Lots of Fed Hope

It is puzzling to me how there is so much talk of taper, yet, hardly anyone expects the taper to happen at this meeting.  The consensus got throttled with the Fed no taper announcement on September, in particular, the ES and Treasury bond shorts.  So I am betting that there are almost no fast money shorts going into this meeting, in ES or ZN / ZB.  Fool me once, shame on you, fool me twice, shame on me.

Well, everyone is not going to be fooled this time, so the vast majority expect no taper, and I am one of that majority.  However, I don't expect much of a pop in stocks on that news, because it is pretty much consensus.  In fact, I expect a small pop, and a vigorous selloff going all the way into triple witching Friday.  So I would be a seller on any pop that comes right after the no taper announcement.  I don't expect any pops on the no taper news to last for more than an hour.

As I have said before, the Fed has always acted more dovish than consensus.  They sometimes talk tough, but they NEVER act tough without a 100% telegraph of that tough action.

Strange Overnight Price Action

Seemingly a huge stop order got triggered in the overnight session and we were down more than 10 handles at one point, but amazingly, we gapped up big and are running even higher.  These are not normal moves, hard to explain, other than everyone wants to get long ahead of the No Fed Taper rally.  Feels like most are not expecting any taper, and at the same time, expect a rally off that news.  The market has not priced in anything close to a taper in December, so if we don't get tapering, I really don't see a rally lasting at all.

Today is a head scratcher, I think we will be higher tomorrow, so I am just watching and waiting for a buying opportunity which probably won't come today.

Study TWTR's Price Action

If you want a lesson in trading super charged, momentum bubble stocks, print out the 30 minute chart for the past two weeks in TWTR and put it away for future reference.  This is eerily similar to the May price action in TSLA, just without the catalyst.  No catalyst, and you get a move of 40 to 59 in two weeks for a $20+ billion market cap company.  That doesn't happen often.  It reminds me of the dotcom boom, except without the satellite plays that fueled so many other tertiary names.  This is just TWTR going solo, leaving behind the rest of the momos in the dust.

The takeaway from the May surge in TSLA and the December surge in TWTR is that in order to fuel a huge move higher, you need a small float, large and vociferous short interest (probably most important!), a popular product, and huge growth potential.  Mix it all up and you get a formula for an explosive move higher.

Waiting for a Bigger Dip

This time, I don't think you can buy the dip down to 1780.  It worked last week, and worked before that, but the energy of the selloff is different.  More pernicious.  Plus, with the December taper talks getting traders more nervous for next week, and the heavy IPO and secondary calendar, I don't see a quick recovery.

Also, we are unable to gap up off a strong selloff yesterday, which is different price action than what we're used to seeing over the past 2 months.

Contrary to prior action, I actually expect a sustained selloff this week culminating in a weak Friday, something that would catch a lot of longs off guard ahead of the FOMC next week.  Probably the best stock to buy on the dip that I expect to continue till Friday is TWTR.  Expecting TWTR to test 55 sometime next week.

TWTR Sparks Momos

The horses change, but with stock bulls looking for the next quick buck, are coming back to social media stocks.  It seems absurd for TWTR to be valued at $30B, with no profits, and with miniscule revenues.  But the stock market is about supply and demand.  TWTR is a recent IPO and the float is small, so you have limited amounts of stock available.  Also, TWTR is the one that has the most growth potential, which is what these momo traders want.  They don't care so much about profits as about growth rates.  It is much faster to grow a company when the revenues are tiny compared to relatively big revenues of a FB.

I am a long term bear on all these social media stocks, they all depend on advertising, and most advertising on the internet isn't effective, and has limited growth potential.  But I see a miniature version of the TSLA explosion higher (during May-August) in TWTR just because of the tight float, huge growth potential, and large number of skeptics shorting the stock.

As for the market overall, I am continuing to see a lagging Europe, despite the continuous inflows.  The supply and demand dynamics are getting much less favorable now for worldwide equities.  The higher valuations are bringing out more IPOs and secondaries, and attracting more hot money that will be just as quick to leave later.  For the rest of the year, I don't see much selling just because of the nature of the stock market up a lot in December.  The reluctance to sell stock because of tax reasons keeps the supply of stock for sale limited.  But, after that, it should be an interesting January/February 2014.  I expect heightened volatility as the supply demand dynamics of a saturated market take over.

Another Dip Viciously Bought

Well that dip didn't last long.  If you didn't buy yesterday's close, or didn't buy right after the tiny dip on the nonfarm payrolls, You either had to chase or miss the move.  The feared 200 print again on nonfarm payrolls was all hype, no substance.  Even the 10 year yields didn't go up, and the 30 year yield actually went down today despite the above expectations jobs number.

 The new norm: the rips seem to come on faster velocity than the dips.  It is counter to what the market should usually do, which is go down faster than it goes up.

