VIX Remains Relatively Strong

The VIX should be imploding today amidst the global rally in stocks, but the VIX is actually higher compared to the same SPX price level from yesterday.  In other words, volatility is being bought in this market despite a strong market today.  Contrary to what most people think, the VIX is actually a leading indicator, when it diverges like this versus the S&P 500.

These gap up opens on Greece deal news and a strong Chinese market aren't doing the job.  The Chinese market is so manipulated that having half of the stocks halted is going to have terribly bearish ramifications for that market.  And their real estate market isn't doing too hot either.  Usually the US can shrug these things off, but this is an old bull market, the BTFD strategy is not going to work as well as it did in years past, or even earlier this year.

We should be rallying with all this bearish sentiment but these good news gap ups aren't doing the job of washing out the BTFD hopefuls.  You probably need a break of SPX 2040, where a lot of bulls are making a stand, in order to get that flush out you need to get a real bottom.  It just isn't attracting enough strong hands at these levels.  Everyone is looking to get out on a rally at these prices.  When you get lower prices and some real fear, then you will wash out the weak hands and put stocks back in strong hands again.

The other option is to form a messy U bottom, where rallies are faded and dips are bought, until you wear out the bulls, and exhaust the bear fuel, and eventually go higher.  That is what happened in June 2011, but they have been rare the last few years, as almost everything has been a V bottom.  There is no edge here, just watching.

Now its China

All eyes have been on Greece headlines but now a lot of the eyes have shifted to the growing selloff in Shanghai.  The Chinese government has no idea how to deal with a stock market, letting company execs halt their shares so they don't go down is laughable.  All it does is make it that much worse for those in those shares who want to get out but can't, forcing them to panic sell on the reopen, whenever that happens.  It prolongs the selloff forcing the selloff over many more days.  Anyway, the Chinese bubble has popped, and it will not reinflate.  Too much damage, too much bad government policy, and an economy that is dependent on loans collateralized by real estate and now equities.

Yesterday we had a V reversal intraday but it seems like a lot of short covering and eager beaver buying.  I would wait for a weak close before I would be willing to say we are near the end.  You have to get investors scared, and a V reversal just doesn't do the job.

The SPX is hanging in tough here, acting like a safe haven while Europe and Asia underperform.  I would not be a buyer today, the level where I am looking for a long is around 2040.  Based on the reluctance to go down, high put call ratios yesterday, we shouldn't get too much selling beyond that level.  But any rally attempts early today will probably be sold.  Strong resistance at 2076 and then 2082.

Greece is a Cancer

Greece is a cancer, not something to hide with pain killers, something that needs to be obliterated and eliminated.  The best thing that could happen is a Grexit, as that will finally get rid of the Greece cancer once and for all and you no longer have that as a bear catalyst.  If you have another can kick, you revisit this same situation later on and the cancer grows.

Still seeing too many hopeful fund managers waiting for a last minute Greek deal, like Greece is the only reason we're going down.  No, most of the reason we're going down is because of reflexivity, general derisking, and fear of badly positioned players who have to puke out their positions if we go any lower.

Getting closer, but not quite at that V bottom moment.  We had the CNBC special on the Sunday night gap down, so that is the first sign of nervousness.  We didn't have a special last Sunday.  We are on the 5th trading day since the big sell day last Monday  Usually you will get a bottom usually between the 6th and 7th trading day after the big sell day, when the selloff has started in earnest.

The Chinese have outdone themselves.  The king of all micromanagers have jumped another level in the realms of historical micromanaging by ordering brokers to support the big caps on Shanghai.  So a market that goes from 2500 to 5000 and back down to 3800 over a span of 6 months requires government support?  LOL.  Tragic comedy.  Sure, you can mask anything with money, as the last 7 years have shown you, but this is really reaching.

Levels on SPX where I will look to scale into buys are 2040, and 2025.  Pretty sure we get to 2040 this week, give about a 50/50 shot that we get to 2025 on this down leg before we go back above 2100 by opex Friday, July 17.

Change of Plans

In order to make the big bucks, you have to have conviction. I had a lot of conviction that the big gap down on the Greece news was a BTFD opportunity. But the price action on Monday and Tuesday have lowered my conviction considerably. I still believe we'll eventually rally from this dip and make another run towards 2120. The sentiment is too pessimistic considering the small dip. But a selloff that goes beyond a certain point, and without an immediate bounce, usually means further selling and lower prices in the days ahead.

