focus has been too much on the daytrader populated stocks that I haven't given my full attention to the futures market.  It's probably why I missed another great shorting opportunity in the Nasdaq on Monday when it was so egregiously overbought on all time frames.

But shorting the indices is where the money is going to be in the coming weeks, not these daytrader stocks.  When the SPX and NDX get weak, the daytraders don't trade as much so there are fewer opportunities in individual stocks.  Now I'm going back to focus on the broader market, where the action is going to be. 

I will not miss the next chance to short, even if it means getting in a bit early.  The big drop is imminent and waiting for the perfect spot is being penny wise, pound foolish.  Big picture, even a short right here on the gap down is a good entry point to short down to what I am picturing is a likely waterfall decline in August.   Can't wait much longer before the short train leaves. 

Money Supply is Exploding

I am biased bearishly for the next 3 months, but I realize that the bulls have the most bullish factor going for them that the bears can't overcome in the long run.  The explosive increase in the number of dollars floating in the financial system.  A big increase in the supply of money and the Fed's willingness to keep interest rates at zero even as inflation increases is about as bullish a macro backdrop as you can get. 

The M2 money stock is still increasing at a 20% annual pace, much higher than the 5-10% pace that it maintained for much of the post 2008 period.  During March/April, it was increasing at a ridiculous 120% annual rate. 

That is the best argument for the stock market to keep going higher.  But that line of thinking is not without its holes.  Look at what happened to the Shanghai Composite from 1998 to 2019, as China's M2 money supply went from 10.4 trillion RMB to 193.5 trillion RMB, a growth of 1760%. 

Well, over those 21 years, Shanghai Composite is up, but less than 200%, which is less than the rate of inflation over those 21 years.  If you kept your money in stocks in China over those 21 years, you have lost money, in real terms.  And seen other financial assets, especially real estate, go through the roof. 

Now I don't see the Fed going on a money printing spree like China did over the past 20 years, but it has increased the money supply by 20% over the past 3 months, which is more than any 3 month period during China's past 21 years. 

The Fed is fomenting a bubble, we just don't know if it will be in stocks or real estate, or even commodities.  Obviously, that amount of money can't all be absorbed in commodities, so we could have simultaneous bubbles in stocks and commodities, or real estate and commodities, or maybe all 3. 

A Joe Biden presidency with a Democratic Congress is what I expect to happen, as the polls are overwhelmingly in favor of the Democrats now.  That would open the door to universal basic income and massive government spending on infrastructure, health care, and anything else they want to spew printed dollars at.  A very small fraction of that cost will be offset with corporate tax increases and taxes on the rich, but most of it will be paid with fresh dollars hot off the press.  MMT is no longer a theory, it is in practice and we'll see in real time the results of what happens when the government spends Fed printed dollars zealously with no thought to negative consequences. 

I was a bit surprised that the Democrats were even more willing than Trump to spend money during the heat of the crisis in March/April.  You would think they might be a bit reluctant to help out a Republican president in an election year but Democrats are poor political strategists, and now, more liberal than ever and looking to give money to anybody and anything to solve problems. 

The US spent the most per capita in stimulus on the pandemic and have one of the worst results in the world.  Part of it is poor government policy, but a lot of it a massive number of poorly educated people that can't think logically, scientifically, and believe in conspiracy theories that have no basis in fact. 

What can you say when you have a substantial part of the population that don't believe in vaccines and think they are harmful, don't believe masks work to prevent virus spread, and think the government is looking to control them by telling them to wear a mask.  You can't govern stupidity.  You don't get a higher standard of living by increasing the level of the S&P 500.

Some may be puzzled why the 10 year yield doesn't go higher when the stock market is going higher, and all you have to look is at the money supply.  The coronavirus stimulus package of $3 trillion was paid for completely with freshly printed dollars with not one bit of a tax increase.  All that money that hasn't been spent, which is the vast majority, is being parked either in cash, bonds, or stocks.  That is why the stock market has been so resilient despite poor earnings, high unemployment, and soaring number of coronavirus cases in the US.  That is why bonds have refused to go down and stay down even as stocks continue to go up. 

So why would anyone be bearish under this scenario?  Because all of that money is likely to stay in cash or bonds until the November election, and probably some of the money in stocks will move to cash or bonds ahead of growing uncertainty in the coming months, both Covid and the election. 

Earlier in the year, I was looking for a traditional bear market as the euphoria in the stock market in January/early February was setting up a big bear market, but the coronavirus has actually set up a situation where a big bear market is quite unlikely, because it has induced the government to print trillions of dollars, which of course, will not be taken back.  

You can't look to history of bear markets starting in 2000 or 2007 to come up with guidelines for the coming years.  The fiscal and monetary response is just too big to ignore, and they are risk asset positive factors that will prevent a 50%+ decline like you saw in the past 2 bear markets.  I even doubt that we'll be able to get back to the March lows anytime in the future.  

Longer term, instead of a bear market that provides a good long term entry for investors, you are more likely to see a range bound market for several years as the printed money flows to other less overvalued assets and corporations increase the supply of equities outstanding through IPOs and secondaries to raise capital as their debt gets closer to maximum capacity. 

