Shutdown Hyperbole

The government shutdown is at the center of the financial news for the moment.  Well, we finally got the government shutdown, and the market yawned.  Well, not exactly, because we did get a healthy gap down yesterday morning, which was based on expectation of a government shutdown.  Shutdown is an overstatement, when you still have many parts of the government still running.  Congressmen are still getting paid, no?

This market is now going to be dead set on the debt ceiling, and we just aren't oversold enough to have a good long entry point into the teeth of the fear tactics.  There will be a good buying opportunity leading up to the deadline, but I need to see more volatility and angst before I pull the trigger.  Right now, we are setting up for it, but not close.

Too late to short, and too early to buy.

Mind of a FB Buyer

The stock market is a schizophrenic animal.  Facebook is the poster child for the wishy washy nature of stocks.   It has confounded my logic for what is clearly a junk business model.  A company that makes money from advertising when no one clicks on their ads.  Wall Street agreed with my point of view for 14 months, until that magical, mythical earnings report in July.  Beating low expectations set off the ignition switch.  From then on, I knew it was suicide to short FB.  In January, it was NFLX putting on the biggest earning short squeeze I have ever witnessed in my career, springing its path toward 300.  In May, it was TSLA having its ignition turned on after blowing out earnings,  supercharging the stock to permanent parabola status.

The continuing disappointment in AAPL has left a huge void.  First NFLX, then TSLA, and now FB are filling in the niche of growth stock darling.  It takes multiple growth names to fill up the void left by such a large cap name as AAPL.  What I find fascinating is the eternal love of AAPL.  It is the Peter Lynch model for investing gone wrong, buying a stock because it makes a lot of money and its  products are used everywhere.  It works on the way up but after a stock like that peaks out, the downslope is treacherous.

When I first started trading stocks, I would look at balance sheets, income statements, P/E ratios, Price to book, price to revenues, and all the other things called fundamentals.  But I soon realized that the market could care less about those things.  The market would reward growth beyond anything, as if everything else was trivial.

That is when I noticed that the people moving stock prices are proactive, not reactionary.  The difference between a momentum investor and a value investor is this:  Momentum investors take a proactive approach to investing (momentum), buying when he sees growth, and prices rising, regardless of valuation.  Momentum investors are the buyers on the way up.  Momentum investors are the ones hitting bids and lifting offers.  That is what moves stock prices, not limit buy orders set below the market.

Value investors need to wait for the prices to come down to meet their value criteria, reacting to a lower price, which means they are buying on the way down, after the earnings have already expanded, and started to flatten out, after the story has gotten old.  The stock market is not like shopping, things that go on sale aren't necessarily a good thing.

 Stocks are about hitting the three bagger, the five bagger, finding the next MSFT.  That can only happen if you have a stock that leaves room for the imagination, crazy future projections of current growth rates, a buzz about it. That is why you had the biotech boom, then the dotcom boom, and now this.  Stocks like FB and TSLA have never been about the fundamentals, but a ticket to dream of hitting it big in the stock market.  Even in such a benign stock market environment, there is little growth in the economy, so you have very few stocks that can capture the imagination of investors with big growth rates.  FB and TSLA have now become the two biggest icons of this exclusive group.

Eventually these bubbles will come crashing down, but that is a 2014 story.  Bubbles thrive at the end of a good stock market year.   Ala 1998 and 1999.  So party on until the calendar turns to January.

Microcosm of the Year

It is that kind of market.  You have a huge uptrend followed by a small range with occasional bursts of range expansion, which really leads to nowhere.  We are in that small range and it is surprising why anyone would want to buy volatility at these levels when the realized is so low.

We are kind of in the middle of nowhere, I have very low confidence what will happen over the next 2 weeks, although I don't think we'll be going up much or down much.  What I do expect is a sharp rip higher after the debt ceiling gets raised and there are no more hurdles for this market.  So we have maybe two more weeks of tight range trading with a potential rip at the end of the rainbow.  Cash is probably the best thing to hold at the moment, just wait for a long entry on any further dips down to 1670-1680.

Dip then a Rip

The market overshot on the Fed no taper news.  The next catalyst will be the debt ceiling, and since this market is filled with chicken littles, it will shake up this market a bit.  Not a lot, because institutions aren't suddenly going to dump their holdings in the hole, en masse just because of an expected debate over the debt ceiling which will be raised.  This is nothing like 2011, when you had the European sovereign debt panic lurking in the background while investors were sweating over the debt ceiling.  There are no external problems with this market, there is no financial panic lurking.

