Sunday, April 13, 2014

Why The Market Stinks

A five year bull market fueled by unprecedented Federal Reserve stimulus appears to be at a major inflection point. Is this the end, a cyclical correction or just a pause? Whatever phase one thinks that this market is in, I think we can all agree that it stinks. And Friday was no different than what had preceded it for 2014 as the selling of momentum stocks continued to spread to the rest of the stock market.

So just what is going on here? In a nutshell, the markets are out of gas. The Government does not have the right stuff. And I do not think that our economy can land on it's feet like Chuck Yaeger did when he pushed things too far. In short, Bernanke's deflationary fears are resurfacing:


As the great movie clip shows, the Fed has reached the point where the jet plane stalls out:

At first the institutional community tried to prop up the market indexes by selling all the momentum leaders and buying the "safe" S&P 500 names. Now those names are starting to crack.  Consider the following:

1 - An unprecedented monetary stimulus fuels a strong stock market rally, rescues the economy, but barely gets the economy moving. Despite Paul Krugman's rants, there is and will not be any fiscal stimulus to help matters. Not in this political environment.

St Louis Fed Monetary Base Chart. This monetary growth dwarfs anything in history. The great Milton Friedman who with Anna Schwartz plotted the money supply back to the 1700s,  must be rolling over in his grave.

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Furthermore, all of the money has gone into stocks for 5 years and not into the economy. Contrast the move in the S&P 500 as represented by the SPY with the growth of the economy - below:

Strong Stocks Were The Only Place To Go:  Stocks always lead, but this is nuts. The troops are not following.

Pathetic GDP Recovery: This is all we get for the above outrageous stimulus?!


2 - Hopeful bullish "spinmeisters" believe that the economy will finally catch fire without the help of the Fed.  However, the economy is showing signs of weakening just as the FED is taking their stimulus away. Furthermore, the Fed stimulus has had dramatically diminishing returns.

Impotent QE Results

3 - The Fed has no more tools left in its tool box. It can not do anything more to stimulate the economy except to keep short term interest rates low. But to pump in more money or to borrow more via QE is irresponsible.

4 - There is very strong evidence that the economy is starting to rapidly weaken and the weather excuse is bogus:

For example, New Housing Permits Have Fallen Like A Stone Even After The Bad Weather Ended:

On top of that, the yield curve is flattening as long rates fall. The hell with our artificial short rates. The banking system is still in big trouble. Just read JPM's earning's report. I think Jamie Dimon is brilliant. If he is having trouble, we are all in trouble.

5 - The ever more interconnected world economy is rapidly weakening.  China's GDP is falling rapidly and is much worse than the "Official Statistics" As per David Ignatius of the Washington Post, the Chinese government is clamping down hard on the county's economic excesses.

China's Phony GDP Numbers - Divide by two?

As I've said before, the BRIC economies are all slowing and the world's economic fate has now just about reached the point where we are all in this together. Furthermore, China is slowly pulling back their loans to the USA and an economic energy war between the allies of Europe & USA  against Russia is not helping. 

Lastly, there are economic games being played by the powers that be. There is no real way that Belgium bought up all of the USA debt that China and Russia recently said goodbye to.  Yet that is what the statistics say. Belgium has got to be fronting for some one. Also, who in their right mind bought up all of that Greek debt last week? Could it be the fictitious firm of "LeGarde  Freres?" Christine has been making the rounds talking up a very bullish game lately. I can't blame her from trying to do all she can for Europe. But my job is to try and figure out what is behind the recent words of Super Mario Draghi and her.

6 - Global tensions are still rising. I have talked about Iran, Russia, North Korea, Syria, and China in recent posts. All potential large global risk areas.

So where do we go from here? The markets are obviously short term oversold and nearing support levels. But the market is not oversold enough and still has some room before it reaches support. Also sentiment is a bit better, but still lousy. So short term may be a bit tricky as a snap back rally could happen at any time. But this is still no time to invest. This is strictly a trader's market. Sell the rips and short the dips. If you are a fast experienced trader and see some sort of climactic selling or major gap down, maybe buy it for a trade. But you can not lose money by staying in cash. Capital preservation is the watchword.

I do not like this situation any more than the next person. But I can not refute the facts. In my opinion, patience and the strength to avoid temptation is all we have right now. Throughout history the world has gone through economic cycles. Let's hope that this is just a bump in the road. But hoping and praying never made anyone any money.

BIG Capital Advisors and Seaview Partners are not responsible for your investment decisions. We believe very strongly in our opinions, but you must perform your own due diligence in making your investment decisions.

Thursday, April 10, 2014

The Bitch Is Back - Stocks Crack Up

So much for yesterday's oversold snap back rally. Today the market faced reality and forced selling came back with a vengeance. What a change from yesterday's oversold rally. Then again, the facts have supported the bears and vicious rallies are the norm during market sell offs.  No one believes that this anemic recovery has caught fire yet without the help of the Fed. And The Fed appears to have run out of gas. Hence, the issue of deflation that Bernanke feared is still with us and getting stronger every day. The old expression applies: "Money makes the mare go."

