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:

https://www.youtube.com/watch?v=5uXoQ7cIDXg

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.

Add caption

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.

http://www.washingtonpost.com/opinions/david-ignatius-in-china-warning-signs-of-trouble-in-financial-markets/2014/04/10/f2dad670-c0cc-11e3-bcec-b71ee10e9bc3_story.html

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.

 

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.

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.

$VIX

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.

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.

NASQAQ 100

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

$VIX

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:

http://www.nytimes.com/2014/04/02/opinion/friedman-follow-the-money.html?smid=tw-TomFriedman&seid=auto

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.

Jerked Around As The Odds Are Getting Worse For The Bulls

A Bad Tape

 

Not that any one has been able to predict the market this year, but I believe that the odds are becoming more risky for investors. I do no recall seeing such a convoluted mixed up split tape. Markets are always crazy towards the end of bull runs. But the dichotomy between different groups of stocks is now off the wall.  I disagree with anyone who believes that MSFT, IBM or value stocks are the new leaders that can sustain a bull market. The bursting of bubble type values may be healthy, but a market without growth leaders is not. This type of environment does not auger well for stocks. The crazy thing is that how the S&P 500 appears to have done nothing but levitate for the past three months as the quality of the tape has eroded -see charts below. But as we all know, market tops usually take lots of time:

 

 

It is also pathetic when the indexes bounce during the first hour like they did on Friday only to fade for the rest of the day. Just about every breakout seems to fail and every up move is faded:

 

 

 

 

Great Charts From Zero Hedge Depict The Split Tape

Other than Ed Hyman's ISI, zerohedge.com is the best thing out there for economic charts that put things into context. Here are some charts that depict the market's deterioration under the surface as money tries to hide in non growth stocks.Click on the below link to see the charts that tell the story of the 2014 USA stock market:

http://www.zerohedge.com/news/2014-03-28/small-caps-plunge-worst-week-22-months

 

 

Yield Curve Flattens More 

 

The economy still needs fuel and the Fed's strategy is to keep short rates low while deploying a gradual tapering off of QE. The problem is that the bond market is not cooperating. It has given us a flattening yield curve that has the potential to choke the economy and the stock market.  Will the yield curve steepen and get back to a stimulus mode? Does the Fed have the power to do anything about it? Will the economy strengthen enough to push up longer term yields? Right here and the yield curve now it stinks. Here is the chart posted by Charlie Bilello, CMT :

 

We Need A Free Trading Crises Free World Environment For Nations to Prosper. Things Are Getting Out Of Hand and That Cannot Be God For Stocks

 

President Obama does not understand the crises laden world that we live in. The Failure of US foreign policy has enormous implications In terms of keeping the world's economies in a safe free trading non disruptive environment. The world's balance of power is shifting and we are greatly to blame because we have left a void to be filled by nations with bad intentions.

I know that I am skating on thin ice when I start talking about foreign policy and the state of the world. However, whether one agrees with me or not, one cannot dispute that the reshuffling of the world's power balance is having an effect on the financial markets. The fact that we have to worry about this dangerous world and think about the consequences of different dangerous war scenarios around the world tells me to worry about the markets. 

In my opinion, we are living through the incumbency of by far the worst president of my lifetime.  This obstinate non strategic thinking President does not understand the difference between getting our troops on the ground involved in dumb wars verses being a strong international power that uses a smart geopolitical strategy deploying the intelligent use of strength in order to avoid wars. Today's world is a much more dangerous place than before President Reagan took office. On second thought, make that Kennedy and Nixon. In fact, in one fell swoop, it seems like all of the strategic foreign policy initiatives of the post WWII era are being undone. 

And to blame our military retreat all on budget cut backs or to avoid the past mistakes of putting troops on the ground is total poppycock. We had a lot less financial strength after WWII than we have now. We were in debt up the wazoo at that time. Also, we do not need to have boots on the ground in order to accomplish our goals. We just need to have will power, smart strategic foreign policy and the integrity to keep our word. Obama is playing a dangerous game with our budget. Entitlements are killing us and the only way to fix them is to acknowledge that life expectancy is much greater now than when FDR was president. We do not have to kick people to the curb in order to make a long term fix. A long term gradual actuarial fix that does not go into effect for say anyone over the age of 50 can do the trick.

