Waiting For the Pullback

Like everyone else, I am waiting for the pullback to buy.  This will make the pullbacks very shallow for the next several weeks.  After we've had a few shallow pullbacks, the market will be softened up for the big whack lower.  That shouldn't happen for some time now because we still have a bunch of sideline money waiting to buy on a dip.  Europe is going to get papered over by the ECB and that only leaves China as the catalyst for a big drop this year.  I expect that to happen within 6 months as the Chinese real estate bubble implosion takes down the economy with it. 

For now, there isn't much to do but wait for the pullback to buy.  Even if you buy early, the buy side is always more forgiving, it ALWAYS goes back up.  But no guarantee that it goes back down if you sell early (just ask the shorters last fall in the 1100s and 1200s.).

Strong Resistance

There is a lot of resistance at this 1350 level, which is where we failed to break out last year.  The market is also up 90 points in 40 days.  So we are a bit overextended.  We will likely be range bound between 1300 to 1370 for the next couple of months.  I prefer to be a buyer of dips rather than a seller of strength.  Really not a good trading market, so I wait for good spots to get in or do nothing.  Greece news is brought up because there isn't anything else to talk about, it really doesn't matter to the US market anymore.  We're past that chapter.

Buy the Dips

We'll have 1 or 2 down days and we'll go right back up. You have to be a buyer.  It is a bull market.  Shorting is a sucker's game right now, in ES anyway.  If you want to go short, short a weaker market.  Why short the strongest market?  Likewise, if you want to go long, go long the strongest market.  ES is one of the strongest markets. 

There is strong resistance at 1345 so I think we're going to have to bide time at these levels, but I don't see us going below 1300 anytime soon.

QE3?

We have one strong jobs number and we've got a lot of traders expecting the Fed to delay or even not do QE3.  I strongly disagree.  If there is one thing that you cannot do is underestimate the desire of Bernanke to juice financial markets.  He's not done yet.  Not by a long shot.  Unless you see unemployment number back in the 6-7% range, you will not see this money printer stop.  They are not satisfied with S&P 1330.  They want 1500 and higher.  Only when S&P goes to new all time highs will they stop printing money.  Gold will go much higher.  Dollar will go much lower.  Stocks will go much higher.  Book these numbers for 2013:  S&P 1500, Gold 2200, and Oil $120 (NYMEX). 

Like 2006

After a flat 2005, traders weren't too excited about 2006, but what we had was a steady rally with one dip in the spring and then a continuation into higher highs and a big up year.  I see the same thing happening in 2012.  Volatility will die out, we'll have our annual big dip which scares the traders, form a bottom, and it will be off to the races.  I expect us to hit the same levels as the end of 2006, 1440 by the end of the year.  That would be the bounce top off the January 2008/March 2008 lows we saw in May 2008. 

Quick Short Trade

There is an opportunity for a high percentage short trade here, the market is gapping up 1% on a good nonfarm payrolls number.  We are already a bit overextended, I don't this gap holds with the big run up over the past month.  I would only look for a day trade, nothing more.  Also we're hitting close to strong resistance at 1340-1350. 

Road to Re-risking

We are climbing it.  The Wall of Worry.  I don't even know why anyone would worry anymore.  Haven't the ECB and the Fed given investors the green light by saying:  we've got your back, we will save the world with euros and dollars coming out of every orifice of the financial beast.  The August to October time frame was a trip to the detox center, a trip to an Indian sweat lodge.  The financial system is now "cleansed" from weak hands, worry warts, and eternal pessimists.  They are clearly risk free, and the market, with the removed baggage, has been moving with a light footedness of the post crash markets of 2009 and 2010. 

It takes time to re-risk, both from a logistical and a psychological perspective.  Deriskers will not immediately re-risk.  It takes time to suck them back in, to regain their trust.  So the market will not rocket higher to 1400-1500, but it will climb, slowly and steadily, with dips that will be bought because the central bankers will not let anything fail.  And then slowly but surely, this rally will get old, too many will be back on board, and we'll be ready to fall again.  But that is a long time coming.  Just ride the wave higher, buy the dips, and stop trying to short.  The time to short will come several months later.  The time for shorts has come and gone.  It is now the bull's time to feast.

