Stock market analysis and commentary from a trader's perspective

Friday, August 29, 2014

Consumers Tiring, NYC Condo Prices Soaring, Italian & Spanish Deflation, And Record Negative Credit Balances

Futures made a new high in the early hours of this morning, then consumer spending figures were released showing the first pullback in six months.

Meanwhile Manhattan condo resale prices hit a record high, and actress Jessica Alba's non-toxic baby products company raised $70 million at a valuation just shy of $1 billion and is prepping for an IPO, according to Marketwatch,

Over in Europe, Italy just had the lowest CPI print ever as the country slid back into recession and entered deflation. Ditto Spain (deflation).

Just another mixed up news day at the top. Investors see this as a time to be all in.

Credit for these charts goes to Doug Short at

With any luck the S&P will ghost higher today as everyone leaves early and will provide a nice buy...for SPY puts.

Or, it slips and fill the 1988.40 gap on light volume, which would likely set up a short-term long entry, using calls.

Either way there is nothing for me at current prices.

Thursday, August 28, 2014

GDP Revised Up, Futures Tank...And Why People Aren't Buying Guns

Good news. Second quarter GDP was revised up from 4.0 to 4.2%. Futures tanked.

That's addiction for you.

Addiction to low rates, buybacks, and easy monetary policy.

More and more, a narrative is growing that stocks will do fine when the Fed pulls the punch bowl away. The reason this narrative exists at all is that stocks are at historic all-time highs.

This is pure socionomics.

The market for guns ignited back in 2008-2009 when it looked like the financial system was imploding. It kept going until last year's record sales. But as the market made new highs and kept going, everyone breathed a sigh of relief.


People Aren't Buying Guns

"The reason is . . . too many guns."

The same happens when almost anyone can have virtually unlimited access to credit. After satisfying all their ego driven desires, they soon reach a point where they don't want it anymore.

Hard to tell if this point been reached yet, but it feels close.

Still, the market never got below 1995.76 yesterday. Doing so today would open the door to lower prices, namely the gap at 1988.40. The 23.6% Fib is roughly 1981 and the 38% is 1966.74. Only below 66.74 would be an eye opener for me, especially if achieved with higher volume.

Wednesday, August 27, 2014

Global Equities Hit A Record Value*

Bloomberg noted today that the value of global equities is now $66 trillion.

*But according to the Bank for International Settlements, the value of global debt is $100 trillion.

At least we're going nowhere fast, and from the sounds of things, having a great time doing it.

AAII investor sentiment is back to 46.1% bulls while the long term average is 39%. Bears are currently 23.7%, below the long term average of 30.5%

Meanwhile in Europe, stocks are mixed today, and the entire German yield curve is negative out to 2017. Deflation has now hit the German bond market. It is trading as if it's in the midst of a major depression.

How much longer can stock markets rally? Until a bond market somewhere says they can't.

Until a bond market refuses to play along and begins to fear default on debt signaled by sharply rising rates, it's one big party worldwide decorated with $40 trillion worth of pretty wallpaper.

Wave-wise, the S&P seems to agree. Even by the simplest of measures (a trend channel), 2020s seem game. Maybe a hiccup into the 1980s at some point, but higher before lower seems the plan.

Too soon to tell if a corrective move started from yesterday's highs, though a move below 1995.76 could raise the odds considerably. Note also the gap at 1988.40. There are several down to 1933.75.

Tuesday, August 26, 2014

Short Term And Longer Term Charts

Futures look double-toppy thus far. This might allow another 2000 print on the S&P this morning, but there was a clean five waves down from the highs yesterday which should be respected until negated by a new high.

If a correction does develop, it may only be part of a smaller degree wave four correction to the 1980-1985 area, however. Below is the updated speculative wave count that I've been following. The bull may not be ready to give up just yet. In fact, it's not even certain iii has been put in yet.

Note also that 1941.50 is the new stop.

As long as the markets create clean waves, trading them can be a great deal of fun. In this case, it appears that the market is forming the final impulse of a channel which has been posted in various forms for months now. As simple as it looks now, it has been a challenge.

Occasionally there is chatter on Stocktwits or Twitter describing the market as "relentless." The more I hear this term, the more I think the market may be in a larger degree third wave. I mentioned this yesterday. Here is a chart showing what I mean.

Third waves, according to the Elliott Wave Principle by Frost & Prechter, are "a wonder to behold." The word relentless seems to describe a third wave, but one that may be part of a larger pattern that is not necessarily a new bull market but a B-wave bounce that is part of a much larger corrective process. This would explain the low volume and weak internals as Frost & Prechter termed B-waves as "phonies." Also, wave C would likely probe much lower than is shown on the chart.

At this point it is too much to try to fit current market structure into a grand scheme. The best course of action is to keep it simple by focusing only on the day-to-day waves. But occasionally it helps to see if the day-to-day waves still fit into a larger scenario. In my opinion, they still do.

Monday, August 25, 2014

Ideal Set Ups For Today, Tomorrow, And Another Time

Today is a new moon and futures have gapped higher after the CME mysteriously halted Globex trading last night due to technical glitches.

Today is either an ideal set up for a gap and crap, or a low-volume levitation to set up a Turn Around Tuesday.