If the Fed continues to print trillions per year, which is my base case scenario, that will induce another real estate bubble, which probably helps GDP growth during that time, which will set up another massive boom/bust cycle.  After all the dust settles, through the ups and downs, the prices of everything will go up, as all reserve country nations have done throughout human history, inflation will become rampant.   Overconfidence in the sustainability of their reserve currency status and the "free lunch" of printing money to solve problems eventually erodes the trust in the currency. 

TSLA is going to hyperspace and the market in speculative names is getting red hot.  Heavily shorted stocks are getting squeezed hard, short sellers are in deep pain, and are at max pain levels, as the sharks are coming after the weak hands with a vengeance.  This is stock market Darwinism, those that got too confident on the short side due to economic weakness are getting culled out,  just as the bulls and overleveraged were in March. 

Bulls are getting a bit cocky here, a comeuppance is coming soon.  Sure, there is the phase 4 coronavirus package upcoming, but I don't expect any big buying ahead of that event, as my models show that the CTAs and equity long/short hedge funds are back to above average long positioning.  The COT data also confirms this, as the noncommercial shorts have been drastically reduced since June triple witching. 

Also seeing a lot of expectations for Q2 earnings beats due to low earnings estimates. 

We have a gap up today and I am looking to short either Tuesday or Wednesday if prices are above SPX 3200. 

Stock Mania Spreading Globally

It was the Robinhooders who have gone crazy over stocks, and even more crazy over call options.  Now the speculative fever is spreading to China.  I can understand the Robinhooders feeling like they missed out on a long bull market and are rushing into stocks after the pandemic, but it is hard to understand the sudden burst of stock mania in the Chinese stock market.  It hasn't gone anywhere for the last 15 years, and listed companies have issued a ton of stock to the individual investors who have choked and drowned in the supply. 

But the Chinese stock investors are a bunch of sheep.  They read the Chinese government pump up the stock market and they jump in with both feet.  They still trust their government after being screwed over multiple times (2001, 2007, 2015).  That is the definition of insanity.  

This isn't a positive sign for future returns.  When earnings are contracting and retail investors across the world buy stocks with reckless abandon, its intuitively obvious that it probably doesn't end well for them.  And most of these stocks that they are buying are pure crap, and total speculations on dreams of buying the next TSLA.  Of course, there are those big cap tech investors, who invest by looking in the rear view mirror, but they are buying at nosebleed valuations in the most popular stocks in the world.

The speculation is most rampant in the "electric vehicle" stocks.  That is the heart of the retail mania, as you can see in the Robinhood popularity chart. 

The top 3, NIO, TSLA, and SOLO are EV stocks.  Also on the list are PLUG, NKLA, and BLNK, which are EV or EV battery stocks.  Basically, Robinhooders are either long EV stocks, coronavirus plays, airlines, or mega cap tech stocks. Those happen to be the stocks that are the most overvalued, or have the worst fundamentals (airlines). 

This week, we have seen the return of rampant call buying, as the put/call ratios go back down toward early June levels.  That is without the big overall market rally that we had last time.  The rally has gotten much narrower, as the Russell 2000 trades like garbage, and the Nasdaq 100 drags the SPX higher. 

One positive for stocks is bond yields staying low despite the rally, so both bond and stock investors are feeling good right now.  There are lots of potholes and pitfalls coming up in a few months.  Covid second wave and election worries are the 2 big ones.  Unless we get a full blown wave of infections all over the U.S., it seems like the market doesn't care.  It knows another phase of fiscal stimulus is coming, so that is a backstop for any dips this month. 

The sooner the phase 4 stimulus package gets passed, the sooner this market will be able to go down.  And like any US government spending that goes on, I am sure it will beat expectations by a mile. 

With each passing day, more signs of an imminent top are showing up:
- Retail speculative mania 
- Aggressive call buying
- Narrowing breadth of the rally
- VIX staying high despite rallies 

This thing is getting ready to topple over.  Hard to stay on the sidelines and not jump in with both hands and get short.  I am just waiting for some positive news headlines to get short. 

Seeing some choppy intraday action since the nonfarm payrolls report last Thursday.  The market looks saturated with buyers, and upside from current levels looks limited.  We may have 3% upside, at most from here, which would be the June highs.  Downside is huge, of course.

Short Term vs Long Term Trading

What time period is the easiest to predict direction?  It is something that varies for each individual.  Based on experience, the longer the time frame, the better I can correctly predict price direction.  It is why I have eschewed daytrading and trying to predict how the SPX moves in the next 30 minutes/1 hour/2 hours, and focused on how the SPX moves in the next 3 days/7 days/30 days.

I have found daytrading to be more and more difficult as the HFTs dominate the price action in the intraday time frame.  I am better at predicting what others will do over the next 3-7 days than I am over what they will do
over the next few hours.