On Monday, you had a big gap down, and although well off overnight lows by the cash open, you were still down over 1% from Friday close, and yet, the market could only gain a few points off that fear open, and immediately sold off the initial bounce, trading lower all day, and even breaking 2060 support. Then on Tuesday, you had the good news gap up on Greece coming back to the table looking to make a deal, but that was immediately sold off, and we closed weak.

Now today. Word of a possible deal. Again. Another reflex gap up higher. Now considering today is the first day of the month, and with automatic equity inflows coming in, this gap probably holds, and we could rally some today. But if we can't break above Monday's intraday highs, then it tells me odds are that we'll have to test lower ground before bottoming. I don't think this selloff will last too long, because we've already had a bit of derisking going into Monday. But we should be weak into the middle of next week, where I will be looking to buy a dip around SPX 2040.

As for Treasuries, the action is quite weak considering the news and equities. I do eventually expect Treasuries to sell off in earnest when the equity market bottoms out and rallies. That selloff should take us to around 2.57-2.60% 10 yr yields.

 Taking a blog break for the rest of the week. Hoping for crescendo selling to buy next week.

A Greek Gift

Greeks have given those who hold cash a gift overnight.  A BTFD opportunity.  The market was set up for this as derisking had taken place already over the past two weeks on the Greek drama, and the uncertainty put a lid on any rallies in the SPX.  Now that we finally got the long awaited Greece panic (likely default, not that it matters if they do or don't), those who held cash waiting for this panic to buy are finally rewarded with a buying opportunity.  The only thing left to do is to take advantage of it and ignore the fear mongering and the chicken littles screaming "Lehman moment", "contagion", etc.

I have bought S&P futures overnight at levels where there is a very good risk reward, and I will hold it till the fear dies down, it could be quite a short squeezing rally when the bears realize that their number one bear catalyst could only take down the S&P 1%, and with European indices aggressively rallying off the Greece fear gap down.  This is the bear's worst nightmare.  Their number one catalyst not even able to keep the market down.  There is really just one thing to do here:  Buy stocks.

No One Wants Bonds

The price action in bonds this week has been extremely bearish.  You had the S&P weak the last few days and the bonds are still selling off.  Every bad Greece headline has caused a small spike that has immediately been sold off in bonds.  And today, Bunds are leading the charge, and taking Treasuries down with the ship.  Apparently no one wants to be be long ahead of a Greece deal announcement, which seems like an inevitability now.  Plus you have nonfarm payrolls coming up next Friday, which I am sure bond traders will not want to be long in front of.  So you have the start of another bond panic, this time it looks to be more sustainable and could take yields up to 2.60%, which would be an exquisite buying opportunity IMO.  But before we get there, the market has to panic some more.  It could get ugly next week if we breakout above 2.50% 10 yr yields.

Neutral on stocks here, but will entertain a dip buy if we can have one more down day.

No Edge

The S&P is trading in a way that I can define no edge at the moment.  It doesn't mean that money can't be made, but it is not easy.  I am neither bull nor bear, but if I had to choose, I would go with the bull side as we will be getting more seasonal favorable conditions at the beginning of July, and we'll get the Greece is saved scarecrows coming back to buy after the deal is done.

It is difficult to just sit on hands when sitting in front of the computer but that is probably the best course of action until there is a trading opportunity.  If we get another down day tomorrow, I will consider a long in the S&P, if we can get to SPX 2090.  Treasuries look quite weak considering the S&P weakness, but with month end coming soon, and likely strength, there is no imminent trade here.

Government Bubbles

Over the weekend, with a moment to relax and step back from the day to day battles, I wondered how much longer this bull market will keep going.  I read parts of a book by Ed Seykota called Govopoly in the 39th Day.  It got me to thinking that there has been a massive fundamental shift from a free market economy to one that is more centrally managed and meddled with by the Federal Reserve and the other major central banks over the past 30 years.  As soon as Greenspan became Fed chair, you had the Fed actively involved in providing a put for the market, by pumping money and lowering rates when the stock market got weak.  It just went into QE hyperdrive since 2008 because of the enormous pressure to keep the government dominated system going due to the weak economy.

