Leaning Bearish

Tough to bet on continuation in this choppy market but I think we've had the upside rally due to positive Europe news earlier this week, and today should be part of that unwind.  There is a growing recognition of China weakness, although I am still seeing a lot of denial and EM love.  The US stock market should be the last one to fall, and things are lining up that way.  Hong Kong continues to be weak, especially H-shares.  Usually it pays not to fade gap downs on Fridays when there is no capitulation.  Today's gap down is definitely not capitulation.

US/Europe Divergence

Something to pay attention to:  The US is vastly underperforming the European market over the past 5 days.  This is not a good sign for the ES for the next few days, but it should be looked at as a positive in the intermediate term.  Europe looks like it has bottomed, Asia is in a bottoming process, and the US is the next one due.  The US market has been the strongest and they always get to the strongest markets last.  Perhaps some bad news out of Europe can be the catalyst for one final move lower to bottom.

Monster Gap Ups After Weak Closes

Today is a classic monster gap up off a weak close.  The odds of a continuation higher off the gap up are high.  I would not be sucked into selling the gap up.  The move looks like the real deal and the European markets are suddenly made of Teflon.  European equities look totally sold out and there are no bulls over there.  Absolutely none.  The sellers have done their deed and with the deep values in Europe, I don't see it going below the lows it made last Friday.  Finally heard CNBC pundits get nervous about China and a hard landing.  It's about time. 

If we are going to get a catalyst to take this market lower, it will have to come from China or the US.  Most likely it will be China but I think that hurts industrial commodities more than US equities.  Copper will perform the worst of all the commodities.  The hoarding of copper in China was plain silly and the reversal of that will make copper prices nosedive.

Recent Price Action and Greece

It is interesting to see that the S&P futures rallied 3.5 points in the 15 minutes after the cash close.  It gives me a hint that fast money traders are well hedged already and it will take a really bad news event to take us much lower.  The high put call ratios in the past few days confirm this.  I initally thought we would have a waterfall decline this week but the price action doesn't agree.

Some will view the weak closes in the last 2 days as bearish.  But that is only if we get continuation and gap downs off those weak closes.  Today we gapped up off yesterday's weak close.  If we gap up again tomorrow, it tells me that we're probably not going down much more on this downleg (1130-1140 zone at the most) and we can rally for a few days afterwards, perhaps to 1210.  If any rally up to 1200+ is due to good news from Europe, I would look to short that rally. 

I still don't think we've bottomed because we still haven't got that Greek monkey off our backs.  Only a default from Greece can get the purge that this market needs and get rid of that monkey.  And also get rid of the fear that a Greek default would be like a Lehman bankruptcy, which is I believe to be completely false.

China Slowdown

Dr. Copper has  a PhD in economics.  It is telling that there is a global slowdown, with China leading the way.  The real estate bubble in china is bursting.  It was a giant bubble.  The repercussions should last for the next several months as market participants start getting nervous about China.

The Shanghai Composite is in the middle of vicious bear market.   This is a hard landing.  There is high inflation, artificially low interest rates, combined with a real estate bubble popping.  Absolute the worst of all worlds over there.  And it is not priced in.  Whatever goes on in Europe will not surprise the market.  But a hard landing in China will. 

Looking for more weakness this week as Europe bumbles along and the hard realities in China become more recognized.

Whistling Past Graveyard

The global economy is darkening quickly.  But no VIX spike, just steady trading without too much concern.  In fact, I heard more that one person on Fast Money mention this as a good buying range and that the market could go right back to 1200.  I don't think so.  The Chinese cat is out of the bag.  Europe has done nothing.  And US is the most overpriced of them all.

The moves today smell of total give up and liquidation in the metals, copper down 6%, silver down 16%, gold down 5.5%.  These are total liquidation moves, with no care for price, just get me out type of trading.  The fundamentals are still bright for gold, but when you have so much pressure from outside market forces, you get days like today.  Gold is extremely close to a bottom.  

Still on course for the waterfall decline, with bottom targets somewhere between 1040 and 1080. 

Range Mirage

The market has worked to get traders to believe in the range, buy at 1120 and sell at 1200.  I no longer believe that range is valid.  The fundamentals are getting worse every day.  It is being reflected in all the world indices except the US.  Europe believes press conferences, Greek bailouts, and band aids will make the problem go away.   Nothing ground breaking has come out from Europe to stop the banking crisis.

The US stock market is the last bastion for long only funds to maintain their equity exposure.  They are scared to death of European equities and they are getting killed in emerging markets.  Ironically, two of the weakest markets in the world, China and Brazil, are probably the two countries that investors still like. 