And this game is mainly about 2 things:  1) risk management - to stay in the game 2) prediction - to profit off of futures movements in price.  Don't believe those who say not to try to predict price, or have a bias, and to follow the price action.  That belief leads to chasing prices and buying a lot of tops and selling a lot of bottoms.  That is how you get chopped up and chewed out by the market.

Also I have found that trading less reduces stress.  When you don't have to constantly focus on whether to buy or sell, that frees up more time to analyze the market to predict where it will go.  There is a constant background noise level of stress that one gets from holding a big position, but if you do it often, usually your body will adapt and it won't affect sleep or everyday life.  If it does, then you probably need to trade smaller positions or stick to daytrading, which is a hard way to make an easy living. 

Scalping and daytrading are ways people try to take risk out of a risk business.  The more risk you take out of trading, the more return you take out.  Theoretically, the safest and most risk free trade (other than "risk-free" arbitrage, something that really doesn't exist anymore) would be to buy and immediately sell, and vice versa, not letting price move at all.  But you don't make anything, and end up paying the bid/ask spread and commissions.

If you are a long term trader, or investor, then you forego a lot of opportunities by not taking advantage of some high probability short term movements that are in the opposite direction of your long term position.  But definitely, it is a much better to err on the side of trading too little than too much. 

The animal spirits are active, and stocks like TSLA are going parabolic.  Speculation is rampant as the futures gap up big.  We are getting closer to the short zone around 3200, and I am watching closely for entry points.  

Fundamentals vs Technicals

There are 2 basic types of trading strategies:  1. trend following and  2. counter trend mean reversion.  Back in the 1970s and 1980s, before the growth of trend following CTAs and systematic trading, trend following provided an edge, because movements were slower and not many were trading technical breakouts.  Fast forward to now.  Trend following doesn't work anymore.  If you look up Jim Simons TED talk, he talks briefly about this. 

So if trend following doesn't work, does mean reversion counter trend work now?  No it doesn't, if you look at all the asset classes as a whole.  If counter trend trading worked now, or worked well in the past, you would have a bunch of counter trend trading funds gathering up a lot of assets.  That's not happening. 

This doesn't mean that one can't be successful trading counter trend or trend following.  It just means that just using simple technical rules for trend following doesn't work anymore, and same goes for simple technical rules for counter trend trading. 

If you read the Market Wizards books, back in the old days, fundamentals were the main focus for traders, not technicals.  It is the opposite now.  Technicals now seem like the main focus for traders, not fundamentals.  So in an odd way, there is more edge from focusing on fundamental analysis now than there is in focusing on technical analysis.  But of course, its much easier to look at a chart and be an "expert".  Drawing trendlines and talking support/resistance is easy. 

Reading through SEC filings, seeing where the supply is coming from and where the demand takes more time and analysis.  What I've found out over the years is that it takes a lot more work to be knowledgeable about each individual stock than it is to be knowledgeable about the stock market.  But with that extra work comes a much bigger edge. 

The edges you get in individual stocks, especially small cap and micro cap stocks can be huge, especially if the majority on the other side of your trade are retail traders.  The edges you get in trading SPX and Treasuries is small, and getting smaller. 

As much as hedge funds have underperformed over the years, as a whole, they are still much smarter than retail traders and avoid obvious mistakes.  And a subset within the hedge fund community consistently generate alpha and make it tougher for people like me to make a living from trading. 

It is no coincidence that after an 11 year bull market, you finally have heavy retail participation in stocks.  After a long bull market, the price efficiency of individual stocks goes down, especially retail trader dominated stocks, like what you see in the Robinhood popularity lists.  The edges in individual stocks are getting bigger, while the edges in the SPX and NDX are getting smaller. 

Paradoxically, it is much easier to make money short selling in a raging bull market with heavy retail participation than in a bear market when most stocks are in downtrends.  You see much bigger short term price dislocations from heavy retail trading flows in a bull market like this.  The blowoff top price moves are more predictable than longer term price depreciation in deteriorating businesses. 

Here are 2 charts of retail saturated stocks, GNUS and KTOV.

These are in different phases of the pump and dump cycle.  The price of the stock usually tops out before the numbers of users holding the stock tops out.  Right now, KTOV looks to be where GNUS was 3 weeks ago.  The rise in the number of users holding these pump and dumps is fast, but the decline is very slow.  This means there are a lot of traders unwilling to take losses and have become long term bagholders. 

The flavor of the week changes, last week it was coronavirus stocks, and now it is electric vehicles and EV related stocks.  A few weeks ago it was Black Lives Matter stocks.  The one constant is that after each of these pump and dump cycles, a huge number of bagholders are left, hoping, praying for another pump to get out. 

Looking at the Stocktwits boards for these stocks is like going back 20 years to the dotcom bubble and reading the Yahoo message boards.  The tickers change, but the pumping doesn't.  Have noticed that people have gotten lazier, and are pumping with fewer words.  The quality is the same, which is really bad.

We've rallied the last 2 days on not as bad as expected Covid case numbers and  because we're range bound.  I will wait to put on the SPX shorts again, let the bulls roam and feed for a while.