As a result, you are getting bubbles in the stock market, and even in the bond market, although it is less egregious.  These are not natural markets.  The massive amounts of liquidity make bubbles a rule, not the exception.  You cannot compare pre-2008 with what we have now.  The global economy is dependent on central bank liquidity to keep the charade going, otherwise the bubble pops and you have a massive bear market.  The Fed can't turn back the clock, it is stuck now.  It cannot normalize rates, and that is why you keep getting the can kicked and delay after delay after delay, regardless of the jobs numbers.  The nonfarm payrolls number is irrelevant.  The Fed will find an excuse to NOT raise rates, and then at the first sign of weakness, they will go to their trusty playbook, QE.  This bubble can last for quite a while, because it is still not unstable enough to pop on its own.  And there is no way the Fed will pop its own bubbles.

The global economy is dependent on inflated asset prices to spur the real economy.  The alternative, which would be to print money and have an expansive fiscal policy would bring about an inflationary tidal wave that they don't want to mess with.  The easy thing to do is to just print money, make the rich people richer, and get enough trickle down effect to keep the masses from revolting.

In this new paradigm, you have to be long financial assets.  Making money shorting stocks or bonds over any considerable period of time will be nearly impossible.  If you are bearish, you are much better off buying bonds than shorting stocks.  If you are bullish, obviously long stocks.  The end game will be when you get unstable markets to overly inflated prices, and also rising inflation, and money printing contributes to the problem, rather than solving it.

I thought the Greeks were going for the hard line and waiting for the EU to blink first.  The Greeks blinked, and gave in to make a deal.  I would have gotten long ES if I had the confidence that the Greeks were bluffing again, but they tricked me.  I underestimated the can kickers, they will keep kicking the can, as long as the market reacts to headlines.  The moment the market stops giving a sh*t, the EU will probably tell Greece to go take a hike and then we'll get the Greece default, and not any sooner.  If the market still cares about Greece, the EU will keep kicking the can.

No real opportunity, waiting for the trade to come to me.  Nothing imminent here.

Fed and EU Can Kickers

The EU is notorious for kicking the can on Greece and giving them bailouts, extensions, etc.  Well, they might stop the can kicking before the Fed stops their can kicking.  Yes, the Fed is even more notorious for their can kicking of rate normalization.  The Fed keeps projecting rate hikes in the future, and when the future date gets closer, they kick the can to a further out date.  And yet the media buys it up, believing their forecasts and projections for rate hikes.  The market doesn't buy it.  And the market has been right.

The yield curve steepened massively yesterday after the Fed announcement, as the market gave up on any hope for a timely rate hike, and the 5 yr Treasury note shot out of a cannon, while the 30 year lagged badly, although both rallied.  The market clearly doesn't believe the Fed will raise in September, and is even giving a rate increase by December about a 50/50 chance of happening.

If it hasn't been clear for the last 8 years, the Fed is screaming:  we are market whores, and will not raise rates when equities are falling, even if they are just European equities!  Those who are long term dollar bulls are living in a fantasy world where the Fed actually raises rates actively.

I am waiting patiently for a dip to buy, and only a Greece default will give it to me.  So I am hoping for a Greece default so I can buy on the cheap and ride the rip higher.

FOMC Today and Greece Tomorrow

The FOMC meetings over the past few years have been up days, with very few down days mixed in.  A lot of those up moves happen overnight and we have another pre-Fed gap up, although much small than it was a few hours ago.  I have noticed that Europe is noticeably weaker than the US so far today, looking at the futures, and it seems quite clear that investors are dumping European stocks ahead of a likely Greek default.  But the positive force of the Fed is keep the buying going after yesterday's rally.  I am inclined to lean towards a sell on the Fed announcement today, merely because the next big event should be the one that the market fears, a Greek default.  So I see upside being very limited, even though it is a Fed day, and expect to see selling after 2:00 PM ET.  I don't think the selling will be due to anything that Yellen says, because the Fed's default action is to lean dovish, which they will likely do again here today.  Even so, I don't think that is enough to lift this market much above current levels.  I am out of the ES long and waiting for a dip buying opportunity on Greek default fears in the coming days.  

