Weekly Pattern in AMC

 AMC is the centerpiece of the meme stock trade.  It trades the most dollar volume among the meme stocks, and often times the most options volume of all the stocks in the US.  It is retail driven, and there are distinct patterns that one can discern from retail traders.  

Retail traders are simple creatures.  You can see patterns in their behavior which repeat over and over again, more often than you would see in the general market.  These patterns are more reliable than ones that you see in a major market like the SPX.  

I will reveal probably the most profitable pattern that can be taken advantage of with size (AMC is a very liquid stock and option).  Its based on a behavioral patterns of retail traders.  

Here are the 3 basic reasons driving the AMC price action:  

1) Retail options traders mostly trade calls, and in particular, mostly calls with less than 1 week till expiration (weekly calls).  Almost exclusively long calls, rarely short them.  

2) Retail traders mostly buy weekly calls during the week that they expire.  They don't like to buy options right before the weekend.  The buying is heaviest on Monday, Tuesday, and Wednesday. 

3) They have limited capital, so they don't have the ability to take delivery of AMC stock if they're call options expire in the money, so they have to SELL the option before Friday expiration if its in the money. 

The reason they behave like this is simply that weekly options have the most gamma, and are the cheapest, and most volatile since they only have a few days till expiration.  This satisfies the gambling instinct of these options punters.  They know that options prices decay with time so they don't like to buy them on Friday ahead of the long weekend.  Also, they like to be in cash heading into the weekend.  These punters' way to manage risk is to be flat over the weekend.  That's their risk management strategy.   They almost exclusively bet on AMC going up, because that's what their group (Wall St. Bets) encourages.  They are herd animals.  More like wildebeests than apes.  

Let's look at a simple pattern driven by the options activity:  

As you can see, AMC has a tendency to rally on Mondays and Tuesdays, forming a short term top on Tues/Wed, driven by their herding behavior of buying calls heavily on those days.  It then weakens on Thursday and Friday as the calls are either sold or lose their delta as they get closer to being worthless as expiration nears as they are out of the money.  This force of call selling and delta going down drives dealer flows to sell their hedges, driving the stock lower into Friday, where it bottoms, to repeat the cycle again.  

If AMC doesn't rally on Monday and Tuesday, it means that AMC is in the middle of a strong downtrend (late June to mid July, late July to mid August) that overwhelms any call options activity, also it discourages retail betting on calls during these downtrends.

As expected, Powell was dovish as all get out at Jackson Hole, basically making it sound like it would be all but impossible to hike rates in the future, while also delaying taper anxiety by not even mentioning any specifics.  The SPX is running away from us, speculation is through the roof, it was the meme stocks last week, this week its an assortment of daytrader favorite shitcos with high short interest like SPRT and BBIG squeezing higher.  

Expecting a different tone in September, but I'm not betting on it.  SPX 4400 is now bedrock support and will be tough to crack much below that level.  SPX 4300 is now a pipe dream for dip buyers. 

Speculation is Coming Back

 Tuesday and Wednesday options activity reveals what is apparent from looking at Twitter, which is that the reopening bulls are back, and they brought along the meme stock bettors who have been piling into AMC options like last May/June.  

AMC traded more options than any other stock yesterday, easily more than AAPL, and with 3-1 call to put ratio.  The meme stocks have driven down the put/call ratios for the overall market to June levels.  From looking at my watch list, most of the speculative retail plays are rallying strongly over the past week.  

I am still hearing a lot of analysts calling for a pullback because its gone up too far, but less than back in June and July.   A couple of days ago on CNBC Fast Money, permabear Guy Adami basically threw in the towel, saying that the dip last week leading to new all time highs means market is probably going higher.  

I have been too bearish on the market, I expected the highs from earlier in the month right before last week's dip to be resistance but the market keeps making new all time highs.  At this point, I have little conviction on any market calls looking for a pullback, but a lot of conviction when it comes to buying those dips that don't last for long.  I have a feeling that things will change in September, with weak seasonality and each FOMC meeting a potential negative catalyst with taper announcement fears.  

But this market doesn't want to stay down, so you can't hesitate when those occasional selloffs come.  You have to rush in like a conditioned animal ready to buy the SPX on any 2-3% dips.  No questions asked.  You will not get a 5%+ dip unless there is a black swan.  And it doesn't pay to look for black swans.  

Boring bull market continues.  Not expecting anything meaningful out of Jackson Hole.  Powell is almost at the reappointment finish line, he will not be looking to rock the boat before Biden's decision.  Expect either status quo mumbo jumbo or a dovish lean. 

Caveman Discretionary Trading

In the beginning, it is about finding an edge, a setup that works over the long run, through multiple market cycles.  Backtesting that setup and also making sense of why there is that edge.  It is not some random thing that worked in the past that you just expect to keep working in the future.  There is an underlying bias or behavior among market participants that create the pattern. 

For example, a lot of retail traders are looking for a quick buck, a volatile small cap stock that is in play and going up on some hype press release from the company.  They see it going up and can't help themselves, they get FOMO and chase a stock that's already up a lot on nothing fundamental.  So they push the stock up to unsustainable levels.  Eventually it goes back down as they sell when the excitement fade away.  Some of these companies will take advantage of the higher price and volume generated by these traders and ram through a stock offering.  Even without an offering, the natural force is to the downside once the high volume frenzy calms down, usually within 2 days.  The classic pump and dump pattern.  

