Market Feels Weak

I am not going to say it is over for this market with the resiliency it has shown, but this week felt like a top was forming with the volatility and the weak finishes on Monday, Tuesday, and Friday.  I think the Greek bailout news will be sold.  The financials were weak today thanks to GS and company.  I think we will go lower next week despite the favorable calendar effect, I think 1165 is in the cards for next week.

Trend Day?

The market seems to be shaken up a bit here, especially GS and the financials.  Criminal charges are very serious and not to be taken lightly.  I think this could bring more fears about other shoes to drop, we'll have to see, but I think this market is vulnerable after 2 days of rallying and we could trend down all day.  That is what I believe to be the highest probability scenario.

Buy the Greek Rumor

Yesterday's strength and the continuation of strength in Europe can be summed up in an old adage, buy the rumor.  We got definitely oversold in Europe and it bounced as expected.  Now the hard part, whether the bounce continues or gets sold off again.  I would give this bounce much more credit if we didn't have the heightened expectations going into the weekend of a plush Greece bailout package and of course, Mutual Fund Monday.  It could be a sell the news phenomena on Monday.  The counter to this is of course Monday is also the first day of the month, which is seasonally bullish.  Lots of crosswinds.

Dip Buying Works Again

At Tuesday's close, after the 2nd visit to 1180 in a week, I figured we would have a harder time bouncing back above 1200.  I was completely wrong, but I also realize the strength of this uptrend and didn't force any shorts.  I've been trading lightly and not making any bold moves.  The time to short will come.  It is a waiting game.  In the meantime, there some daytrading opportunities here and there but I see no swing trade opportunities yet.  We have the GDP announcement tomorrow, I don't think the shorts want to be exposed to another possible overnight gap up and are probably going to scramble this market higher in the final 30 minutes.

Counterintuitive Take

I am beginning to think that the more problems in Europe, the more likely fund managers will allocate cash to US assets and away from European assets.  The European markets have been badly lagging the US market, and usually they move very close together, historically there is a much higher correlation between US and Europe than US and Asia.  But the more problems that surface in Europe, the more investors flock to US stocks and bonds. The strength in the US seems to be in part from this asset shift from Europe to US.  Very counterintuitive. 

Another Big Gap Up

I think that was it for the correction.  It came and went, and we're probably going to go higher from here to retest the highs.  It was just another buying opportunity.  This market needs to go higher before it can have a substantial pullback.  There are still a lot of sidelined investors looking for a pullback or for the all clear sign to jump in.  The big picture is clear.  We are in a cyclical bull market and the cycle is not finished yet.  Sure there will be daytrading short opportunities like earlier this week, but the trend is up.  The Fed wants to blow another bubble.  Today will probably be a gap and go and we'll probably test 1206.

Fed Game Plan

There will be some short covering ahead of the Fed and after the non-news that the Fed will do nothing, there will be a sell on the announcement.  After the initial selloff, we should get the start of the real move which should be up to 1191.  I see nothing the Fed can say that can make this market go much higher than 1191.  I do see things the Fed can say which would make the market swoon, especially if the extended period language is taken out.   So ahead of the announcement, a short is the best bet.  On the dip that I foresee, I would buy it because if a Spain downgrade doesn't take it down today, I think Bernanke can.

Downgrade of the Day

It is Spain's turn to get downgraded by the ratings agencies.  The timing is pretty much right around the European close, I wonder if those guys are trying to get the most bang for their buck with these announcements.  Anyway, what figured to be a good short sell opportunity ahead of the Fed is now all messed up with this news.  I don't have a good feel for what the Fed reaction will be, I expected a sell on the announcement, now that we've already gotten beaten down, its harder to game.  It is getting panicky in Europe, I must say a bottom is probably not far away there.

Futures Up

There was a huge amount of volatility in the European market, and we have a low of 1176.75 in the overnight session and a high of 1189.75.  A 13 point swing in overnight trade is pretty big, and there seems to be a lot of nervousness about how the Greek problem will be resolved.  The contagion is rolling over to Portugal and Spain.  The futures are up big and the market seems to smell some kind of positive news out of Europe.  That's what it feels like.

The US markets were pretty much oblivious till the fear hit the market all of a sudden.  That is what happens in these overbought, overbullish sentiment markets.  You get slow creeping upmoves and violent fast downmoves.  I don't think we'll go right back up like last week.  We'll probably churn at these lower levels or grind lower in the coming days.  I'm going to play it carefully, but I think 1170 is good support and 1194-1195 is strong resistance. 