We should pull back to 1680, get the chicken littles nervous ahead of debt ceiling, and then rip higher when it becomes obvious that the debt ceiling will be raised.  Anyway, its much better risk reward buying the dip ahead of debt ceiling than shorting ahead of it anticipating some kind of panic.  This market isn't set up to panic, since Fed has proven they aren't going to taper unless the bubble gets bigger.

Expecting a trip down to 1680 this week or next week, it will likely be the best buying opportunity before we rip higher to 1770 by December.

Growth Stock Bubble

FB, LNKD, TSLA, NFLX, YELP, P, SPLK, etc... are the growth darlings of this market.  When there is a lack of corporate earnings growth, the ordinary stocks struggle to make gains.  Since we hit 1680 on the S&P in May, the market has been range bound, with a slight upward bias.  Under these conditions, where the average stock chart has leveled off, investors look for stocks that will outperform.  No, it will not be AAPL.  That is a has been with growth diminishing.

Growth stocks are the only stocks that can attract big outperformance in an environment where the the stock indexes are already up so much.  It reminds me of the dotcom bubble in 1999 and 2000.  The last year of the bull market in 1999-2000 saw most stocks lagging the indices, because the indices were being pumped up by tech stocks going parabolic, while everything else was flat to down.

We are entering the late stage of a bull market where the growth stocks massively outperform everything else.  What is the polar opposite of the most hated financial asset (long term Treasuries)?  Stocks like TSLA, FB, NFLX.  We are right in the middle of the move, with perhaps another 3 to 6 months left.  You have to be a buyer of these stocks on any dips of 5-10%.  They will rocket back up to new highs quickly.  Into the teeth of the debt ceiling debate, where fear is pervasive, these stocks will be the ones to pick up into the hole.  Coming out of the dip, they will rip higher confounding the valuation bears.  My year end targets for these momos are TSLA at 250, FB at 60, LNKD at 300, NFLX at 400, YELP at 100, P at 40, and SPLK at 75.  The Twitter IPO will drive the euphoria into overdrive.  All the while I expect AAPL to struggle to get to 500 by year end.  It will be a tale of two cities market for the rest of the year.  Get ready.

Tiny Taper

In all likelihood, we will get the tiny taper from the FOMC meeting today.  I have yet to see a meeting since Bernanke has become Fed chairman where he was more hawkish than expected with his actions.  Now he has talked tighter on rare occasion, more than the market expected, but he has never acted tighter than expected.  NEVER.

So you have that historical backdrop to this meeting, so while I do expect a tiny taper of $10B from the $85B/month, I cannot rule out the Fed putting on their skirts and doing nothing.  I would put the odds of that at about 30%, which is higher than the market is pricing in.   I put 65% odds of the Fed doing $10B/month, and 5% odds of $15B/month.  The odds are zero of them doing anything more than $15B IMO.

So based on the probabilities that I see here, you have a 30% chance of a huge spike up after the meeting, which would put the ES at 1720 in less than hour.  And you have a 65% chance of a moderate rise to 1705-1710 after some initial back and forth trading.  And a 5% chance of a moderate fall to about 1690-1695.  In any of those cases, I expect the VIX to fall after the announcement.   The VIX is too high considering the amount of volatility we have been experiencing, which is minimal.

Double Barrel of Good News

The market is loving the news over the weekend, with the Syria deal with Russia, and then Summers withdrawing.  I don't view either bit of news as game changers, because the market was already over Syria last week and Summers wasn't going to do anything different than Yellen, since he's bought and paid for by Wall Street, while Yellen just likes printing money.

After a rally from 1625 to 1695 over the past 2 weeks, a 1% gap up on good news is usually an intraday short opportunity.  Especially with the FOMC meeting coming up on Wedneday, I cannot imagine significant amounts of capital will want to get long at these levels. 

The buying that you are seeing in premarket is mostly shorts covering their positions to cut their losses.  And there was quite a bit of shorting last week on the premise that the market has gone up too far too fast ahead of Fed tapering. 

Looking beyond the next couple of days, if we get the expected tiny taper and the relief rally accompanying it, we should be around ES 1720, which would provide an excellent short entry point for a move back down ahead of the debt ceiling budget talks in the coming weeks. 

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.