Finding an edge takes time and experience, but its only the first part of game.  The next part is discipline.  Discipline is mainly 2 things:  1) risk management.  2) trade selection.  Once you find your edge, keeping that edge is easier than keeping your discipline.  

For a lot of people, discipline is a function of results.  It is easier to maintain discipline when you are making money than when you are losing money.  There are a lot of trading cliches that are useless but the one about trading smaller after a big loss is useful, but psychologically difficult to implement.  That's due to our caveman roots.

After you have been winning, you feel good, and don't want to risk losing that good feeling by trading bigger, even though you can, with the same level of risk, because you now have more capital.  After you have been losing, you feel bad, and don't want to keep feeling bad.  So how do people cope with that feeling?  They trade bigger, even though they have less capital now, increasing the level of risk after losing.  That's revenge trading.  Taking less risk while winning, and taking more risk while losing. 

Revenge trading is what happens after you lose money on a trade and also lose your discipline.  It has been the bane of my existence.  If I never revenge traded in my career, I would have a lot more money right now.  And I don't think I'm the only one.  Its the caveman in us that is hard to contain.  The urge to double down.  This urge is especially strong in mean reversion traders.  That is the biggest edge that trend followers have over counter trend traders.  Trend followers have better risk management.  

The next aspect of discipline is trade selection.  Its much easier to maintain the same trade selection when you are winning than when you are losing.  When you are winning, you feel good, so you don't want to lose that feeling by making too many trades.  When you are losing, you feel bad, so you want to quickly get rid of that feeling, and become desperate to find the next trade to make back your losses, to get back to even.  So most end up loosening their trade criteria and get desperate trying to make their money back.  This can lead to a downward spiral of entering subpar setups which leads to more losses and more desperation.  It continues to feed on itself until you start making money again and even at that point, if you are still down a lot, you can still have that desperate mindset which makes it that much harder to get out of the hole.  

The flip side of compounding is losing so much that its almost impossible to come back.  If you start with 100, Losing 50% of your bankroll, and then making 50% back leaves you with 75, not 100.  Losing 90% of your bankroll and making 90% back leaves you with 19.  Excessive risk taking and volatility in your account is a negative drag on long term account growth.  I wrote about overbetting and  optimal bet size several years ago.   

That's why you can teach people the right setups to trade, and still the majority of them will screw it up because they lose their discipline.  

The bounce back from that overnight dip to 4350 in European hours on Thursday has gotten the SPX back to the pre-FOMC minutes break down level of 4440.  Call me old-fashioned, but the 15 minute chart looks like its begging for a retest of 4350 at a minimum in the coming days.  Definitely not shorting, as I refuse to short SPX until after the parabolic rally phase, but it seems odds favor the bears here.  Also, I find it interesting that you got the biggest equity inflows since March 24 last week, as the SPX was weakening from all time highs.  It looks like FOMO has finally caught up as the SPX kept grinding to new all time highs.  Those on the sidelines couldn't take it any longer and decided to pile into equities.  Seems somewhat ominous to me, but doesn't derail me from the BTFD strategy. 

If we do get back down to 4350 or even lower this week, I would be a buyer expecting Powell to be a cooing dove at Jackson Hole ahead of his reappointment decision, with Delta variant as a very convenient excuse. 

Similarly, I am a buyer of dips in Treasuries ahead of the 2/5/7 year auctions and Jackson Hole.  The power flattening over the past several days is consistent with tapering fears in the market, and everything in my gut tells me that Powell will be more dovish than expected on Friday. 

Dips are Fleeting

You can tell the strength of the market by seeing how much time it spends near the highs, how much time it spends near the lows.  The SPX is a textbook example of a market that spends most of its time near the highs, making those occasional selloffs look like crashes, because traders aren't used to the SPX going down and staying down.  Its like trying to keep a beach ball underwater!  

You can't keep a strong market down for long, and that dip from Thursday pre-market during European trading hours was like red meat to the bulls, who ate it up ravenously.  The SPX basically shot out of a cannon on that gap down open.  You see things like that and you know that the next time there is a dip, you can't hesitate, you have to be ready to act, know your levels where you want to get long and then buy when it gets there.  

I managed to get a partial long position in the premarket on Thursday, but wasn't able to get full size as I was waiting for the cash market to open to see if there would be some options hedge sellers coming in to sell the SPX, to add more.  It was the opposite. 

I still think there is another dip waiting within the coming days, with Jackson Hole coming up next Friday and with traders cautious heading into September.  Get your shopping lists ready, this market won't give you much time to get long when it gets down to low risk buy levels.

Dying on the Hill of Reopening/Reflation

It feels like we are at the beginning stage of a risk off period for the SPX, but all signs point to it being a shallow pullback.  

The main reason for just a shallow pullback is the pure strength of the SPX and its outperformance vs. global indices, with very few dips, steady uptrend without a euphoric parabolic rise.  With Powell blatantly pandering to the stock market and trying his best to get reappointed by Biden, you will not hear anything hawkish from him for at least another couple of months.  Jackson Hole will be an exercise in mealy mouth rationalizations for staying dovish.  No way he sets the alarm clock for tapering there.  