Changed Market

This market has now transformed from a dip buyer's market to a range bound two way market.  I think there will be opportunities both on the long side and the short side in the coming months.  Right now, Greece related sovereign debt fears cloud this market, but in reality, it is a distraction from the real fundamentals of the ES.  For tomorrow, I expect the market to stabilize ahead of the FOMC meeting.  But after the announcement, the sellers are likely to return.  It is still risky to go long, and a bit late to go short. 

Danger

Greece downgraded to junk, Portugal also downgraded by S&P.  The European markets are starting to panic, and the contagion is rolling over to the US markets.  This market is very vulnerable to a sharp selloff and that's how you can lose 20 points in an hour.  A very dangerous market to be long here.  It should be interesting for the next 4 hours.  I think we'll probably test 1080.

Greece Worries Again

It is Europe dragging down the futures again.  There is nothing new under the sun.  There is a lot of complacency but there is also a lot of momentum.  Selling in the hole when the market has just dipped has been suicidal for the past year.  I will be watching probably and won't do much today.  The FOMC meeting is tomorrow, so I'm sure we won't be staying down for long.

Running Out of Gas

This market looks like it exhausted itself coming back from Goldman and Greece news the past 1 1/2 weeks.  There was a lot of firepower used to bring this market back from 1180 to 1216, and all the conditioned Monday buyers this morning are staring at losses.   All the speculation I see in the regional banks tell me that the speculators have no fear.  I will be looking to find a spot to get short sometime this week.  Longs are poor risk reward at this point.

Treasury Dumping C Shares

We knew it was coming.  The Treasury is dumping up to 7.6 billion shares of C through Morgan Stanley.  This adds up to over $35 billion in C shares being dumped on the market if the whole lot is sold.  That is a massive sell order and presents a significant headwind for the market in the coming weeks.  Add to that the other IPOs and secondaries that are popping up left and right and you have a supply shock coming.  I would expect there to be a correction in the face of all this supply.  As for today, its Mutual Fund Monday, of course we are going higher.  I am watching and waiting for higher prices to short.

2009-2010 Momentum

In the long run (20+ years), the stock market converges to the value of the future discounted cash flows of its earnings over time, which is either paid out in dividends or indirectly through stock buybacks.  But in the intermediate and short run, the stock market can converge or diverge from its "fair valuation".  That fair valuation is debatable, but using historical valuations is a fairly good barometer for what is fair. 

I'd like to talk about the short to intermediate time frame.  This can be anything under 5 years.  In that time frame, which most traders are focused on, valuation is a small factor compared to momentum, trader sentiment, and short term news / events.  This brings me to the current stock market.  We have been rallying hard and continuously for over 1 year, and to many, it is unbelieveable because unemployment is still high, the housing market is still weak, and the economy isn't booming.  It is a huge wall of worry that the market has been climbing.  That has prevented this market from bringing in weak handed speculators who are easily shaken out by selloffs.  The 2008-2009 bear market shook out those weak hands.  The speculators and investors on board and in the market will not be easily shaken out.  I repeat, these investors will not be easily shaken out.  That is why the dips have been so fleeting, and the weakness so quickly bought.  The weak hands already sold. 

But things are starting to change.  The market doesn't change on a dime, but its character changes gradually.  These shifts take time.  When the shift is complete, you get a sharp correction.  With the recent surge in equity call activity and the increasingly complacent behavior of investors, we are using up what time we have left before this market becomes more two sided.  It has been one-sided for over a year, and the signs of change are visible.  The world markets are lagging the US, or breadth on a world scale for equities is weakening.  US is strong, but Asia and Europe are lagging.  The small caps have outperformed in this recent leg up, another sign that investors are reaching out for risk and return. 

While things are lining up for a turn in the market, we have to remember that momentum is a powerful beast in the market.  The stronger the momentum, i.e. 1995-2000, 2003-2007, the more likely it is to continue.  And this market has very strong momentum.  So how to handle a momentum market beast?  Well, I would recommend following the uptrend, but the signs I mentioned above tell me that it is late in the momentum game.  Yet, it still feels early based on anecdotal evidence and overall dissatisfaction with the economy and jobs.  Ultimately, I'd like to see investors more positive on the economy and jobs before I am comfortable with an intermediate term short position.  Yes, that is a very contrarian stance, and contrarians usually get crushed in trending markets.  But from a very long term point of view from 2000 to present, going short follows the trend of lower equity prices and lower valuations.