Currency moves in Forexland are starting to accelerate. The USD is gaining steam and the euro and yen are weak. If the move in USD persists, it could dislocate the market. The market hates a strong dollar.

Jackson Hole ended with dovish talk from Yellen regarding labor markets and rates, as in the labor market can't deal with higher rates just yet, so party on. Nothing can deal with higher rates, so it's a moot point -- which is why if the Fed has to follow rates higher (because it does not control the bond market, contrary to the dreams of many), things will get messy.

Above Friday's close is the psychological 2000 level and the 2014.18 Fib extension target. Internals are weak and these levels are sells for me.

Below 1941.50 would be problematic for higher highs.

The more I think about the current juncture on the S&P, the more I think it could be putting in some sort of wave three top, with a forth wave correction to the 1737 area to come, then another run to 2000+ in a fifth and final run to end the run from 2009. But that's for another time.

Friday, August 22, 2014

Yellen & Draghi Saddle Up In Jackson Hole

Yellen due to speak from Jackson Hole at 10am EST and Draghi at 2:30pm (if they can keep him off the bar saddles at the Million Dollar Cowboy Bar, just kidding).

The bar stools are actual leather saddles which are fun to sit in but easy to fall out of after a few. Janet and Mario may need to commiserate over the latest socialist blooper, this time in Venezuela.

How would you like to get fingerprinted in order to buy a nice bunch of kale? Apparently nothing goes too far for socialists.

Also, check out the irony in this marketwatch story:

The metaphor may be about the firehose of information coming out of Jackson Hole, but the hidden meaning (possibly overlooked by the editors) is the gush of liquidity coming from the Fed.

That liquidity may be reaching its limits. Futures look pretty freaked out in the overnight session. JH could serve up some hints to a market that is priced for perfection but looks awful under the hood.

Let's not forget a key passage from one of the greatest trading books ever written, Edwin Lefèvre's Reminiscences of a Stock Operator, based on Jessie Livermore:

When my buying does not put the stock up I stop buying and then proceed to sell it down; and that also is exactly what I would do with that same stock if I did not happen to be manipulating it. The principal marketing of the stock, as you know, is done on the way down. It is perfectly astonishing how much stock a man can get rid of on a decline.

I repeat that at no time during the manipulation do I forget to be a stock trader. My problems as a manipulator, after all, are the same that confront me as an operator. All manipulation comes to an end when the manipulator cannot make a stock do what he wants it to do. When the stock you are manipulating doesn't act as it should, quit. Don't argue with the tape. Do not seek to lure the profit back. Quit while the quitting is good and cheap.

Any form of stimulus, QE or otherwise, is a form of manipulation. It is outside assistance which acts as bait to buyers. Free money gets used to buy assets than increase in value when more people buy them than sell them. As long as the money is freely available, buyers buy. When the buying wanes for whatever reason, there is little to support them and prices fall precipitously.

For whatever reason, something has spooked futures. The reason doesn't matter. With so few players in the market as signified by dismal volume readings as the rally has progressed, the market may simply relocate to where more buyers and sellers conducted business. The closest level seems to be the 1970 area. There is another one at the 1950 area, but it would "break" the wave structure of the rally. Below 1941.50 would suggest much lower levels to come.

Otherwise, the next highest Fib target, after the psychological 2000 level, remains 2014.18.

Thursday, August 21, 2014

Why The Latest Narrative Is Likely Wrong

Here we are at all-time highs, and the narrative-of-the-day is about money on the sidelines. $10.8 trillion of it.

That's the figure being cited in a Marketwatch story this morning which seems to provide investors yet another hook to rationalize valuations that now rival those of 1929, 1937, 2000, and far exceed those of 2007.

This is a perfect example of linear trend extrapolation due to the reliance on exogenous causality rather than social mood to predict markets. (An excellent explanation can be found here: The Fallacies of Trend Extrapolation and Reliance Upon Exogenous Causality, courtesy of the Socionomics Institute.)

The inferred hook is cash on the sidelines.

Social mood causality would explain why such hooks appear now: because the majority is bullish at highs and project that bullishness into the future.

If higher prices are indeed coming, internals suggest we should be on the lookout for investors and traders taking their money off the table -- putting even more cash on the sidelines, to run with the article's theme.

For the second day in a row, the new 52-week high-low difference on the S&P was below 40, compared to 184 back in 2013, the record since the 2009 lows.

During the most recent correction to 1904.78, there were just 8.8% of the S&P above the 10 day moving average. Yesterday closed at 94.2%. Above 80% is where corrections usually start from -- when everything looks great.

Yesterday there were more declining stocks on the NYSE than advancing stocks. That means breadth sucks. At highs.

This chart telegraphed the correction and the rally months ahead (it was also wrong for a long while, too). But the point is, where do you think cash on the sidelines is best used?

Not shown is a 61.8% Fibonacci extension target at 2014.18. There are higher targets, too. But the way the S&P is acting of late, with volume expansion on down days and weak internals on up days, it doesn't feel prudent to hope for them.

Today I will be trying SPY 199 puts against what is left of my SPXL position. The Fed's Jackson Hole meeting is today through Saturday. The new moon is Monday. I will give myself some room to be wrong a few times with the puts.