Crude Oil is Topping

I don't see many good trades on the horizon that are high probability.  As I mentioned before, I am bearish on stocks, but I am more bearish on crude oil.  While stocks have been avoided because of Syria, crude oil has been accumulated because of it.  Based on my view that the importance of Syria has been exaggerated, crude oil is overpriced.  Global growth is not sufficiently strong to drive crude oil prices higher from here.  And based on COT data, speculators have already made their bets on higher crude oil prices, it would be difficult to get more speculators on board.  Without more speculators getting long, fundamentals need to drive crude oil higher, and I don't see that happening.  Lastly, crude oil seasonally tops out in September, after the driving season has concluded and before refineries enter a maintenance period which lowers demand. 

I was surprised to see such a strong rise yesterday which only reinforces my view that we will not break 1600 on any move lower from here.  But this correction, should be more drawn out than the one in June.  I am expecting more of a messy U bottom that lasts most of September than a quick V bottom that we witnessed a few times earlier this year. 

Bracing for September

There is shroud hanging over this market, worrying about Fed tapering, Syria, upcoming debates over the budget and the debt ceiling, etc.  It has weighed down this market since August 15 when market participants started to price in some of the upcoming events.  I was feeling quite bearish at the time, if you look back at some of the tweets during my blog break.

I expected something more than what we have gotten so far, the reaction to all the potential negative catalysts has been tamer than I expected.  So while I initially felt like 1560 was a lock when we had that first move down to 1650, I no longer think that way.  I am not as bearish about this market due to its resilience in the face of bearish headlines.  Yes, we are making lower lows but nothing that usually forewarn of a coming waterfall decline. 

So while we have our relief gap up on the non attack of Syria, it should not last for more than a couple of days before the taper worries resurface and Congress returns to vote on Syria and start preliminary rhetoric on budget deals and debt ceiling.  So there are still negative catalysts out there that should give us one more wave lower, down to about 1600.  But I just don't see this market going below that level this year.  I am expecting a fairly shallow, but messy correction (more U than V bottom) before we go back above 1700.  This market will not die easily, and we should be prepared to buy after the next wave lower. 

Topping Out

The action feels toppy.  We have had a huge rally right up and slightly over the May highs, but now we've gotten positive earnings from AAPL and FB and now we are going back down.  I am also seeling relative weakness in oil and the Nikkei.  The biggest reason I am getting bearish is the steepness of this rally, the air underneath, while facing a Fed that will likely get louder about tapering in the fall and with no earnings growth.  The market is boring now, but I expect an interesting August with a return of fear. 

The put/call ratios got very low late last week and earlier this week.  The market is now vulnerable to a pullback, although its not a screaming sell yet.  I may get more bearish if I see more signs of complacency.

Earnings Disappointments

We are getting a string of earnings disappointments in tech, EBAY, INTC, MSFT, GOOG, etc.  We haven't seen action like this in quite a while.  Even when earnings were mediocre last quarters, stocks tended to trade higher after earnings.  It is getting to the point where on a micro level, the profits are not justifying the macro trade of long US equities.  But the irrationality should continue because earnings haven't gotten bad enough.  There is still plenty who view the 2nd half as being stronger which I highly doubt. 

We made a small break of the May 22 high and are trading back below it thanks to disappointing tech earnings.  The capital spending is just not there for tech to go much higher.  At some point, the music will stop.  Perhaps with the decreasing appetite for riskier bonds from investors, you may shut off the corporate bond window which has been fueling a significant portion of these stock buyback programs.  Without the continuing stock buybacks, stocks will have a hard time going higher. 

Feeling Toppy

This market has made it all the way back to the May 22 highs of 1687 on the S&P.  The market has a memory, and whenever it gets back to a past significant high, it has a difficult time busting through on the first attempt.  Also given the steepness of the runup over the past several days, this looks like an easy money short zone for 15 to 20 points.  But I wouldn't look for 30, because we may or may not get it, and if you don't get the 30 pointer, and wait for it, you may eventually have to settle for 0 points. 

This is still a strong market, and you have to take the dips as buying opportunities.  But this is one of few shorting opportunities that I have seen over the past few weeks. 

By the way, I would rather be short crude oil as a proxy for market weakness than the S&P.  The S&P is the strongest market in the world, so anytime you can take a fairy highly correlated proxy that I view as weaker and short that instead, it makes more sense. 