Most of the action over the past few trading sessions has been to position ahead of a Greek default.  You can see it in the relative weakness of Europe, the bid in Bunds and Treasuries, and the Greek headlines.  Fund managers are selling equities, especially Europe, covering shorts in bonds, and raising cash to sidestep the Greek default event.  This makes it very likely that when we do get a Greek default, the dip will not last long, just because it isn't a fundamentally meaningful event, and most traders will have had plenty of warning to prepare for it.  

So I am sitting on my hands waiting for that dip buying opportunity on Greece default headlines.  I expect a face rip higher once the Street calms down and realizes that a big bad catalyst has been used up and didn't do any damage to their portfolios.  

Gap Down and Go

This is not common.  A gap down that continues lower from the opening bell.  We haven't seen too much of this action over the past couple of years.  It is almost textbook to see buyers coming in off a gap down, especially when it is due to European news.  But we are below the open, after 30 minutes of trading.  It is a bit of a change of character, although I am still sticking with the view that we are in a trading range, and that we are close to the lower end of that trading range at these prices.  That trading range is SPX ~ 2050 to 2130.

These Greece worries have weighed down Europe, but traders will be surprised to see how little the market actually goes down if Greece indeed finally leaves the EU.  I would venture to guess that S&P wouldn't even finish -1% on the day, much less crash like some believe.  And that would just be a set up for a tremendous buy the dip opportunity and new all time highs, as Draghi would overreact and become even more dovish.

It is probably a moot point, because odds are high that they will kick the can again and give Greece an extension or another deal, whatever it takes to placate the markets.

These are attractive levels to buy ES, and I have entered a small long position this morning, expecting a bounce soon.

Grecian Formula

Greece has never had this much power since Alexander the Great.  Greek officials, if they were trading futures, would have made a fortune just by trading off their own headlines.  I'm sure they would have made enough over the years to pay off their debt!  Really, it is puzzling to see the market so enamored over such an insignificant issue, but it is fear of the unknown.  Fear of Grexit.  I am sure the market would make a very slight dip, and rally huge after Grexit, because it would get rid of this uncertainty, and you would no longer have a cloud hanging over the market.  I don't buy the contagion argument, because the bond markets in Spain, Italy, Portugal, and Ireland are telling you that there is no contagion risk.  Spain and Italy 10 yr yields are trading below US Treasuries.

This range bound trade in the S&P really makes it hard to trade the index, and the commodity bear market is making it boring to trade most commodities, which are stuck in tight range bear markets.  So that leaves the bond market, which is giving more action than the conservative fixed income investors want.  There are cries about lack of bond liquidity.  It seems pretty orderly to me, the only time it was disorderly was when Treasury yields spiked lower on October 15, and I am sure the Fed doesn't mind lower rates.  I doubt you have the kinetic energy in this bond market to cause a spike higher in Treasury yields, especially considering the large number of speculator shorts in the market right now.  Remember, the spike lower in Treasury yields on October 15 happened because the bond market was still leaning short at that time.

The best trading is in the bond market right now, which is fine with me.  I have transitioned away from the dull S&P futures a long time ago.

I am thinking that the Treasuries have found a bottom, and we should carve out a range over the rest of the month, between 2.30% and 2.48%.  My plan is to trade that range, the only fly in the ointment is the Fed meeting next week, where I am reluctant to be long into because it seems like with this positive economic data, Yellen will lean hawkish, which could surprise and scare some fixed income fund managers into panicking.  I think we will maintain this higher yield range for at least another month, until we get enough weak hands out of this bond market and the sellers dry out.

Open is Everything in Equities

Today has been a very slow day for trading so-called daytrader stocks.  The active stocks with big volume that are up big or down big.  On a slow day, the first 30 minutes of the trading day, from 9:30 AM ET to 10:00 AM ET become even more critical than usual.  This is especially true for a short seller who will find his best short entries on spikes higher in the first 15 minutes or even right at the opening bell.

If I had to rate the importance of the open on a scale of 1 to 10, it would be a 10.  The lunch time hour would be a 3, and the close would be a 5.  The pre-market/after hours trade I would put at a 7.  Yes, the pre-market/afterhours is more important than the close!  That is when all of the PRs and earnings news comes out, and that is the main driver for most daytrader plays.  That is why you can't just be ready by 9:30 AM and say you are completely ready.  You need to be there for pre-market, so it is preferable to start from 8:00 AM.

