There is some risk being taken off the table, probably due to some nervousness ahead of the Portugal bond auction. Like almost all bond auctions, it will likely be a non-event and the rookie traders will likely buy back the same position at higher prices then they sold a couple of days prior.
There is still a lot of pent-up buying potential for equities. Ever since the flash crash, there has been no inflows and until I see sustained retail buying to match the bullish sentiment, we're still a long ways from a top.
Tuesday, January 11, 2011
Beyond the Next Dip
Sometimes I get caught up in the day to day movements and forget to see the forest while staring at a tree. Livermore always said the big money was in the long term moves, not the short term fluctuations. Whatever short term fluctuations we have in risk assets: stocks and commodities should be used to grab the long term position. So we must do whatever we can to get a long term position in line with the long term trend. I believe the long term trend is up. I will follow that theme and look to get long, not short. I will still short, but only when the set up is very ripe. Otherwise, I'll be more focused on long setups.
I can't put all my belief in sentiment. Especially when its so fashionable in the media to mention the sentiment surveys as a contrarian indicator. It is counter to what other things are telling me. The Fed's QE, the improving jobs picture, and the lack of retail enthusiasm and equity fund inflows.
I can't put all my belief in sentiment. Especially when its so fashionable in the media to mention the sentiment surveys as a contrarian indicator. It is counter to what other things are telling me. The Fed's QE, the improving jobs picture, and the lack of retail enthusiasm and equity fund inflows.
Monday, January 10, 2011
Europe Rehash
The script has all been laid out beforehand and I'm sure everyone knows the plot. It is Greece then Ireland then Portugal then Spain. It's Portugal's turn. I doubt this will be much of a market mover because everyone knows. Still we get the gap down but I wouldn't bet on much of a drop, it has been a fool's game to call tops.
Friday, January 7, 2011
Lots of Index Hedging
The equity put call ratios are low and the index put call ratios are high. This usually isn't a good short term sign. Based on the intraday action, the market wants to take a rest but not pullback much. I still doubt that we'll pull back below 1250-1255 level this month. However, I think the upside for the month is limited because sentiment is so bullish. I'm going to play this market as if it in a tight range, with an upward bias. So not really much to do. Just waiting for a fatter pitch to swing at.
Market Should Be Down More
When the market doesn't go down as much you expect on a consensus miss for an economic report, it speaks to underlying strength and demand for stocks. This was a woeful miss, especially with high expectations coming from the ADP number. I think we're going higher today because we're still not at levels where you have willing sellers.
I am sitting on the sidelines waiting for an easier trade, trading right now seems to be exchanging fire in the front lines. I'd rather be a sniper waiting for a sure shot from safe range.
I am sitting on the sidelines waiting for an easier trade, trading right now seems to be exchanging fire in the front lines. I'd rather be a sniper waiting for a sure shot from safe range.
Thursday, January 6, 2011
Nonfarm Payrolls
Taking the over on the consensus numbers of 150K jobs growth. It will be a low hurdle to jump over, but the crowd isn't dumb. They saw the blowout ADP numbers and I'm sure the whisper numbers are much higher. Expecting a gap up after the nonfarm payrolls numbers beat.
Out of Short
I am taking this little dip in the market to get out of my short position near break even. I will look to recharge on the short side if we get closer to 1280. Even then, I doubt we'll go down more than 25 points so 1255 should hold. Playing short is a mug's game in a bull market. The put call ratios are low and have been for a long time.
Welcome to the bull! We have to get away from the bear market sideways market playbook. This is a very strong market, and we need to adjust to the new action. I will play short much more carefully and I will be a buyer of all dips.
Welcome to the bull! We have to get away from the bear market sideways market playbook. This is a very strong market, and we need to adjust to the new action. I will play short much more carefully and I will be a buyer of all dips.