Another thing I've noticed is a slight bearish shift in investor attitudes towards individual stocks, especially cyclicals and reopening trades.   They are still bullish, but not as loud as before since they are losing money.  With SPX holding up so well, they definitely have not given up on their trades and are hanging on hopes that the market rotates from growth to value. 

Watching CNBC and Bloomberg, Twitter, etc., I still get the same takeway.  There are a LOT of reinflation/reopening believers, many of them die hards.  They are willing to die on that hill of reinflation/reopening/higher rates.  They are seeing small cap underperformance as a buying opportunity.  They dismiss leading indicators, crude oil weakness, Delta variant, slowing China, and downtrending 10 year yields.  

Maybe they will be right, but the weak price action going counter to their beliefs shows that the pain trade is still lower for the industrials, financials, commodities, materials, consumer discretionary, etc. plays.  

We will need to see these reopening trade investors throw in the towel and give up before you get a long term tradeable bottom in small caps.  Seeing how weak Russell 2000 is, it won't take a big down move in SPX for that to happen.  A move down to 4350 on SPX would probably be enough to do it.  Or a choppy 2-3 week period of pullback to 4400 -rally- pullback to 4400 would also get the job done.   

Here is a video from Wall St Jesus, who captures the current environment well.  Not as bearish as he is, but do expect a shakeout of weak longs in the coming weeks.

With such a dovish Fed, you have an implicit put on the market, so the long term risk reward for longs are favorable, even if you buy all time highs.  The wall of worry is still there, with Delta and Fed tapering still keeping investors from going all in.  As long as that wall of worry is there, and there is no euphoria, you can stay long term bullish.  

Targeting 4380-4400 on SPX for a dip buy.  

All Time High Household Equity Allocation

There is a reason for the underlying bid in this market.  Investors are piling money in at a rate of over $1 trillion annualized into equity funds in 2021.  Compare this to the previous 20 years.  Post 2008, the only years that are over $250 billion are 2013 and 2017.  It just so happens that those were 2 years when bonds were heavily sold and out of favor, just like this year.   2021 is 2017 on steroids and HGH.

Also adding fuel to the runup is the post earnings season buyback window coming in, with stock buybacks providing even more buying power.   Equity fund inflows + corporate stock buybacks + $120B/month in QE.  Also don't forget retail accounts that are now massively invested in individual stocks, more than any time since 2000.  Those are the liquidity forces that bears are battling here.  It is a powerful force in this market, but it will not last forever.  

Counter-acting those forces are IPOs, SPACs, secondary offerings, corporate stock option issuance, which are all substantial, but not on the same scale as the flood of money coming into the market.   

With further Covid stimulus unlikely and the infrastructure package being spread out over several years, the government will have a much smaller footprint on the market over the next 3 years (assuming Republicans win either House or Senate, which is high probability just looking at history of midterms), it will come down to animal spirits and investor psychology and willingness to go even heavier into equities, which are already at all time highs, even higher than 2000 bubble highs.  Below is as of June 2021, so the household equities percentage of total assets is even higher today.

Combine this with record high valuations and the TINA (there is no alternative) sentiment about stocks vs. everything else, it is a long term warning sign. 

The bears have been crushed since March 2020, and most of the time from 2009 to 2021.  Trees don't grow to the sky.  There is long term confidence and  blind optimism towards stocks, passive investing and putting money into S&P index funds as a result of a 12 year bull market.  This is reflected in household equity allocations and this year's massive equity fund inflows.  With a Fed asleep at the wheel and Powell recklessly staying dovish as he seeks Biden's approval and reappointment, I still see several more months left in this SPX up cycle, but all the flashing amber lights are there.  

1999-2000 was a Nasdaq bubble that took the SPX along for the ride.  This time, its a SPX bubble that is taking bitcoin, art, alternative assets, etc. along for the ride.   The breadth and magnitude of this bubble is the biggest in the history of mankind.  And unlike previous bubbles when governments were either on a gold standard or didn't embrace simultaneous bazooka QE and fiscal stimulus, this time, the bailout mentality is off the charts.  

In all likelihood, the bubble will pop in 2022, and the Fed, with their plans on hiking in 2023 will be stuck on zero.  There is no way Powell tries to force even one rate hike like Yellen did in December 2015 into a global slowdown.  The question will be after the taper, will the Fed sit on the sidelines as the bubble pops, waiting for the economy to get worse before acting, or will they reinforce their bailout credentials and preempt the downturn by announcing QE infinity 2.0?  I think it will be the latter.  

But unless Powell decides to buy $120+B/month in equity ETFs on the backside of the bubble, he's not going to stop the bear market.  The Fed is all in on keeping stock prices high.  Powell is Draghi Part 2.  I'm sure he will try to do whatever it takes to keep stocks from going down, and try to be a hero, but in the process, guarantee stagflation and earn him the title of worst Fed chairman of all time. 