The result is that the major indexes have broken some support levels. As one can see in the below charts, major support lies near the 200 day moving averages. For some reason, ahem, the talking heads on CNBC are all bullish. But that is CNBC's raison d'etre. After all, they need to have a bull market in order to keep up their ratings. Therefore, all we hear are so called experts talking about things like valuation, the long run, and so on. Message to CNBC: where are the people telling us about all of the negative economic statistics?

1 -Why do I have to read elsewhere that the Baltic Dry Freight Index is off to it's worst start in years?

2 -Where is the analyst who will tell us that new housing permits are dropping like a stone to new 2014 lows, AFTER the snow excuse period has ended?

3 - Why does no one talk about the Fed being clueless with weakening QE powers as they flip flop away from the taper while the economy weakens?

4 - Why is China's potential hard landing being ignored? China's phony stats?

5 - What is this media nonsense about the phony unemployment rate? We all know it is around 10%. And I am not talking about the discouraged worker effect. I'm talking about the chronic unemployment that is an aberration from history.  

6 - Why does no one talk about the flattening yield curve?

7 - Finally, how on earth can anyone believe in the jobless claim numbers when they are a fait accompli that proves that more people are ready willing and able to work but are not entitled to get unemployment? Inquiring minds want to know what's up with the CNBC financial media fix.

$NDX made another low for the run and is close to major support

$SPX has some catching up to do but broke down from some sort of head and shoulders top

Sentiment still lousy

Put Call Ratio Is Still Low*

The Number Of Bulls Is Still High*

$VIX Inches Up A Bit, But Still Low

McClellan Oscillators Turning Down But Not Oversold:

In sum, I believe there is more downside to go. How far down the market goes is for astrologists and soothsayers. I just say "red light."  This is not a market for bottom fishers or investors. There will be plenty of time to invest in the future. In the meantime, I will short the rips and cover the dips. And I will trade around positions a lot. I may even grab some long exposure during some rips as I did yesterday - see my tweets. But, I am not about to change my bearish stance until this atmosphere changes and a decent bottom is put in.

Unfortunately, in my opinion it is harder to make money as a bear than as a bull. And IMO, despite the momentum stock carnage, this sell off is tiny so far. It certainly can not yet be called anything but a correction within the context of a secular bull market.  That may change into a cyclical bear or worse. But there is no evidence of that yet. I was short QQQ and small caps via TZA today. I held TZA overnight and will short the other indexes as opportunity arises.

*Taken before today's sell off . Charts thanks to Charlie Bilello, CMT

BIG Capital Advisors and Seaview Partners are not responsible for your investment decisions. We believe very strongly in our opinions, but you must perform your own due diligence in making your investment decisions.

Sunday, April 06, 2014

Forced Selling As The Market Appears To Be Finally Cracking

It took three torturous months for the market to finally get hit across the board. Its about time! I was going crazy with this reversion to the mean, going nowhere buzz saw market. The incremental S&P 500 highs that occurred while the mostly NASDAQ momentum leaders were getting slaughtered was too much for most traders including me to handle. Now it looks like the supply demand equation has finally changed. For two way traders like me that brings hope that some real money can be made, albeit in shorting the market. For investors, there is no free lunch forever, so stay in cash until this storm blows over.

For the first time this year, all the major averages look like they are reversing down. As a consequence, since last Thursday, I have been short. I can not say that I was not shaken from some positions a few times, including on Friday morning's wild ride. But once the averages took out Friday morning's lows, it was apparent that the dyke was broken. I therefore added to my core QQQ short and this time feel confident (famous last words) the market will follow through to the down side.  I do not know how far down this move will go, but I do know that there is money to be made on the short side. And I again caution that this is not a market to invest in or bottom fish in.

A major but little discussed component of the decline is forced selling via mutual fund and hedge fund redemptions plus, drum rill please, the margin clerks. That is one reason that I believe that this sell off has further to go. The margin clerks are selling out hedge fund portfolios indiscriminately. They strike at different hours of the trading day and just dump whatever shares they must sell on the market, not caring at what price or what effect the selling has on the tape. Naturally this is a short seller's dream that takes on a life of its own as the selling feeds upon itself.


To make matters worse, the market is not oversold enough to call a bottom. Sure certain groups like biotechs may be extremely oversold and may spike up soon, but by every indication the entire market is not. Furthermore, complacency still exists. For instance the put call ratio gave a big warning signal last week. The $VIX - above - is still at extreme lows even after Friday's sell off. And the S&P Oscillator is no where. Therefore, if this is the bear phase that I think it is, the market is just beginning to fall.

Market Sentiment:

Whether the fall is for 5% or 25% is irrelevant as long as the red light is on. As I have stated all year, this is not a market to invest in. And the market will tempt us all. It almost tempted me into buying  some swing trades as I stated in my last post. thank goodness, that nothing tempted me to nibble or I might have been whipsawed down.  

