Yesterday was another low volume chop fest. 6 point $ES range all day long. Most stocks were stuck in tight ranges as well simply decaying premium on options and not really lending themselves to any meaningful new chart updates. The slow drift higher in high beta continued and the headlines and certain stocks were seemingly dominated by one man: Carl Icahn. $AAPL, $NFLX, $EBAY. It really is amazing how supply and demand is being played. Carl is a clever guy and his energy at 77 is something to be admired and his mental flexibility to adapt to the new social media world is impressive. He’s playing the masses beautifully and very successfully so. But playing them is what he’s doing. And observing investor behavior is key to understanding the stage of the market we are in.
$EBAY was the latest company to announce a shaky outlook going forward, but investors didn’t care. They cared about a new buyback announced and Carl investing in the company. As we know none of this means anything for underlying value, but it is enough to get people to chase.
$NFLX exploded 17% higher on some headline growth numbers, yet the reality is the market is paying over $20B in market cap for a company that throws off only $5M in free cash flow per quarter while ignoring huge balance sheet liabilities ($7.3b in off balance sheet content costs).
And so futures were pushed higher after market close only to drop hard on the release of bad China PMI data. Something is smelling in China and it’s not only the smog. But the market will only really notice when it’s ready to and so far: no cigar.
I covered my $ES short again overnight for a +4.5 handles or so, simply because I want to keep locking in some profits as I expand my swing shorts and as we keep bouncing around in this range. Yesterday I added to $VIX futures on weakness and $IWM March puts on strength.
The short term upside risk remains especially now that markets seem to have, at least temporarily, swayed from the 2000 analog. But as tonight’s sudden drop showed: Things can change on a dime and the larger risk/reward remains very much to the downside. I see this market action is exacerbating many people as they get frustrated by the aimless chop and markets continuing to defy what fundamentals seem to indicate. This is what excessive sentiment brought on by extreme liquidity does. It disconnects everything.
I mentioned the flat top meme on twitter. There is something to it and it has occurred before. The last similar example I was able to find is October 2012. As you check the comparative chart to the $DJIA then and the $SPX now you can note the strong similarity to the previous structure. That one produced a 100 point $SPX drop in 4 weeks. So I remain patient and disciplined in this difficult trading environment.
Finally, this monthly chart of $IBB makes it clear what this market is really all about and exemplifies the size of the downside risk in the weeks and months to come. One could of course play it long with call lotteries. Just all trading experience tells me the big money is going to be made on the volatility that follows and whenever this reversal comes it will come quickly and be meaningful and will be very hard to catch if not already positioned for it. Last night is a good example. As people again chased into the close or, worse, bought in after-hours, they are now waking up to a -11 point $ES drop from the after-hours high. One of these days the dip will not be bought for a while. And, I suspect, the vast majority will be very much trapped.