Fundamentals of the Dollar
The euro has been the punching bag of traders for a year now. But the long term fundamentals for dollar weakness is still intact. Contrary to what the pundits on TV say about the importance of growth rates on currencies, other factors are much more important. The most important factor is supply. If there is too much money supply, the value of that money will go down. It is that simple. The United States is a much more aggressive printer of money than the European Union or Japan. Despite the large budget deficits in Japan, their money supply growth is very conservative. Same with Switzerland, to a lesser extent.
The United States is a liberal printer of money. It can get away with it because it is a reserve currency and used extensively for international trade. The U.S. government has abused this priviledge to run up huge budget deficits through big tax cuts, rebate checks, and all sorts of stimulus. The Fed is more than happy to buy up this debt to keep rates lower than they should be.
From a long term fundamental view, the euro and the yen should be valued higher than the dollar. The Eurozone and Japan both run trade surpluses with the U.S. They are not printing money like the U.S. Europe is trying to fix its long term fiscal problems by taking their medicine and reducing budget deficits. This hurts the currency in the short term, but is a benefit in the long term. The U.S. is just kicking the can down the road with more stimulus, bloated budgets with big tax cuts, and more QE. The trend is secular and will not change until the policies of the U.S. government and the Fed change. I don't think the Fed will give up on QE until we get runaway inflation, which is still a long ways away (due to a lack of wage pressure).
The United States is a liberal printer of money. It can get away with it because it is a reserve currency and used extensively for international trade. The U.S. government has abused this priviledge to run up huge budget deficits through big tax cuts, rebate checks, and all sorts of stimulus. The Fed is more than happy to buy up this debt to keep rates lower than they should be.
From a long term fundamental view, the euro and the yen should be valued higher than the dollar. The Eurozone and Japan both run trade surpluses with the U.S. They are not printing money like the U.S. Europe is trying to fix its long term fiscal problems by taking their medicine and reducing budget deficits. This hurts the currency in the short term, but is a benefit in the long term. The U.S. is just kicking the can down the road with more stimulus, bloated budgets with big tax cuts, and more QE. The trend is secular and will not change until the policies of the U.S. government and the Fed change. I don't think the Fed will give up on QE until we get runaway inflation, which is still a long ways away (due to a lack of wage pressure).
Wednesday, January 5, 2011
Bull and Bear Markets
The same strategies don't work in bull markets like they do in bear markets. I believe we are in a bull market. That means the odds of shorts working are noticeably reduced. Imagine if you tried to short during the 2004 to 2007 period. Sure, you had the market correct but they were infrequent and most of the time, shorts lost money.
In equity bull markets, trends are slower and last longer. Sentiment is less effective. Just look at the sentiment numbers from 2004 to 2007. They lingered in mostly bullish territory with the market going higher most of the time. I have a leg short, but I'm not very enthusiastic about it despite just a minor loss. I need to see more signs of retail investors putting money where their mouth is. I want to wait for steady fund inflows before trying to pick a top. Every short before then is just a short term trade.
In equity bull markets, trends are slower and last longer. Sentiment is less effective. Just look at the sentiment numbers from 2004 to 2007. They lingered in mostly bullish territory with the market going higher most of the time. I have a leg short, but I'm not very enthusiastic about it despite just a minor loss. I need to see more signs of retail investors putting money where their mouth is. I want to wait for steady fund inflows before trying to pick a top. Every short before then is just a short term trade.
Blog Trolls
If you don't agree with my commentary, then fine. If you want to use me as a contrary indicator, go right ahead. I don't mind the criticism. But if all you are going to do is post nasty comments and take potshots, then please visit another blog. If the trolling gets out of hand, I'll just remove the comments feature.
Blowout Jobs
Well, we got a huge ADP jobs number, 297K. That is going to get the juices flowing for the bull crowd. The market always moves ahead of the economy, and the last thing to move is jobs. Once companies start hiring, most of the good news will already be reflected in higher stock prices. Yet, we still have a gap down because of weakness in Europe.
Gold is selling off here and I am putting a leg in here on the long side. This will be a long term trade. I want to ride the bubble. I believe we will see huge upside in gold for the next 6 months.