The SPX is forming the front side of a massive mountain, the biggest we've ever seen.  It likely goes over 5000 before the top is in.  The higher it goes, the harder the fall.  The back side will be painful for those that are unfamiliar with extended bear markets.  Bitcoin will be destroyed.  If bitcoin can go from 60K to 30K while the SPX is making all time highs almost every day, I can't imagine how low it will go when the SPX enters a full blown bear market.  Sub 10K is likely.  For those that think bitcoin is the new digital gold, you are off your gourd.  Bitcoin and SPX are positively correlated.  Just look at the historical charts. 

August 2011, August 2015, December 2018, and March 2020 were quick drops and quick recoveries.  They have conditioned investors to buy the big corrections, as the market always comes back and makes new 52 week highs within a few months.  But those big drops didn't come after these kind of astronomical equity inflows or household equity allocations.  Long term sentiment towards stocks was never this frothy in 2011, 2015, 2018, or 2020.  Its a different story now.  It will get interesting in 2022 and 2023, when I expect the volatility to come back with a vengeance.  

For the bears:  it will be your time coming up in 2022, if you can survive the parabolic up phase over the next 6 months.  

For the rational speculator:  either take a long break until spring 2022 or hold your nose and go long SPX for the next 4 months and get out before the top.  Or if you don't have FOMO, just wait for a high probability setup to buy on a dip and hold on till year end. 

Gamblers, Speculators, and Investors

Deep down, there is not much separating gambling and investing.  There are 3 levels I would separate them to.  

1. Gambling:  short term bets:  sports betting, casino games like slot machines, blackjack, poker, roulette, craps, etc.  

Most forms of gambling are pure luck, but there is skill involved in poker, blackjack, and sports betting.  The outcome of most bets happen quickly, so they attract the impatient and thrill seekers.  A negative stigma attached to gamblers, even professional gamblers.  Not many people look up to successful blackjack players or sports bettors.  I guess some people look up to successful poker players in the past 20 years due to the poker boom showing up on TV and youtube, but not really a respected profession among the general population. 

2. Speculating:  short to intermediate term bets on stocks, options, futures, bitcoin & cryptos, FX, and other alternative assets.

This is the bridge between gambling and investing.  There are speculators that are like gamblers and there are speculators that are like investors.  This is the most crowded space in the financial community.  This is where the action is.  This is where the money is made and the blood is spilled.  The biggest group of speculators that move markets are hedge fund managers that need to keep up with the averages, that can't afford to have several down months in a row, that can't afford to think in the really long term.  Leads to some irrational price movements from stop losses and forced risk reduction.  I would argue that prices are made by speculators who move in and out regularly, not by long term investors.  If you want to win, you have to know what these guys are thinking and be one step ahead, predicting their next move. 

Choosing the right products and stocks to trade is also an edge.   So is choosing the right time frame where there is the least competition or the softest competition.   

In the markets, the shorter the time frame, the more competitive it gets and the harder it is to have an edge.  I know that if I try to scalp SPX against the HFTs, I'll probably lose.  But if I take the other side of swing trades over 3 to 5 days in pump and dumps traded heavily by greedy retail traders, I have a big edge and will win in the long run.  

With the really long term time frames, valuations usually merge much closer to long term fundamentals, which are much easier to analyze and predict than investor psychology during a bubble.  For example, I have no idea what TSLA will do in the next hour or the next week, but over the next 5 years, just based on fundamentals, I have a lot of conviction that it will be much lower in price.  This is not just TSLA.  Considering how much flotsam has bubbled up in the past 12 months based off of ESG hype, bitcoin hype, biotech hype, I can name probably another 200+ tickers that would go down as much if not more than TSLA over the next 5 years. 

3. Investing:  long term bets on stocks, bonds, real estate, and alternative assets.  

There is a big edge in having a longer time frame than those that are price makers (e.g., hedge funds, short term traders, trend followers).   But there is a caveat.  You can't be leveraged.  You have to be able to withstand big drawdowns.  The market can stay irrational longer than you can stay solvent IF you are leveraged.  If you aren't leveraged, then you can stay solvent regardless of where the prices go in the short term.  

There is a reason why the top of the world's richest are investors not speculators.  That's why Buffett is richer than Soros or all the other hedge fund managers out there who charge exorbitant fees and still can't amass more money than Buffett.  

But in some cases, its better to not be a long term investor.  Like 1999 or 2000.  Like now.  When you are in a raging bubble, and you decided to invest for the long term, that is asking for trouble.  Not all stock markets have been as bullish as the US during its history.  Look at China, Japan, Europe, and some of the emerging markets.  The stock market doesn't guarantee good returns like many believe.  A lot of the SPX outperformance vs global equities is due to corporate welfare in the US. Don't confuse brains with a bull market.

The SPX continues with the low volatility grind higher.  But both bonds and industrial commodities weakening lately.  It feels like a shoe is going to drop at anytime.  Would much rather be in bonds than stocks here.

Meme Stock Graveyard

Retail traders can move stocks up temporarily, but they can't fight the forces of fundamentals weighing down on their favorite names.  Meme stocks are a collection of some of the worst stocks in the market, defunct businesses and or pipe dream stocks that have become massively overvalued due to nonstop pumps from retail and the inflow of dumb money.  

