Sunday, January 27, 2013

The Fed may dial it back this week

Sorry for the late post, my other business had me on lock down this weekend, and now just coming up for air.

I think the market have front run the Fed to such a point that they may push back a bit to give them room to keep buying bonds and and MBS and sell the volatility to keep their hedges in place.  My personal view is the vol crash this month is too steep to maintain, and the Fed is going to have to whisper words of concern to get the market out of this feedback loop.

IEF and VIX-X have diverged from SPY, gold got smacked, and that flashes a warning to me that equities are next.  I wonder how much short covering in SPY the AAPL pair trade is still left.

I am still in the camp of ultimate new highs, but am expecting a nice retracement very soon. It will be difficult for me to be long going into the Fed meeting (won't be short other than some VXX),  Even if I am wrong and the market pops, how much is left?

GDP at 1%, no wage growth, no employment growth, no inflation, max margins, everyone is keeping their currencies weak against the dollar. We are already up over 10% from November, with 2% profit growth this quarter.  5-7% more brings us up 17% in three months, with the SPY on a french curve chart, that screams crash.

I see the SLV chart of 2011 as an analog to SPY.  An unsustainable move that no one sees ending, that retraces a bit, then a push to new highs to really get the juices flowing, then down to earth for the next two years.

Sunday, January 20, 2013

The Armstrong Line is Breached

While watching the incredible exploits of Felix Baumgartner as he successfully broke the record for the highest free fall jump, I learned something, and that was there is a line of altitude once breached requires a human to where a pressure suit, and obviously oxygen, in order to stay alive.  That is the Armstrong line.

This week the market powered metaphorically through that line, and like the human body, it will require extraordinary measures to maintain, and or rise from these levels.

My momentum based buy signal is overbought, showing a pretty large divergence on the daily, from the September peak, to this new high.  There is not the same intensity.  On the hourly, which I trade, I am getting chopped now on my signal line.  This is a red flag for me.  My signal chops on consolidation and reversals. This looks like the latter. Eighty percent of the components of the S & P 500 are buys on my signals, and twenty percent of those are considered blowing off on my indicator.  I am not screaming bear market here, as I am convinced sometime this spring we will reach the Von Karmen line (Google it), and reach for those new highs.

I think the volatility play is over for now, the February to March expiry is not nearly as steep as January to February curve, and  the last time we had a fall so steep in volatility, it rose 55% over the next two weeks (hat tip to Zero Hedge). I have been riding XIV, and now long VXX.  Retracing some of the Vol calmness will pressure the broad markets.

I think gold, silver and the miners are ready.  The cycle guys are saying we are swinging to participate in a multi month move, and I have/had buys on both metals.  Miner ETF's are still chopping, but some individual stocks are buys.  I am in NAK, AG, and NAK.  Miners have totally decoupled from stocks, and am looking for some regression to the mean.

As an aside, I am doing a paid webinar on day trading XIV, a trade that I do a lot, and have had some very good success.  If interested email me to get the details.  The class will probably pay for itself on your first trading day.

Enjoy the rest of the long weekend.  Bob

Sunday, January 13, 2013

To the top of Mt. Everest

The market has been climbing relentlessly higher since the March 2009 bottom.  Last week I discussed the drivers of this movement, and this week, I will discuss the four remaining tools/events left to push the market onto new highs.

The price of oil, oil is the lifeblood of our economy, and acts as a tax when it rises, and a regressive tax at that.  Lowering oil prices will provide a growth story to the markets.  It is clear, at least to me, that the price of oil is being elevated in the paper markets, while the fundamentals are supporting lower prices.  If I were a Central Banker that can control the paper markets, and need a cheap boost to growth without using up my spare monetization dollars, I can flood the market with naked short contracts and drive down the price of oil.

The Saudis today are reducing production, they are doing this because they see a glut coming, and are trying to get ahead of it..  The U.S., Canada, and Iraq all increased production last year, and are on tap to increase it again in 2013.

The relative price of the dollar.  The dollar is at a point where I see declines coming.  The Yen is grossly oversold, and the Euro has been creeping up since the beginning of December.  A falling dollar, with managed energy pricing, will provide a export boost to our multinationals, and the relative value of their profits.

Money flows from Bonds to Equities.  We are starting to see money flowing from bonds to stocks.  People are seeing the relative yields and are making business decisions to go for those yield.  Plus, the tax debate has ended, and was benign for the top 1%, regarding cap gains and dividends.  The fed is out of short bonds and so yields are rising due to supply and demand.  It won't take much for investors to lose a lot of money in capital losses on a back up, and we could see a flood of money coming out, and only the equity markets are big enough to absorb those dollars.

Deficit numbers are going to look pretty good for March and April.  The kabuki theatre of the fiscal cliff negotiations was designed to scare as many people out of the market as they could, in order to generate cap gain tax revenue(remember my thesis from last week). I think it worked.

So based on my above scenarios, and with the SPY 7% below the all time highs, and a political class that is determined to shape public opinion, I conclude that the highs will be assaulted.  Talk about climbing a wall of disbelief.

I am waiting for a gold and silver buy signal to reenter, but the large cap miners, I believe have bottomed, and am in NUGT.  If my scenario plays out, we will see a collapse in the Vix, and I can see XIV in the 30's, so watching that instrument very closely.  I hold VXX calls for Feb, hold VXX credit condors, and am in XIV on buy signals, and day trading it daily, opportunistically.

Below are a few charts.

By BKudla

Sunday, January 6, 2013

I have a theory

I am sure it is not unique, but worth sharing nonetheless.  My view is the Federal government is desperate to get the stock market back to being the tax revenue engine it was under Bill Clinton.  Incomes are flat, and national income is not going to be growing anytime soon. They have a problem; how do they goose the stock market and yet control inflation in food and energy.  Their answer has been suppression.

First is was lowering interest rates, then massive selling of interest rate swaps, then massive selling of volatility futures, and massive selling of alternative investments like gold and silver, and probably energy too.

We have however have reached the point of marginal utility.  Interest rates are zero, the largest open short interest in silver ever, and the largest sell off in volatility ever.  These are just the tools I can readily see.  Math and physics are taking over, we are reaching infinite intervention amounts with less and less effect.

Please take a look at the charts from Simply stunning, and ties into my thesis from last week.  Talk about blowing your wad.

My charts

I exited the week pretty light, and stand ready to buy volatility on my signal, and sit back through earnings season and watch.  Miners and natural gas companies look poised and some are already moving higher.  I am and will take some trades in this area.  Have a great week.