The point is that this will not be easy. I expect many sharp oversold bounces that may tear my head off. The temptation to buy oversold downside whooshes will be there. I will probably be fast enough to cover some shorts into the whooshes, but am reluctant to wear two hats and buy into them for quick long side scalps. I don't think that I can wear two hats at the same time while keeping my thinking clear. From my perch, the old expression just changed to short the rips and cover the dips.   

Lets take a look at three of the major indexes

NASDAQ Composite is now testing a long term trend line. It broke some support and has another level of support to test - indicated on chart below.

NASDAQ 100 is similar to the NASDAQ. Here is a shorter term chart that zooms in on the broken support and the next level of support below. My only question is will the NASDAQ 100 bounce off the support or break through right now:

S&P 500 made another new high and then got zapped with an in your face reversal on Friday. I think that the major indexes may now catch up with the NASDAQ 100 and Momentum stocks that have been broken for quite some time. Topping is a process in which large institutions try to disguise their moves by hiding their money in the so called safer large cap stocks.

The Dow Jones Industrials look similar to the S&P 500.

Doug Kass humorously called this sell off "the revenge of the algos." We all know that the HTF guys are out there and I am sure that they are going to give the tape extreme volatility as karma for the entire HTF debate that was in our conscience last week.

BIG Capital Advisors and Seaview Partners are not responsible for your investment decisions. We believe very strongly in our opinions, but you must perform your own due diligence in making your investment decisions.

Wednesday, April 02, 2014

Grandma Janet Flip Flops And The Market Rallies - Is This For Real?

So much for Tapering. Janet Yellen made a speech yesterday that completely contrasted with the policy that she spelled out both in her speech last week and in her testimony before Congress. Ad a little bit of Putin hesitating at the Ukraine border, a steepening yield curve and voila, the market rallies. Call me the new contrary indicator. It seems like the more worried I get, the more worried Janet gets as she tries to save the day. The result is that the $SPX is barely at a new closing high.

S&P 500

Also the Dow Jones Industrials are close and the NASDAQ 100 - which was leading, is lagging but bouncing.


But, this time the rally looks like it may have some legs. At least enough to possibly do some long swing trading. For some clues, lets quickly look at the three legs that determine where the market is going:

1 - Monetary Policy Or The Law Of Diminishing Returns

Janet Yellen's flip flop is a concession that the weakening economy needs more Fed fuel. The problem is that the Fed's QE fuel does not have too much power anymore.  Thus, we are back to feeding the stock market junkie, but the drug dose is very small. The question is will it be enough to get he economy to fly on its own or is Janet about to be checkmated as the economic recovery peters out? 

2 - Tape momentum Gaining

At least some stocks are starting to make new highs and the former market leaders, including the momentum stocks are starting to bounce. Here is a representative spectrum of charts:

AA broke out a several days ago. They have reinvented the wheel with a new stronger lighter "revolutionary" aluminum wheel hub for trucks

BAX is consolidating the recent breakout based upon splitting up the company into two parts allegedly worth in the mid $80s

CXO Fracking oil and gas plays are all the rage - at least for now as the price of oil rises. 

EOG A great fracking company but getting long in the tooth

DIS: The quality Dow Jones growth leader getting close to the all time highs.

HPQ Cost cutting and accounting have made this rally. In my view HPQ is a dog. But maybe it runs some more.

LVLT Beautiful breakout

MSFT Mr. Softee has had quite a run. Maybe they can squeeze a little more out of it, but MSFT has a lot of work to do in order to prove that a turnaround is in place. The hopes about a new CEO and MSFT Office For IPAD can go just so far before they have to show some big results. 

GOOG Not cheap and not over valued. But a great company. If one has to bet on a comeback for the old leaders, GOOG is the one.

PCLN the same as GOOG above

VIPS never fell too much and now its approaching old highs

BIB Biotechs bouncing, but how far will the bounce go?

3 - Sentiment is Getting Absurd Again. Just Look At The $VIX testing Multi Year Lows


Now lets remind ourselves that all the problems of the world that I have discussed in prior posts have not gone away. All we have is a possible respite in the Ukraine. I would not bet on it. Then again, as bad as Putin is, The Ukraine is not a market killer in and of itself as long as Putin and Obama cool down the rhetoric and escalating. Today's brilliant NY Times article "Follow The Money" by Tom Friedman puts some perspective on Geopolitics - with the exception of insane players like Iran and North Korea:

This is still a trading market. Not all indexes are in gear yet. A strange institutional rotation is trying to prop things up. The Fed is in a corner fighting for it's life. Also the end of the month mark ups and start of the seasonally strong April during which new funds were deployed today.

Most importantly, some of the new highs are holding up for the first time this year and the former momentum leaders may possibly be waking up. Based upon that, I feel a tiny bit better about the market. Therefore at this juncture, I may try some swing trades of up to several days. But I want to see much more before I become bullish.  Investors should still be very careful until I see more new highs holdup and market leaders come back.

BIG Capital Advisors and Seaview Partners are not responsible for your investment decisions. We believe very strongly in our opinions, but you must perform your own due diligence in making your investment decisions.

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