History doesn't repeat, but it does rhyme.  GME, AMC, CLOV, and SPCE are good charts to review and study what happens to meme stocks at the start of the feeding frenzy, and what happens afterwards when the stock gets bogged down by a boatload of stuck bagholders clinging to hopes of a revival to past highs.  GME is the most seasoned of the post peak meme stock plays.  After its crazy run up in January, the lack of new retail money, high prices, and weak fundamentals bear their weight on the stock price.  AMC is entering this phase of the post peak meme stock cycle, as it is now down over 50% from the peak, but still at ridiculous price levels.  There will be occasional spikes higher, echo pumps, along the way, but expect it to go down gradually over time as the bagholder hopes slowly fade away.  Similar story for CLOV and SPCE. 

I bring up the meme stocks because we've got a new one on the horizon, HOOD.  HOOD is a little bit of a special case in the meme stock world, because its a fresh IPO, and the free float is a small percentage of the overall shares outstanding.  Also, unlike GME, AMC, CLOV and SPCE, the fundamentals are not bad.  I would argue that its probably the highest quality meme stock out there, and probably the least overvalued. 

 

I am not saying that HOOD is a good long term stock to own, but I can definitely picture it going much higher due to the small float and the relatively decent fundamentals.  The fact that most of these retail newbies who are piling into the meme stocks have brokerage accounts there probably gives it more staying power and long term popularity.  It is probably the best meme stock "story" of the group.  

HOOD has instantly become a daytrader favorite, and that in itself probably will give it a premium multiple compared to other retail brokers.  It is probably no coincidence that the other main meme stock, AMC, has done poorly in the past few days as HOOD has skyrocketed.  HOOD is taking up all the retail buying power, taking away the fuel that  AMC constantly needs in order to keep the stock price up, which is difficult at these inflated levels.  

The S&P 500 has gone nowhere for the past several days.  A boring market.  Nothing going on, although I still expect a sudden pullback later this month.  Complacency is building up slowly, yesterday was the first day post Monday, July 19 dip that the put/call ratios got to low enough levels that are a warning sign.  A few more days of these low put/call ratios and sideways price action will set this market up for a quick drop.  That is the hope, at least.  I am not making any bearish bets.  Just hoping for a dip to buy. 

2017 Template

I mentioned several weeks ago about the similarities that I see between 2017 and 2021. Another similarity is the behavior of bond yields.  After a big bond selloff post 2016 election, the bond market rallied from March 2017 to September 2017, going from 2.62% 10 yr yields down to 2.03%.  After a big bond selloff post Georgia runoff election in January 2021, 10 yr yields got up to 1.75% in March.  It has been rallying ever since, with 10 yr yields now down below 1.20%.  Both of these bond rallies occurred as the SPX kept making new all time highs, staying above the 50 day moving average, with infrequent, brief, and shallow corrections throughout. 

2021 SPX chart

2017 SPX chart

 

The big difference between 2017 and 2021 is that the Fed was actually hiking rates and tightening monetary policy in 2017, which would eventually lead to a market top in 2018.  This time, the Fed has stayed super dovish and only hinted at a possible taper.

The Fed has now backed itself into a corner, nurturing the biggest bubble in financial history with any kind of rate hikes probably causing a 2008 style collapse in the stock market.  

We've gone beyond the moral hazard of the 2008 and 2009 bailouts.  Almost everyone who is investing now believes that Fed will come to rescue whenever there is a correction in the stock market and the Fed is basically a meme now cranking the printer going brrrr.  

Tapering QE is now like rate hikes back in the old days.  Rate hikes are now a long term theoretical construct which were possible in a pre-bubble environment with decent organic growth, but are untenable in a zombified overindebted corporate financial system that relies on super low interest rates and an implicit Fed backstop during stock market corrections.  Rate hikes in this era would collapse the house of cards that has been built and violently pop the biggest bubble ever, so they are out of the question.   

The bond market is beginning to sniff out the distinct possibility that the Fed is basically at the same spot that BOJ was in the early 2000s, and the ECB was in the early 2010s.  5 year yields are now trading under 65 bps.  Once this bubble pops, whether it be 2022 or 2023, that will effectively kill any chances of raising rates during the boom portion of this cycle even as inflation stays high for an extended period of time.  At that point, you are probably looking at the 5 year being back at their 2020 levels of 0.25%, and 10 year yields going back towards 0.50%.  At that point, there will probably be serious discussions about negative interest rates in order to see if the positives of the wealth effect from higher bond prices and lower corporate bond yields would be worth it to cross the Rubicon and accelerate the de-dollarization of the financial system.  

Financial history shows that when the masses start investing heavily in stocks as they are now, with the highest valuations in the history of the US stock market, bad things will happen.  Its not a matter of if, but when.  My bet is that the shit hits the fan in the second half of the 2022, as the midterm elections get closer, with a high probability that the Republicans will win either the House or Senate, if not both.  Once the realization of gridlock and no more fiscal stimulus till 2025 hits, it will make the fiscal cliff of late 2012 look like child's play.  No more fiscal stimulus would be one of the worst pieces of news that the market could get.  After all, there is no organic growth, it is all fueled by fiscal and monetary largesse.  Even with QE, unless the Fed jumps the shark and goes full BOJ and starts buying equity ETFs, the stock market will be in big trouble. 