Never Underestimate this Bull

The US stock market is the only game in town.  It is now considered safer than Treasuries!  You have such a supply and demand imbalance, not enough US equity being supplied, demand from asset managers who now believe that the US is the best house in a bad neighborhood, from corporations buying back stock because they have no need to invest their cash.  All of this is fueled by a drive for yield which now has investors shunning junk bonds for equities! 

Going down in the corporate structure to the riskiest asset which now is considered the safest.  Yet, we still have plenty of die hard bears who cannot accept that stocks can go up without a strong economy.  It can be confusing to wrap your mind around this market when looking at 1) long term fundamentals, 2) short term asset manager positioning, and 3) supply and demand. 

But 2 of the 3 favor higher equity prices, only the long term fundamentals favor future equity weakness, but the last 20% of a move is notoriously irrational and make no fundamental sense.  Think Nasdaq in 2000, China in 2007, global equities in early 2009.  So we are in that last 20% of the move here, so we could get up to 1800 on the S&P for no other reason then its the only asset that is viewed as safe.

Grind Higher

We are on the upslope of the V.  The V bottom on June 24.  These V bottoms usually take about 4 to 6 weeks to play out to completion, right now we are just at 2 weeks.  So we have about 2 to 4 weeks of this uptrend left.  I am leaning on the beginning of August as a potential top. 

The area to watch for a potential stall point is SPX 1650 to 1660.  So most of the upside has been made off this bottom.  But at the same time, I don't expect to see much downside.  1600 should provide a sturdy floor to this market, if we do have a pullback. 

In general, the rise in yields will limit the extent of the equity rally, as well as the expected Fed  taper in September.  Expect lower volatility and boring trading in July, as we will be climbing the wall of worry.

U.S. Equity General

As the privates and seargents get bloodied up, the general stands at the rear with a few scratches.  The U.S. equities have been holding up the best to the threat of QE tapering and global slowdown.  This past correction after the FOMC meeting has been a minor battle, nothing serious enough to endanger the general.  You can only injure and kill the general if you have a major battle.  The S&P 500 will not go down much unless you get that major battle. 

The privates (emerging markets) and seargents (Europe) are always going to be in the line of fire, in even the small battles.  Emerging markets got battered, and Europe is of course underperforming the U.S.  This past wave of selling should provide a few weeks of benign markets, before we get the next bigger wave.  

During this benign period, which should be all of July, I foresee the S&P working its way up to 1650, with the emerging markets struggling to rebound.

So if you want to short this market, you should short China/emerging markets.  If you want to go long this market, you should go long U.S. 

By the way, Egypt doesn't matter.  It just provides a possible short opportunity for crude oil.

V Bottom

It has never paid to sell weakness in the S&P 500, so you have these fleeting dips that get snapped up without much fear or capitulation.  The Fed is so scared of any stock market or bond market weakness that it starts jawboning the market higher whenever you get dips. 

It happened yesterday when the Fed blabbermouths said the market "misinterpreted" the Fed.  Well, what is there to misinterpret?  The market sold off because it now believes the Fed will not sit and do nothing if a bubble grows.  So if the Fed won't allow the stock market to bubble up even higher by tapering, doesn't that automatically make stocks less attractive?  In effect, it has become the Bernanke put and the Bernanke covered call.  Shorting calls (tapering when markets bubble higher) against the common so there is limited upside.

But all the money in the world is squirreling their money into U.S. equities, it is the most loved market in the world.  So it will be the most resilient to any downside, and if you are going to buy any risk asset, it should be U.S.-based, either bonds or equities. 

I think we made a low this week that should last till at least August.  You have shaken out the weak hands from stocks, and bond market panic is likely over.  I expect a run back up to SPX 1650 by next week. 

The First Bounce

This little rally attempt on the gap up here on the China is not going to zero relief will not last long.  I give it one day tops, for this bounce.  We are in a fragile psychological state and we haven't gone down to low enough levels just yet to satisfy the margin clerks. 

The technical damage from the selloff after the Fed announcement is significant.  1600 was broken easily and there is carnage in the bond market.  This will have repercussions that will last for a while, so I don't expect us to just shrug off the peripheral weakness.  Yes, the S&P is the strongest market in the world, and it will be where the investors will flock to when the coast is clear.