If all I did was trade equities, I would put all my energy into being totally prepared and focused for that 9:30 to 10:00 trade.  That means having your watch lists already prepared, game plan for each stock on that watch list, and price levels to sell or buy.

If you are a short seller, most of your entries should be during this 9:30 to 10:00 time period.  If you are a long only trader, most your exits should be during this time period.  Which means that it is much more critical for longs to take on positions overnight, especially if they are trading active stocks.

The trading day is like a microcosm for a trading year.  90% of the opportunities come during 10% of the time.  The open is the key for profitably trading equities.

Bond Pressure

They are shooting at the bondholders.  The sharks are out in the water, looking for anyone long government bonds, it doesn't matter the country.  We are in the heart of the bond panic.  Yes, it can get worse, but most of the damage has been done.  The weakness in the Bunds, where yields got up as high as 106 bps and the coming supply of the 10-yr and 30-yr auctions today and tomorrow are building in a concession quickly before the auctions.

In bond land, the weak hands are out, the medium hands are half in/half out, and the strong hands remain in bonds.  It is a process that happens over a couple of months, you get a big rise in bond yields, and then the market stabilizes at a higher yield level, and waits for the next move, which is usually back to the long term trend, which is down for bond yields.  I am bullish on bonds at these levels, as 2.47% 10 yr yield is an area of support, with 2.50% and 2.58% acting as more minor support.  After the auctions dust settles, we should see lower yields.

The S&P and the global equity markets are trading separately, as Europe continues to underperform the US.  As I said in the past, the hot money flows, currency hedged (shorting euros and buying European equities), are acting as a double whammy as European equities go down while the euro gets stronger, the worst of both worlds for the currency hedged European equity buyer.  I expect to see European underperformance continue, because the investor community is still overweight Europe despite better fundamentals and supply demand dynamics in the US.

Can't Catch Them All

You will sometimes miss opportunities.  If you cannot accept that and always need to try to catch every move, what ends up happening is that you end up compromising your entry points and chasing.


For example, let's say that you were waiting to buy 10 year Treasuries at 2.45% yield on Friday, and it got to 2.44% yield, so you missed it.  Then you see the bonds bouncing from the reflexive selloff and you decide you need to get this move that you've waited 3 weeks for and chase to buy when Treasuries are at 2.41%.

So by missing your original target entry point by .01%, you get in at .04% higher than originally wanted just to try to catch that bounce move.  This ruins profitability.  If you can just stick to your setups and not let it bother you when you just barely miss your entry points, you are more than half way there.  Sure, a big part of trading is recognizing what is likely to happen with a stock or bond or commodity, but an equally big part of trading is maintaining psychological discipline and not get caught up in things like fear of missing out (FOMO) chasing, revenge trading, and trading bigger/averaging down to make your money back quicker.

An underrated aspect of trading is learning to accept being imperfect.  Part of being imperfect is missing opportunities that slip between your fingers, selling or buying a bit too early, missing the bottom by a day or two, or selling for a quick loss right after you get in because the stock just doesn't feel or act right. Sure you feel like a idiot, selling 10 minutes after you got in for a quick loss, but if the original buy was a mistake, there is no need to compound that mistake by holding and hoping it goes in your favor.

 If you always strive to be perfect, you end up falling into overtrading traps:  microtrading, trying to catch every wiggle, or just flat out chasing when you missed your entry and the price gets away from you.  

I have been sucked in to those pitfalls many times in the past, and it is a part of being a human trader.  Sure, if you can computerize everything, you get rid of many of the psychological hurdles, but you also eliminate a huge part of trading, which is predicting the future based on hard to quantify intuition and experience.  That is why I continue to just trade discretionary because this intuition and experience is a big part of my edge, something I cannot program into a system.

It is a rather uneventful Monday morning, the Treasuries are slightly higher from Friday's close, while Bunds are a little bit lower.  Unlike the last spike in Bund yields in May, this bounce off the bottom is much weaker, and the yields have been staying above 85 bps for most of today's trade.  It seems like yields want to go higher again this week, to test the longs one more time before we get a lasting bounce.  I am looking for another run higher in German Bund yields this week, which should pressure Treasuries.  Still waiting for 2.47% 10 yr.