Simply Amazing

Just wow!  As you know my expectation for a top of between 165-172 for SPY is now in the zone.  But I expected a sharp selloff before that happened. Maybe in the age of robots we are going to go directly to the target zone that is programmed into the computers.

I have been trying to back of the envelope this move based on the nearly one for one relationship we have between the Fed's balance sheet growth and the stock market.  As of Friday the SPY is on a 37% annualized gain trajectory.  The FED's balance sheet is projected to grow 32% over the next twelve months, if they keep the same pace, and 20% until the end of the year.  So getting overvalued on this measure, and that is not including if Ben slows or stops printing.

The earnings yield on the S&P is is 5.4%, which is triple the current ten year rate at 1.88%.  The dividend yield at 1.95%.There is still room to run here, with the big assumption earnings and interest rates rise and stay low respectively, doubtful.

The stock market is rotating out of defensive names and into growth names, and they are rotating out of bonds. This should move money into resource and energy names; kiss of death for margins in a non pricing power environment.

According to Sam Stovall and the S&P, under the current scenario, is if bond yields stay constant to earnings yield is stock price growth of 11% one year out, if the this ratio compresses however, results fall off dramatically.

So giving the devil his due,  the blow off price can rise to 185 on the SPY.  But having said that, I believe that ramp brings along energy prices and bond yields and will start causing some market spasms as it tries to get there.  My bet is will get at least a 5% pullback before June OPEX.

I am staying with my short SPY with puts for June OPEX, same with long volatility, and long energy (uranium, coal, and drillers).  I closed my gold puts for now, and may reenter if we get a spike and fail the 20 again. I also bought lottery puts (June 80)on DUST this week, as DUST is now 100% over its 200 EMA (I did the same play in April to great success),.  I am expecting gravity to take hold again, and bring it to at least the 50 EMA.

The other play I am having good success, and passing to my subscribers, is a little program I wrote on short squeeze candidates.  Recent names that have worked well have been CLF, COCO, BTU, JRCC, and NILE.

I will share a few of the buy ideas that hit my undervalued screen for next week, below.

Ben has Caught the Tiger, Now What

The narrative we are being fed is that all is well, and everything is improving.  That is all well and good for the  Central Bankers if they can jam the stock market higher, at the same time contain energy and financing costs.  This week that has changed, and I think the incredible amount of hot money coming out of Japan is starting to wash over the globe, and investors have taken note.

In Japan and the U.S., bonds are being dumped, Central Banks in Asia are being forced to cut rates as to not disadvantage their exporters. The net effect of all this is commodities have awakened.  Coal, uranium and oil and gas drillers popped, as well as steel and rare earth companies.  I traded CLF, NFX, JRCC, UEC, BTU, SGY, URRE and CHK.  Still in most of these names, plus a few miners (which will awaken as a group very soon).

I may not be the smartest guy, but higher financing and input costs in an economy with no pricing power, debt saturated, and with no income growth cannot be bullish.  We are going to go from the virtuous circle of Fed liquidity to its vicious side.

The Fed and Wall Street have trapped themselves with their own meme.  If things are so great investors are now thinking, let's dump the bonds, buy growth, and protect against the coming inflation.  This will not end well.

For me, I am short SPY into June OPEX, long volatility, long energy and select commodities, dabbling in miners, slightly short gold (until the Yen abates it's fall, or GLD breaks over it's 200), and am interested  in the for profit education names, as they just popped onto my buy screen.

I posted a few charts below.  Enjoy your weekend, as will I. Summer has arrived in Southern California.

I SPY

Last week I spoke about the SPY and it's relationship to the 20 EMA and Stochastics, and the foolishness of shorting. What a difference a week makes.  SPY's relationship to it's moving averages and momentum has changed immensely, and based on the recent characteristics of this year's rise, we are due for a pullback to at least the 50 EMA before or if we move higher.

Some stats:

• SPY is on a 28% annualized pace as of Friday
• SPY is already up over 20% in six months, nearly breaking the longest streak for the stock market before a major correction (21% over 7 months)
• 20% of the SPY components are 20% over their 200 EMA
• YHOO, BBY, NFLX, GME, and three Biotech names are 40% over their 200 EMA
• The SPY has been moving in 10 point bursts before succumbing to a correction the 50
• The first two bursts in 2013 took seven weeks, the last 2.
• Friday marked an inverted Hammer
• The two main competitors of SPY; gold and oil are waking up from their FED induced slumber
• Margin is at an all time high, amazing!  There is no money on the sidelines.

I am looking for a 6 point correction in SPY over the next two weeks.  I am short with some June SPY put spreads, and VXX, hedged with some energy stocks (SGY and NFX) and specific miners (NUGT and SLW).

If I am wrong and we push higher, it will drag up the laggards which are the miners and energy stocks.  The narrative all is well, so the all is well names should recover.

For the record, I believe there is at most 10 more SPY points left, which is at most 5 more percent of performance.  It is inconceivable to me that with the FED's liquidity producing only a GDP growth rate of 1.5%  at peak earnings and margins we can continue this rate of ascent.

Some charts

PS I am conducting some basic and advanced charting and portfolio management classes this month at www.chartingforsuccess.com