But the greatest fear these days is to miss a continuation of the rally, rather than dealing with a big correction.  With big gains this year, the long term holders will be reluctant to sell this month and have to pay capital gains.  They would rather sell in January, when we should be higher like always, right?  So it is going to take a totally unexpected news item to bring this market down more than a couple percent for the rest of the year.  I just don't see it happening, with the Fed unwilling to taper earlier than expectations.

Right now, we are in a bad spot for traders.  For the nimble, I recommend shorting early next week.  But honestly, I would rather trade individual stocks than trade index futures here, the market is going to be dull.

Closer to BTFD Opportunity

Yesterday,  we had a continuation of weakness that has been uncommon.  It is a function of a lot of complacency leaving many without put protection, and stronger economic data stoking the tapering fears again.  Today, we had another fakeout after a stronger first hour, and now we are going for 3 down days in a row, which is definitely a change in character since we bottomed in October.

I see a confluence of strong support around 1770, so we have limited downside here.  The US is still the strongest of them all, with Europe now crumbling, because it doesn't have the POMO program to pump up their markets.  We are getting very close to a beautiful BTFD moment.  I don't see any deep selloffs unless the Fed surprises the markets with a December taper.  With the 10 year yields where they are, they will not rush the taper, and will wait and see.  Buying the close today should prove profitable by next week.

From Strong to Weak Hands

The past week we have consolidated above 1800, trading flat but gathering up more bulls in the process.  Also, getting more skewed call volume over the past several trading sessions, a sign that greed is taking over.  I am seeing short term topping signs, as the smart money sells to the dumb money.  The 10 year yields are sticky above 2.7%, and do not want to go down.  It looks like we will see a concurrent selloff in the 10 year with the S&P, as the biggest fear in the market is not overvaluation, but the Fed tapering with stronger employment numbers.

I don't see a December taper, because most of the Street do not expect it, and the Fed under Bernanke has NEVER surprised to the hawkish side when it comes to policy action.  On rare occasion, they have talked tougher than expected, but they have never acted tougher than expected.  

We are near saturation, there is very little upside for the next several weeks.  But also limited downside due to the lack of pullbacks.  Right now, I can only recommend looking for spots to short sell.  Going long is only advised after 1.5-2% dips. We will not dip more than 3% for quite a while, so 2% dips are safe to buy.

Blog Break

See very little compelling with this market, long or short.  Likely more grind higher action with remote chance of a 1% whack out of the blue.  Nothing new.

I will be taking a blog break for the week, and will not make any more posts barring something breathtaking happening in the markets.  I will continue to make a few tweets on Twitter.

Sellers in Europe

Despite 20 straight weeks of inflows into European equities, they are lagging the world indices.  Even the ECB rate cut and negative interest rate jawboning didn't provide a lift.  Europe has no growth, and no QE, so there is no endless flow of money to buy up all risk assets in euros.  So you are getting this lagging performance even with relative undervaluation.

It has been a while since we've gotten a true scare in this market.  We are vulnerable to a sharp one day move lower because of the excessive complacency.  Yesterday saw some heavy call activity in the equity and index options.  Even though buy the dip will still work, it will be more like 75% probability of it working rather than 90%.  The percentages will keep going down for that strategy as the market gets more saturated with weak hands.

This 1800 level is significant, and with so many already on board, we won't be able to just blast through to new highs so easily anymore.

Picking Tops in a Strong Market

We are in the super bull phase of this 5 year long bull market.  During this phase, it is tempting from a valuation and overbought perspective to short the market when it looks shaky.  But it is actually dangerous to short a strong market like this after it has already gone down 1%.  Because these are the type of markets that can slowly grind higher, not giving investors a chance to cover on a bigger dip, forcing you to either hope for a drop or get tortured with a 1000 cuts as we go higher bit by bit.  These kind of grind it up bull markets drop quickly out of the blue, but the drops don't last for long.  So you will have many more up days than down days even when the market is mostly flat.

The best approach for this type of market is to either wait for the market to flatten out for a few months, and then strike on the short side, or just buy the dips.  It is still the best strategy, even though it is well known.  Because right now, so many are still looking for dips to buy stocks, and the market just hasn't offered many to investors over the past month.

The market feels toppy, but I won't fall for the trap to short it here.  I will wait to buy the dips.  And will only short rallies when they get overbought to a truly extreme level.

The 1999 Rules

Another day, another new all time high.  ICLD is gapping up 40% after already going up over 200% on Friday.  A move from 2.55 at Thursday's close to 13.50 at today's open.  Over 500% in less than 2 trading days.  Animal spirits are out.  Gaps up are the norm.  The more daytraders that trade the stock, the higher the gap up. This was what happened in 1999, when there was nothing "bad" on the horizon.  Daytraders get bold, and drive up momentum pump and dumps to extreme levels.  