Fed is Dovish

Who is actually surprised by that?  They will keep rates low till 2014.  Last year it was till 2013.  Ok, next year it will be 2015.  These fortune tellers actually think they can predict the economy 2 years out.  Look how wrong they were in fall 2007.  It doesn't help to think what should be done.  My job is to react to what will be done, and that is more QE and more pump priming.  The question about QE3 is not if, but when.  And then it will be on to QE4.  I believe the dollar has made a long term top, and gold a long term bottom over the past few weeks.  US equities are in a bull market, but with S&P at 1325, there isn't much upside.  It looks fairly valued.  The only way to go higher is to get overvalued.  That will be hard to do unless we see enthusiasm for stocks again like the good old days.  Those days are long gone. 

FOMC Meeting

Today is an FOMC meeting.  Usually you get some kind of rise ahead of the meeting but when most people don't care about it and it is a nonevent, it will trade like just another trading day.  The volatility is dying out as one would expect with a rising market.  It is a fool's game to try to pick a top here, I won't do it.  I'll be waiting on the sidelines for a dip to buy.  Like everyone else. 

Up and Away

It is a bull market in US equities.  You have to follow the bull market trading plan if you want to trade with the highest probability.  Shorting is ruled out unless you reach extremes in optimism, which we have not yet done.  There is going to be a dip of 3-5% when some "spooky" headline comes out of Europe and you have to buy it.  Not much to do while you wait.  Bull markets are waiting games.  Trade less, hold longer. 

Topping

We are reaching the peak of US earnings season, and with it, a typical pattern of topping out as the earnings come out.  It is a strong market, so I don't want to enter into a short too soon.  Perhaps when we get some of the big tech earnings come out, we may have a sell the news reaction.  And I'm sure there will be some "spooky" headlines thrown in from Europe for the scarecrows to flee.  That might be the dip that one would use to cover and reverse to long.  Nothing high percentage yet, perhaps 60-40 odds.

BTFD

Yes, you have to buy any dip greater than 10 points.  We got a 20 point dip this morning, and the buyers snapped up the shares voraciously.  Downgrades in Europe don't matter.  That is yesterday's news.  A Greece default won't matter, past a day.  Europe is a basket case, and the market has put it into the corner, quarantined it and deemed the rest of the world contagion proof and it's all OK.  Yes, even China, now that the Chinese government wants stocks higher.  This charade can last for several weeks.  I won't say several months because the S&P is already near 1300, there just isn't a huge amount of fuel to take this thing higher.  The herd is already crowding into US equities and shunning everything else. 

Monday is a US market holiday, and it looks like derisking ahead of the long 3 day weekend.  Look for them to re-risk when they come back on Tuesday.

Downside Coming

We have consolidated for 4 days between 1260 and 1280, building up a wall of optimism to tear down.  The wall was complete with the nonfarm payrolls report, which all the shorts were afraid of shorting ahead of.  So now that the good news is out of the way, it will be a free fire zone with Europe as the main course, with China weakness on the side menu.  The cat is now out of the bag:  the US is the last one standing.  All the fund managers are crowding in to the US long equities short Europe/emerging market equities trade.  This trade can go on for quite a while, since it has only recently been mentioned. 

I expect next week to test the bulls, with a sharp pullback which shouldn't last more than 3 days.  Best trade is probably to buy that pullback as the money flows will support US equities for some time to come as it sucks away institutional money from other parts of the world.

First Week of January

I usually avoid short during this time because of the institutional money pouring in.  It doesn't mean the market can't go down, but I don't like playing for downside so early in January.  Next week, it is a different story.  ADP employment numbers were blowout, but the market has already given up the pop on that number in premarket.  This market looks like ripe for a pullback, perhaps another European mini panic attack.  Ahead of tomorrow's nonfarm payrolls, I will let the bulls roam, next week I will be looking for shorts if we are between 1265-1280.

Monster Gap Up on First Trading Day

What's new.  The institutional money pours in and the only way to balance buy and sell orders is to raise the price.  That's the gap up.  It is 15 years in a row for a gap up on the first day of the year.  Now after the gap up, it can keep going higher (more likely than not) but no guarantee.  Only the gap up is the guarantee.