Daily Market Brief

They Know Nothing

ESAs we all work with limited information and the realization that someone always knows more than we do it is tempting to assume that the action driven by the others projects that they know what they are doing. Nothing could be further from the truth. The reality is most of the time others are just gaming, sometimes they just have more influence than either you or I. Case in point yesterday: We saw the sudden jump in the $ES that gave the impression something wonderful was about to happen (yes movie analogy). Of course that entire move was given back during trading hours as it proved to be simply a gaming exercise around the action of the ECB and the words of its Oracle Draghi. Yet many got hurt by this move, either by stops taken out or people invited to chase the move. For myself I just stuck to plan and process and sold more in the 1837 area giving me a better average and a nice exit as we hit lows. Overnight we see the same strength again as Europe is bouncing and I scaled into strength again, yet I will remain mostly cash into NFP to manage any spike we may get.

CNBCI reiterate: Nobody knows what markets will do and when. What we can do is identify probabilities and favorable entries & exits and keep our own psychology in check in order to extract value from the market in a as consistent manner as possible. Yet know that the airwaves are filled with people who keep making prognostications about the future and currently that message is completely one sided as the parade of people calling for ever prices continues unabated on CNBC.

SPX monthlyAs far as January is concerned markets are at an interesting crossroad in relation to the monthly channel vs 5EMA: Right in the middle. To maintain the trend markets have to at least hit the top & touch near the bottom. The most volatile ride would be to hit both in the next 3 weeks, but it’s clear something has to give here soon, either this trend continues in January or it will not. So far markets are down slightly giving little clue what the next move will be.

Market-Cap-to-GDP-using-Wilshire-5000On a fundamental basis it’s not clear to me what the next push higher would be based on: Earnings downward revisions have been a plenty, the baltic dry index keeps sinking, the Fed is starting to taper yet sentiment is at record highs. Is it just fund flows? These actually show a bias toward bonds at the expense of stocks so far in January. Valuations continue to be excessive via historic norms despite the pink unicorn narrative that is pushed regarding P/E’s. The attached chart showing market valuation versus GDP makes it very clear that the market is not cheap here.

Helene Meisler has some interesting statistics:

“I did see a terrific study done on what tends to transpire in the
market in years after the market has been up 20% or more the
previous year. If we go back to 1975 there were 11 instances
where we had a 20%+ year. In the year following, whether the
market was up or down, there was always a correction that made its high in the first quarter. Every time. Sure, it’s a small sample.
But 100% is enough for us to consider it. Six times the high was
made in January. Once it was made in February and four times it
was made in March. The average decline was almost 7% and
lasted about four weeks.”

Knowing that corrections also occur with the change of leadership at the Fed (end of this month), the odds for a correction are increasing. Yet the downside continues to be elusive.

Given the 2000 fractal the most likely unfolding remains range bound till Opex and then a down move into the end of January. But this is conjecture on my part and can’t be the trading bias. As you saw yesterday I traded long and short in a market that was just bouncing around in range. Buy the dips and sell the rips. Yet I sense the big money making opportunity will be made to the downside in the next month or two.

For today: Fridays tend to have a positive bias and futures are creating that sentiment on cue. Jobs will be the key event in terms of data and algos will do what they will do. I continue to want to sell $SPX into strength, but know that Friday pin action will most likely make for boring trading after the first couple of hours unless of course we break the bear flag to the downside, however there is 0 evidence so far that would support that notion.

Charts with comments included below:












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