But let's not get carried away and think too far ahead.  The bubble will get bigger before its all over, so its still better to look for longs than shorts.  Price action and the charts tell you that its still a BTFD market, as the dips are rare, and when they come, they don't last for long before V bottoming and going back to all time highs.

Delta and China

The two fear variables of the day are the Delta variant and China.  It doesn't matter what I feel about both (non factors in the intermediate to long run), because they can bring about brief but sharp dips in risk assets because of the positioning and complacency.  

Institutions are what moves markets, the major markets anyway.  I am not talking about stocks like AMC or the small cap stocks that are daytrader plays and retail dominated.  And during the slow August month, ahead of the usually feared September and October, most institutions who are heavily in equities and with historically low bond exposure aren't likely to chase this market higher. Not after 17% up on the year in the SPX and near all time highs.  

And with no new stimulus checks and federal unemployment checks ending in September, the endless retail bid for meme stocks, and assorted Wall St. garbage should slow down in the coming months.  According to research I've seen the last couple of weeks, retail investors were big buyers of that dip on July 19 and have been big buyers of Chinese stocks that have been dumped wholesale by fund managers. I would guess their firepower will be more limited in the coming weeks.  

This week, we are starting to see the SPX struggle to make new all time highs and stay up there.  There has been some volatility during the overnight market hours, as we've seen fairly large drops during Asian hours only to see the dips quickly bought.  When you start seeing the intraday volatility go up as the market goes sideways after a big V move higher, it is a subtle warning sign that the next big move is much more likely to be down than up.  

I'm not interested in shorting the SPX here, I have a few individual stock shorts which will probably go down much more than the market if we get a move back down to 4250.  Even though I expect a parabolic move up in the 4th quarter, its likely that during the seasonally worst part of the year coming up, a consolidation between 4200 and 4400 is the highest probability scenario.  I am waiting for the dip but will not bet on it.  

I am noticing that commodities are very well bid and rallying despite the SPX going sideways this week and even with Delta and China scares.  From a big picture perspective, the commodities are the most undervalued assets as they've gone sideways for the past 15 years even though the USD money supply has tripled during that time period.  An explosive commodity bull market is probably just right around the corner. 

Short Selling Small Caps

I don't often talk about trading small cap stocks, because it doesn't really teach you much about how the bigger, more important markets move.  If you are shorting stocks, you are mostly reacting, not anticipating.  Its almost like a whole different world.  Trading futures and index options is a tough game, but one which I am involved in because of scalability and strategy diversification.  The edges in futures are much smaller than the edges you will find in individual stocks, especially retail driven small cap stocks.  

You have to consider who is on the other side of your trade.  Is it institutions or retail traders?  One has a lot more buying power and is much better informed than the other. If you look at the Stocktwits boards, you would think that the average IQ of a retail trader is in the low 80s.  Most of these daytraders have never read an SEC filing in their life.   Probably the extent of their research is looking at charts, doing some paper napkin analysis. 

You also see many shorting small cap stocks these days, especially the biggest gainers of the day.  Now these are your better educated traders, and a lot of them do fundamental analysis and have a good understanding about the float, dilution, SEC filings, etc.  But their Achilles heel is not ignorance, but arrogance.  Thinking that they can't lose, because they usually win, and refusing to take losses and holding on to a short that is going against them, which is much more dangerous than holding a long that is losing.  When you are getting short squeezed, your margin requirements go up as your account equity goes down, bringing on a margin call that much more quickly than holding a losing long position. 

It used to be less popular and a lesser known strategy back in the day before you had short biased educators like Tim Sykes come along and teach it to a huge pool of newbies.  In the old days when there weren't so many trading "educators" and stock alert services, there weren't that many short sellers in the small cap world. 

Back then, it was safer to short, with very few outlier moves.  There was a smaller pool of traders chasing these stocks and a much smaller pool who could get short squeezed.  So you didn't get the infinite short squeezes like a GME, AMC, etc, because the retail buying power for pump and dumps was just not as big as it is today.  The sheer number of daytraders is so much more now than at anytime in the last 20 years, they can overwhelm low float stocks with their cumulative volume for several days.  It is amazing to see so many ridiculous supernova parabolic moves since spring of 2020.  In this new era, the stock market is a literal minefield for the short seller.  I would only recommend it if you are super disciplined and can take your stop losses and never let losers get out of control.  Easier said than done.  Also, the borrow fees, short interest fees, and occasional buyins, usually at the worst time right before the stock is about to enter a 2 week downtrend. 

Shorting pump and dumps was my main strategy for several years, but I didn't learn that much about trading because it was too "easy".  What I mean by easy is that if you could hang on to your short position, 95+% of the time, the trade would go in your direction, even if you got squeezed for a day or two before it did.  When you win more than 95% of the time, you develop bad habits, you get stubborn and hang on to losers because they almost always turn into winners if you can withstand the storm.  Of course during the rare times when they keep going up, you lose everything you made that year in one day.  Also, you don't learn anything about predicting stock price movement, because the end result of these pump and dumps is essentially a fait accompli. 

Shorting pump and dumps is a winning strategy, in a similar way that selling index puts is a winning strategy.  You are essentially short gamma.  You win most of the time.  But the few times that you lose, they dwarf the size of your wins.   If you can deal with the big losses, and not completely blow up, then its a great way to make money in the markets.  But again, you don't really learn that much from selling index puts or from shorting pump and dumps.  You don't develop any intuition about market direction. 