A break of 1100 is imminent, probably next week.  Beyond that, you have an air pocket, where panic and liquidation could push us down to 1040 at the worst.  Best case scenario, I see this market breaking 1100 down to 1080, and then bottoming there.  Either way, we've got more downside to go to reflect the new fundamentals of a helpless Fed, slow acting Europe, and deteriorating Asia.

Waterfall

In a bear market, you don't have time to wait for perfect short opportunities.  The market follows its own timeline.  China is in crash mode, and Europe is just dead.  The US is the only thing keeping the patient alive.  But without QE3, the US patient is in critical condition.  More stimulants in the form of easy money is needed but the Republicans are putting on some serious pressure to the Fed to stop the endless money printing. 

Usually waterfall declines take 7-8 trading days to complete.  If you consider the start of the decline yesterday, we have till next Thursday/Friday till we hit bottom.  Who knows how low we can go in that time frame.  I am thinking 1070-1080 will be a price target for a reasonable bottom but we may just go straight to 1040.  Today, the AUD/USD is down almost 2.5%.  These are monster moves.  Euro is also getting hit but a relatively tame 0.75%.  Maybe the elephant in the room is not Europe, but the bursting of the real estate bubble in China.

FOMC Day

I am expecting a grind higher off the open for the first 2 hours.  After that, we'll probably just trade flat.  This FOMC announcement will be hard to game, so I'm not really interested in trading too much after it comes out.  If we do get a rally off this meeting, I will look to short tomorrow morning.

Do the Dip and Run

This market is going back to its old habits.  The dip and run is rearing its head again.  I can feel the dipsters desperate to get long ahead of Bazooka Ben and more QE goodies.  No one dares short with the bazooka aimed at the sellers.  Expect a finish near the highs, probably to 1211-1215 area.

U.S. Stock Premium

Was watching Bloomberg TV the other day, a segment mentioned the forward P.E. ratios of the Hang Seng Index and the Eurostoxx 50.  They were between 8 and 9.  The S&P's is 12.7.  That is a 40-50% premium for U.S. stocks over Hong Kong or European stocks based purely on forward P.E. ratios.  That premium seems grossly out of line with historical norms.  For those saying that U.S. stocks are cheap, then overseas stocks are cheaper than cheap. 

Gap and Go

Looks like a gap down and bleed lower all day today.  Options expiration hangover, China slowing falling apart, and short term overbought readings.  Another Monday big gap downer.  The last 2 were bought, this one will be sold. 

Top Will Take Longer

I've been thinking about the action over the past week, and a bit surprised that very few people are believers in the rally.  CNBC traders seem to think this rally won't last.  But most are scared to short this thing as well.  I don't think there are many shorts left to squeeze.  But also without a resolution in Europe, you won't have the wave of fund money coming in to drive the market to 1250 and higher.  And I don't see a Europe resolution until the market forces it through panicky trading from a Greek default or some specific bank problem.  Dollar swap lines doesn't solve the problem.

So the most likely path now is one that brings a quick pullback late next week followed by another rally.  In other words, this benign period should last another 2 to 3 weeks, lower volatility with limited upside and downside.  A range somewhere around 1160 to 1230.  My outlook has changed because the character of this market has changed to BTFD (buy the f dip) with Europe putting in a short term bottom.  Europe has outperformed the US since Monday.  It takes time to get bulls on board.  Bulls don't like volatility, so the best way to get traders bullish is to have lower volatility, not necessarily higher prices.  From a price perspective, this rally has very little left.  From a time perspective, this rally still has a lot left in it.

After this benign period, we should get a sharp resolution to the downside to test 1100 and likely lower. 

Bear Meat

The bears are going through the grinder again.  Fifth straight up day, and still a big wall of worry over Europe.  The market does not make it easy on the short side.  Right now, we need time at this higher level to convert more bulls before the next leg lower.  I am really hoping for one more piece of government intervention in order to get performance chasers on board.  That would be the easy short.  If we don't get that, it will be harder to time the short, but sometime in the middle of next week sounds right.  I am not interested in longs at this point until we get capitulation.  The level I am looking at is ES 1222.  Above that, we could get a short squeeze up to 1235.

Dollar Swaps

This is not a liquidity problem.  The ECB and the Fed think providing dollar funding will solve the banking crisis.  It is a solvency problem that needs to be solved through wholesale sovereign bond purchases and a TARP like program.  Liquidity is not the problem.  I think you have to short government intervention that doesn't solve the problem.  We probably will squeeze shorts for a few more days up to the FOMC meeting, but after that, there are no barriers to shorting this market.