Gold is selling off here and I am putting a leg in here on the long side. This will be a long term trade. I want to ride the bubble. I believe we will see huge upside in gold for the next 6 months.
Tuesday, January 4, 2011
Shallow Pullbacks
This is a totally different market than the one we are used to from the past 2 years. The volatility will be reduced and it will be frustrating for those relying on sentiment to time the market. The main reason for this is the lack of retail participation in the market. You just don't see the fund flows into the market which mark a long lasting top. We saw that in January and April of 2010.
The improvement that we'll likely see in the jobs picture will drive continued equity strength. The lack of jobs was the main thing holding back the bulls from becoming euphoric. When we get improvement in jobs, you will have the necessary ingredient for a last gasp blowoff rally, probably to 1400.
It is mindboggling how we keep going higher despite the lack of fund inflows and the insider selling and secondary issuances. I can only come up with POMO. Anyway, we should not expect much of a pullback this month, in fact I would be a buyer of dips rather than a seller of rallies for the next month or so. I am short now due to the excessive speculation but will likely change my tune on a pullback down to 1247. I think we see 1300 before 1230.
The improvement that we'll likely see in the jobs picture will drive continued equity strength. The lack of jobs was the main thing holding back the bulls from becoming euphoric. When we get improvement in jobs, you will have the necessary ingredient for a last gasp blowoff rally, probably to 1400.
It is mindboggling how we keep going higher despite the lack of fund inflows and the insider selling and secondary issuances. I can only come up with POMO. Anyway, we should not expect much of a pullback this month, in fact I would be a buyer of dips rather than a seller of rallies for the next month or so. I am short now due to the excessive speculation but will likely change my tune on a pullback down to 1247. I think we see 1300 before 1230.
Never Going Down
It feels like we have an endless uptrend. The money flows in the beginning of January are always tough to fade on the short side. I assume an avalanche of pension fund money came into the market yesterday, and probably some leftover for today and tomorrow. It is notable that bonds were weak yesterday, which probably means pension funds were selling bonds to raise cash to buy stocks.
I still believe we top this week, but I don't want to go all in here, waiting to get short in stages.
I still believe we top this week, but I don't want to go all in here, waiting to get short in stages.
Monday, January 3, 2011
Shorting Here
I have put on a bit of a position on the short side. I will look to add more perhaps later today or later in the week.
2011: Last Gasp
Sentiment will not be as reliable as it was for the last 3 years when fear was more palpable. In complacent bull markets, sentiment is less reliable because greed is not as strong an emotion as fear. So here is one vote for traders who rely heavily on sentiment to be left behind by this stubborn bull.
For the next several months, you have to be bullish. I am not recommending buying stocks right now, as I see a shallow pullback in the next two weeks. But if you had to place a trade now and couldn't get out for 6 months, I am a much better buyer than seller.
Why am I saying this in the face of such bullish sentiment? Because the one thing that has made traders reluctant to embrace stocks is jobs. And jobs will be more plentiful in 2011 than in any of the past 3 years. The lower unemployment rate will drive expectations for earning growth which will lift stock prices. The Fed is a nonfactor for the next couple of meetings until we get closer to June, at which point we may see some weakness come in due to expectations of the end of QE2.
As for the first trading day of the year, I am looking to enter short in the first half of the day looking for weakness in the second half of the day.
For the next several months, you have to be bullish. I am not recommending buying stocks right now, as I see a shallow pullback in the next two weeks. But if you had to place a trade now and couldn't get out for 6 months, I am a much better buyer than seller.
Why am I saying this in the face of such bullish sentiment? Because the one thing that has made traders reluctant to embrace stocks is jobs. And jobs will be more plentiful in 2011 than in any of the past 3 years. The lower unemployment rate will drive expectations for earning growth which will lift stock prices. The Fed is a nonfactor for the next couple of meetings until we get closer to June, at which point we may see some weakness come in due to expectations of the end of QE2.
As for the first trading day of the year, I am looking to enter short in the first half of the day looking for weakness in the second half of the day.
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