1. If you feel the urge the short, wait a few hours and short when it's 10% higher.  

2. Buy the close on the flavor of the month daytrader stock.  Sell the gap up open.  

3. Forget the sentiment polls, put-call ratios, and overbought levels. Only short when stocks seem like they will never go down. 

4. Don't think this has to end soon.  It won't.  

5. Fundamentals will not matter, investor psychology trumps everything from now on.  

We have reached escape velocity on the stock market.  Normal rules do not apply, you have to pretend like you are in outer space, because the movements will be abnormal.  The bubble is now pumping full throttle, embrace it, because it won't end soon.

Year of Misdirection

What we are seeing is money funneling from the financial assets which are bonds and commodities into equities.  I believe we have seen 90% of the move, and we'll soon see investors shunning equities again.  There will be no great rotation from bonds to equities, because the countries with the most financial assets: U.S., Europe, and Japan are aging.  What you are seeing in 2013 is a  huge fakeout in the financial world.  Because of fears of Fed taper, and a strong bull market in stocks, investors are getting out of bonds and going into equities.  That is a huge mistake.

I don't look at day to day economic numbers to determine my view of the market.  I look at the big picture. I see a "recovery" that is 5 years old and we've yet to have any meaningful economic growth that wasn't a reversion to the mean (i.e., 2009 and 2010).  Now that we've had the bounce back from the financial crisis, you have no economic acceleration.  Logically, how can the economy grow when there is little job growth, little wage growth, and all the money is going to the rich?  The rich don't need to spend more money, they have everything they need, isn't one Tesla enough?  Isn't one yacht enough?

There is an aging, slow growing population in developed economies, there is not any sound economic growth in the emerging markets (China is a real estate disaster waiting to happen), and financial assets have risen substantially for 5 years.  There is no pent up demand.  You have used up the low interest rate/refi bullets.  There is no appetite for government stimulus.  It is all up to the central banks, and they have manipulated interest rates to near maximum potential.  Unless the Fed goes into QE overdrive and drives long term rates to a Japan like 1%, you have taken up all the benefit from lower interest rates.  Corporations have issued a huge number of bonds to lever up their balance sheet to buyback their own stock.  They are not investing in the future, they are just managing their balance sheets.  You have a slight uptick in economic activity due to the wealth effect from a surging stock market, which is not sustainable long term.  That is a not a recipe for economic growth.  It is a recipe for a boom that will soon turn into bust.

Yet, in this kind of environment, investors are piling into stocks because of the huge outperformance and don't want to be in bonds because of the potential Fed taper.  Well, Fed taper is probably 90% priced in, and the equity market will have a taper tantrum when it does arrive, which will limit the taper from $85B to around $75B and remain there for a long time.  That to me is still very bullish for bonds.  And with little economic growth, despite the remaining QE, equities become extremely vulnerable to a potential recession, which I don't see many people predicting.  At these valuations, a recession takes the S&P to 1500 easily.  I am bearish for 2014, but given the uptrend, we will need to chop around for a few months before the trend changes.  Thus, I am predicting a flat and choppy 3-4 months and then the beginning of a new bear market.

Bears are Endangered Species

We got a monster intraday move off the gap down yesterday and it seems like quite a bit of short covering when we hit new all time highs, ahead of Janet Yellen today.  Eventually it will be a surprise when the Fed doesn't pump the market, but it still seems to catch bears off guard and make bulls bolder.  I am now itching to go short for a swing trade, something I haven't felt like since August.

First there is the psychological barrier of 1800 just above, and the complacency of the crowd.  Second, long term yields are rising, which will keep a lid on interest rate sensitive sectors.  Lastly, I am seeing Europe starting to lag, at the same levels as when the debt ceiling deal was announced, almost 1 month ago.  In the meantime, the S&P is up 50 points.

ES 1790 will be a premium short entry, and one that I will take if it happens by Friday.

Choppy Till March

The amount of issuance of stock is starting to catch up with the market, as investor inflows and stock buybacks are met with supply.  There is a limit to how much corporations can lever up to buy back their own stock.  Who is going to buy corporate bonds from an already levered out company when the economy is slowing down?

Corporate bond market spreads over Treasuries will be a canary in the coal mine.  The worst case scenario for this market is to see corporate bond spreads blow out, financials underperform, and breadth deteriorate.  Right now, the stock market is pricing in something that appears unlikely to these eyes: an economy that can stand on its own without increasing asset prices and/or increased deficit spending.  With investors finally getting positive about stocks and pouring money in, you have already used up a lot of potential buying power from the retail crowd.  Thus, these inflows will buoy the market on dips for a few months, but the increase in stock supply will dampen any rally attempts, leading to flat, but choppy markets.  By the middle of next year, I see the market having the biggest shakeout since 2011, falling from its own weight of overvaluation and optimism.