- Russia

Yes Putin did call Obama and there is a possibility of a deal. But 80,000 plus troops are now ready to invade The Ukraine and 10,000 Russian troops are conducting nuclear warfare drills. I think that Putin is using Hitler's playbook in order to grab more territory. I do not think that Putin has Hitler's ultimate goals. But whatever the goals are, precedents are being set by Russia for all the world to see. Not that we are not hypocrites. But relationships with or without treaties are being made all over the globe that will cause the dominoes to fall as one superpower defends its allies and the other super powers defend their allies. This leaves the world in a tricky place where any misstep can lead to widespread war. Kennedy famously read Barbara Tuchman's "The Guns Of August" during the Cuban Missile Crises.

Yet all of the index futures are up tonight, probably based upon today's meeting between Kerry and Lavrov, plus Putin's call to Obama as I type this.  

- Iran

Iran is going to get its Atomic bomb and Israel is already getting prepared for war with Iran. The possibility of Israel attacking Iran and the US being forced to back Israel or let Israel hang out to dry to let the chips fall where they may is beyond scary. Russia is going to try and make Obama blink on the Iranian front.

Just to show what a crazy world this is, here are my armchair quarterback fantasy thoughts.  If I was Obama, I would talk tough about Iran and make a deal to back down on Eastern Ukraine in exchange for the Russians backing down on Iran, giving us the green light to surgically destroy the Iranian air force, missiles, and nuclear program. Of course we would need the skills of someone like Henry Kissinger to pull this off and a hard fast line must be preserved in the rest of Eastern Europe, but I digress. Just the fact that I am thinking about all these crazy things means that many other people in high places are gaming this insanity out too.  No matter what side of the issues one is on, all outcomes appear to be bad.

- Israel

Israel will do whatever it takes to destroy Iran's nuclear capability. I take Iran at their word why they repeatedly state that they will annihilate Israel. I believe that the deadline is June first, when our current sanctions "deal" with Iran ends. After that Israel will have no choice but to attack, because unlike Obama, Israel does not mess around with red lines. The problem is very complex because Israel's bunker busters do not have the ability to destroy Iran's underground fortified nuclear facilities. The USA's bunker busters do have that capability. That leaves Obama in the position to shit or get off the pot. No matter what the Russians or Iranians threaten, this is the big one. In my view, Obama has no choice but to shock and awe Iran's nuclear facilities, missiles and air force. It is the lesser of all evils. Yet I do not trust Obama. Israel does not trust Obama and the world has seen Obama blink and lie too many times to believe him.

- Syria

Just another mess, but this one was one of the major starting guns for the bad actors of the world to exploit the USA's weakness. Once the "red line" was crossed and Obama failed to act, bad things were set in motion. Now we read more reports of Al Qaeda making inroads in Syria.


- Saudi Arabia

The Saudis are bad people, but they are stable and on our side in the battle against Iran. They may be one of the keys to solving the Middle East's issues. If we Go after Iran, we can stop a Middle East arms race that will surely start and we can help to form an Israeli Saudi alliance that may help pave the way to Middle East peace.  Strange bedfellows, but the common enemy may just open the door. Obama just traveled to Saudi Arabia at the Saudi's urgent behest. I hope that they can help to make Obama wake up. 

- China

China is patient and is watching. If they see a strong USA, they will not make trouble with Japan, Taiwan, North Korea and so on. If they see us waver, they will be more attuned to have a Laissez-Fu-Yong approach towards any North Korean war mongering. furthermore, Nixon and Kissenger's détente with China may erode further as Russia tries to ally with China by selling them much needed oil and gas.

- North Korea

Kim's haircut mania only needs a mustache to complete the Hitler act. He has become more emboldened recently and has repeatedly had many missile "tests" belligerently threat South Korea, Japan and the USA. Today he announced that more provocative nuclear tests are coming. One day his game of nuclear blackmail in exchange for aide is going to go too far.

With war like things such as NATO defenses being threatened and Financial warfare escalating with Russia we are at a critical juncture. Plus the world's economies are acting poorly and our economy is possibly running out of gas.


My Strategy Is The Same: This Is Not An Investor's Market

I am short C based upon their failure to pass the stress test and the bad yield curve.

 

I am long BAX because it broke out on Thursday after announcing that they will up the company into two parts.  On Friday afternoon BAX stated that the two parts are worth in the mid $80s - well above Friday's closing price.

One can place odds on any one of the above financial and World Black Swan scenarios. Or one can realize that at this point, investing is dangerous. If one is going to play, my advice is to be nimble by trading small and fast.  I do not intend to hang on BAX or C too long. 

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.