It still seems as if traders are trying to play for the bounce, and don't want to miss a good buying opportunity.  The capitulation may take a bit longer than I expect, but we should see it this week.

Killing the Bonds

I have never seen anything like this in the bond market.  I have never seen a bond market rate spike while equities are going lower with commodities weak.  This is clearly not an economic move, but a move based mostly on fear and liquidation.  These type of moves do not last for long.

The fundamentals of the bond market are excellent, you have central bank buying and an economy that is too weak to bear higher rates.  Bonds are in a bull market, and it should last longer than the equities bull market.

I expect capitulation within 3 trading days, with buy levels on the ES around 1550.  I am waiting to buy, I don't believe it is worth it to short at this point in time, it is getting late in the pullback.

Bond Market Leading

The initial reaction to the Fed meeting was clear.  The bond market wants to go lower, and that is scaring the equity market.  Usually weakness in bonds doesn't necessarily lead to weakness in stocks, but what we saw with the selloff in gold is that financial assets are highly correlated, so when any major asset sells off too much, it panics investors and they sell everything. 

Right now, the bond market is leading the stock market lower.  But I remain bullish long term on the bond market, so I don't think this selloff will last long.  What did surprise me was the vigor with which the USDJPY bounced back from its deep selloff after the Fed announcement.  It tells me that a lot of the fast money was long yen going into the meeting and they are unwinding in a hurry.  It seems like this dollar uptrend will eventually have a blowoff top before it goes the other direction.  It is the TINA currency.  There is no alternative. 

I do expect this selloff to extend as post options expiration often leads to a lot of volatility and the charts are setup for a capitulative selloff down to 1560 to 1570. 

The Fed Event

A lot of anticipation for some kind of fireworks for this Fed meeting on Wednesday.  Right now, it seems like the consensus is for the Fed to mention that QE will be data dependent, and that they are not going to be taper yet, with hints of a future taper.  What has happened over the past month is what has been going on for the past 3 years.  A weak emerging markets, a dead in the water Europe, and a beach ball like buoyancy of the US. 

S.O.S.  There is nothing new under the sun.  The S&P gets small scratches as the surrounding troops, the Nikkei, Shanghai, and Europe get maimed.  

I do expect a sell the news event on Wednesday, but if there is a pop on the announcement, I will look to short, not the S&P but Japan or emerging markets. 

Yen Shorts Under Pressure

The irrational upmove in the USDJPY has been scaled back by a huge chunk.  It has bitten a big chunk out of latecomers buying into the yen weakness rhetoric.  Japan is in a structural deflation for a good reason.  They are old, and old countries experience a natural deflation as demand for goods drops.  All the money that Kuroda is printing is just going to be sitting at the banks, propping up JGBs.  The Nikkei is full of globally economic sensitive companies that depend on a strong China, and good global growth, not just a weak yen.  Japan has to deal with a weakening China and weakening global growth, along with a domestic economy that is in structural zero growth territory. 

That being said, the yen unwinding seems mostly finished, as the USDJPY selling over the past several days seems capitulatory.  And the ES has support around 1590-1600 area.  You have to be a buyer of dips now, as I still have the view of this being just a pullback in a long term uptrend.

Nikkei in 2008 Mode

The moves in the Nikkei have been as violent as the moves that you saw in all the stock indices in 2008.  5% up and down moves are happening with ease.  USDJPY is trading wildly as well.  Abe and Kuroda are both clueless, they didn't know what they were messing with when they tinkered with the natural forces of the market.  They think there is a free lunch with money printing.  Only if you have the reserve currency is there a free lunch, ala Fed.  There is no demand for the money printed in Japan, more adult diapers are sold than baby diapers.  There is zero growth, of any kind, economic, population, productivity.  Japan is a zero, investors really have run out of ideas if there best one is to invest in Japanese stocks. 

Now the wave of margin calls and derisking from the short yen, long Nikkei trade is unwinding with noteable after effects in European and U.S. equities.   A lot of weak hands, a lot of hot money is in Japan.  It is finding its way to the exit as they didn't sign up for this negative volatility when they bought into the hype. 

Expecting a brutal day today, closing at the lows, probably down to 1610.