In the short selling world, there is a fine line between good risk management and being too careful.  If you are too careful, your returns will be low, and it will be bleeding out from repeated stop losses, covering at bad prices.  In that case, you never blow up, but you don't make all that much either.  But what's worse is if you don't manage the right side of the tail distribution, and cut off the outlier moves.  If you don't cut the losses at a certain point, then you are going to be taken out by a black swan move, such as this:  

A stock going from $4 to $100 over 4 trading days back in 2016.  I actually started shorting this in the 20s thinking it was overdone but by pure luck, I couldn't find more borrows, otherwise I would have gone in heavy.  I was able to withstand the storm, although it was quite painful.  I had to reduce my position near the top due to potential margin calls.  If I had short 25% of my acccount balance on DRYS at 20, and never reduced, I would have lost everything at the top at 100.  

There were quite a few blow ups among short sellers on this one.  What is interesting about DRYS is that the CEO George Economou was then able to dilute shareholders continuously on the other side of the peak, as retail bagholders kept averaging down, buying the dip, thinking about how much the stock is down from the peak, dreaming of a repeat of that monster move.  They provided the liquidity for the CEO to raise several hundred million and recapitalize.  He then was able to use his super voting rights to acquire the fully capitalized company after the dust settled.  Essentially all the retail bagholder money went to the CEO via the stock market.   

That shows you how greedy retail investors looking for big gains and looking in the rear view mirror provide the liquidity for these companies to keep selling stock after the pump and as it keeps dumping.  Its actually stock manipulation 101.  The higher a stock goes, the more it entices traders to buy as it goes down from the peak.  Most retail investors think a stock is cheap when it is down a huge amount from a recent peak.  A good recent example of this is CLOV, a Reddit favorite meme stock.  

CLOV just happens to have their SPAC lockup expiration in July, and I'm sure that big pump in June to over $28 has done them a huge favor in giving them willing buyers on the way down.  After seeing it go up to $28 like a bottle rocket just a month ago, retail bagholders have either averaged down, or new ones got lured in at 14,13,12,11,10,9,8 since it seems like such a big discount.  

The SPX is at an all time high, I am surprised, but not shocked.  Nothing shocks me anymore when the SPX is going up.  The buying power and liquidity backing it up is ridiculous.  I still think we are in a range bound market, with the lower bound around 4250, and upper bound around these levels, but I probably sound like an old pit trader complaining about algos when he can't adjust to the new markets.  CTAs heavily long, weak seasonal period for the next 2 months, and retail message board activity in SPY at very high levels are warning signs.

Chop Coming Up

 We haven't had a chop trade in quite some time, its been dip and run on the daily since the November 2020 election.  Over the past 9 months, SPX has gone from 3280 to 4380, or a 44.7% annual rate.  The valuations are sky high.  The momentum unbelievably strong.  But historically, the SPX usually back tests breakouts and don't normally go up in a straight line.  There hasn't been a lot of trade between 4250 and 4350, and its a bit of a volume vacuum.  I expect that vacuum to be filled with some choppy trade from 4250 to 4350 over the coming weeks.   

I don't expect a V bottom this time around like you saw off the June dip, just because of the lack of consolidation between the 4250-4350 area.  Also, seasonally weak time of the year, from mid July to early October, so you have almost 3 months when SPX makes almost no gains historically.  Still have Delta variant fear, and that probably doesn't dissipate until you get to lower levels and have more of a flush out of weak hands, or a few weeks pass by.  

Long term, its still setting up for a parabolic rise later this year, but my base case is for a choppy period for the next couple of weeks, and then assess the situation from there.  

If we do get that chop that I expect, that should take 10 year yields down towards 1.10%.  The bond market is confounding a lot of people, who can't explain the price action other than saying its short covering.  That's usually a sign of a strong market. 

SPX Rocketship

It looks like the SPX has reached an intermediate term ceiling at 4400.  The uptrend has been so steady, with only very brief corrections, but with 10 year yields down below 1.30%, the stock market propellant that is lower and lower yields is running out of fuel.  I am now expecting a range trade for the next 3-4 weeks, trading mostly between 4300-4400.  Post opex July until opex August is usually a seasonally weak time of the year, as Europe goes on vacation and lack of new buyers willing to take the market higher after such an extended run.  It is possible there will be occasional forays into the 4250-4260 zone, but those should not last for long, as that is rock solid support.  

The next few weeks could be the last decent opportunity to grab a seat on the $SPX rocketship below 4300, with a likely destination of 4700-4800 by year end.  

The sudden worries about the Delta variant, declining 10 year yields interpreted as economic weakness, and bad stock market breadth are the most common excuses I see for the selling.  Those seem like non issues considering how dovish Powell has been and the already overflowing liquidity as shown by the massive reverse repo cash balances parked at the Fed.  

The only way you can get sustained selling is if you get a very sharp hawkish turn from Powell in the next 2 months, which is about as likely as Trump saying that the 2020 election result was fair.  

I am hearing many "experts" opine about how market is overbought with a bad mix of high inflation, peak growth rate, bad market breadth, Delta variants, etc.  The pessimism, which never really went away earlier this year, has come back more broadly in the past week.  Put/call ratios are rising, hearing a lot of bearish market calls for the next 3 months going into a potential taper announcement. 

I don't expect this bearish psychology to really fade away until the fall, when you will have had enough time to consolidate the gains from the last several months, forming a base to propel into a parabolic FOMO chase for performance I expect in the fourth quarter.  Until then here is a simple game plan:

There is always a potential for an overshoot to the downside, but with the worry this thick, I would be surprised if it went below 4200 on any overshoots.  Maybe finally we'll have a range trade this year, favoring traders, instead of the steady upward grind higher that has been a gift for buy and hold investors.  

In strong uptrends like this, in a bubble environment, range trade doesn't last for too long, so I will probably just buy and hold as we get closer to the end of August. 

Wall of Worry is High

It didn't take much of a dip for the worry to rise.  All I can do is shake my head, at how easily equity investors start worrying about a pullback.  I don't even need to mention what they say on CNBC Fast Money, as they recently brought that permabull Tony Dwyer, notorious for being bullish all the time except when the markets are in a raging uptrend.  He's been looking for a pullback since March, 400 SPX points ago. 

Let's take a look at the CBOE equity put/call ratio:

 

Right back towards the high end of the range this year, when the market made V bottoms in late January, late March, mid May, and mid June. 

Bearish activity in options is confirmed by the ISEE call/put index. 

Powell came out on Wednesday as his usual over the top dovish manner, using different language this time to try to brainwash investors into thinking inflation is transitory.  If you could get inside his head, I'm sure he's on automatic QE pilot until reappointment, but he'd never tell anybody that.  

He'd never say the Fed is political, but his future is in the hands of Bazooka Joe Biden, who has basically become the puppet for the grand American MMT experiment.  Of course Powell will do everything to please his boss, and that's to be as dovish as all get out, regardless of the data or the markets. Once he gets reappointed, don't be surprised if he suddenly changes his tune and sounds much less dovish.

This is a grinder's market, you're not getting any easy setups right now.  The best trade is probably just being long the SPX, but its run up so far this year, its not easy to put on the trade, especially if you want to put on size.  

Treasury market is also tough, another strong market that refuses to stay down.  I'd also be a buyer of dips there.  

The best opportunities come when investors are getting shaken out, stopped out, but these days, the uptrend is so strong, the dips so shallow and fleeting, that's just not happening.  Tough.

Flooding the Market

You remember those video games with the secret code to get unlimited lives?   This market is using a cheat code.  Its unlimited liquidity.  If you need it, you get it.  Even if you don't need it, as seen by the $800+ B in reverse repos, you get it.  The Democrats are apparently working on an infrastructure bill, using reconciliation, to be able to pass unlimited pork with 50 votes.  

There has never been such an expansionary fiscal and monetary policy by a nation in modern history.  Even World War II spending pales in comparison to the trillion dollar spending bills + bazooka QE combo.   The market distortions are not only hitting stocks, everyone's favorite asset class, but its hitting bonds.  10 year yields from July 1 to July 8 went from 1.48% to 1.25% on a short squeeze of epic proportions, as the stock market basically went nowhere, with a very brief dip that was bought aggressively by the ravenous dip buyers.  

There is so much excess cash flowing out there that any minor dips are quickly bought up.  This reinforces equity investors to just hang on, and not sell weakness.  Almost every time that stock investors have sold weakness, they have made a mistake.  Eventually, they learn their lesson.  If fewer and fewer investors sell weakness, then the market can't really go down.  And over the last 15 months, bullish and optimistic investors have made most of the money, so the ones that have the most money at the current time are the ones that have been bullish, and continue to be bullish.  

The money is not only concentrating towards the wealthy with big stock portfolios, but its concentrating even more among the most bullish of the wealthy, who have been buying the dips and continue to add to their stock holdings.  And they are getting ample support from the Fed.  

You can't fight the money.  If you are going to be short, you have to be selective, choosing the stocks where retail investors are oversaturated, and are stuck holding the bag.  The meme stocks like AMC, SPCE, GME, CLOV, WISH have rolled over and retail traders are notoriously poor at cutting losses, which means these turds, which have no fundamental value, will keep going down until most of these bagholders can't take it anymore and finally sell.  

The Robin Hood crowd has gotten too greedy.  They should have been happy with what they made on GME and AMC, but they tried to run their game on other stocks like CLOV, WISH, and SPCE and it never gained critical mass.  There can only be so many meme stocks because these Reddit traders have a finite amount of capital.  And from the looks of the stock charts that I see where retail is crowded in, that capital has been shrinking, while the $SPX keeps going higher.  

Even though I expect the SPX to go much higher this year, in the short term, it just looks to be too much, too fast.  But I definitely wouldn't fade it.  There hasn't been a lot of call volume lately, so the put/call ratio is not at extreme lows that you often see at the tops.  So even if it does pullback, it probably is like what you saw last week, 1 or 2 down days, and then a surge back towards all time highs.  

CPI number comes out today, I don't think its going to be a market mover for the SPX, but after the 2 day selloff in Treasuries, it wouldn't surprise me if bond traders buy after the number comes out.