Daily Market Brief

Lions and Tigers and Bears, Oh My!

CapitulationThe dance is always the same. Markets go up relentlessly and all you see and hear about are people raising their price targets, as with JP Morgan’s Tom Lee about four times in 2013. Never mind that he was wrong about his target each time and hence had to raise it repeatedly, but presented as an oracle he was nevertheless.

Five weeks later and a few percentage points lower and doom and gloom everywhere with Tom DeMark ringing the scare bell with a 40% correction prediction and how the next 2 days are super critical. Really? It was this panic talk that helped sour sentiment further and rip the $VIX and $VXX higher which provided a solid re-test of Monday’s lows. Sure enough Mark Faber is coming out with 40% drop headline numbers last night as well and so the pot is appropriately stirred. Classic.

Add to the fact that Fed speaker after speaker is now coming out and is pushing for an aggressive taper agenda combined with a massive outflow from stock funds that reeks of capitulation and you have a fast and nasty correction with a very, very nervous market.

Turns are notoriously hard to predict with any precision, and so a day like yesterday proved to be very effective for playing highly profitable intra-day trades taking full advantage of the volatility. As I made my case for a swing trade set-up yesterday, these intra-day trade profits are a welcome cash infusion while patience is required with the turn. As we saw with many market participants yesterday these rips and flushes are impacting investor sentiment quickly. It is natural as people feel out of control when the action is seemingly unpredictable.

SPYAs you know I keep a keen eye on the macro and any analogs that may be of use. The 2000 analog, while useful in January, has now deviated hard this week and has to be considered dead. Every analog ends and the market will do what it will do. As I look at some longer term charts, however, I continue to see signs that a bounce of size is near:

1. The obvious observation is that this is now the steepest correction in over a year pushing against the 150MA.

2. The MACD collapse is rivaling the more severe corrections in 2012.

3. Any of the previous corrections danced with the 50MA before either bouncing or correcting further below (as in the 2012 cases). This did not occur this time as we sliced below it, paused a bit lower and then just continued to where we double bottomed yesterday. The size of the fund outflows explains this action, but it also highlights how oversold conditions are at the moment. Outflows can be explained as a result of tax related profit taking and concerns about the QE reduction that the FOMC is undertaking combined with rather underwhelming earnings results.

SPXAs I was watching the action yesterday it occurred to me that I’ve seen this movie before and not too long ago. It was another year where QE was pulled: 2011 after the big run up in 2010. In the adjacent chart you see the corrective move that occurred in the early part of the year with a pierce below weekly 21 MA, similar to what we are seeing now. That year of course resulted in a multi-month H&S build that culminated in a fierce summer correction. Will this year play out similarly? No idea, but the set-up is intriguing as it indicates a very strong bounce possible over the next 3 to 4 weeks possibly resulting in a new high, which seems a laughable thought now given current conditions, but traders in 2011 probably had the same sentiment at this stage of the decline.

FEB 3-5As it were I took nice profits on several trades this week so far whilst also expanding my trade book in expectation of a reversal. The remaining book is currently mixed with some positions in the green and some in the red as the turn hasn’t materialized yet.

As I explained in the feed yesterday things can change very quickly. The market is looking for an excuse to rally as money managers don’t get paid on redemptions but on showing returns on their portfolio. And, so far, 2014 has been an utter disaster. Pressure to show results is on.

ECB and Draghi are on deck today with the market hoping to get some hint of what the ECB will do, either at today’s meeting or next months’ meeting. Any such hint could spark a fire under markets, any failure of such a hint would likely cause harsh selling. Hence I decided to close my #DAX long for nice profit as another bow to discipline (see feed tweet).

SPX weeklyBesides Draghi we have the big, bad #NFP number tomorrow and this will be the key event to close out the week. What the reaction will be I don’t know and if you gave me the number today I couldn’t predict it either. But I will point out that we are on four consecutive weeks of decline for the $SPX. And this hasn’t happened in a long time. So no matter how this week ends, prospects for a better week next week are improving by the day, hence my trade plan:

Road MapMy strategy today: Same as yesterday. Take profits as they avail themselves, take advantage of intra-day movements, and keep building the long book on weakness, and then scale out along key milestones on the $SPY road map.

$AAPL: Great exit on the call trade yesterday. The upside case remains in play, hence I took some lottery calls using a portion of the profit from yesterday, so my risk is confined to that.


$GS: Is it 2008 again? The stock keeps acting like it’s on death row having sliced through all its key MAs in a virtual straight-line. So far playing calls has been fruitless exercise, yet a turn here is a beacon of a larger turn so I’m keeping an eye on it.

GS daily.

$VXX: Sitting at a key spot primed for major reversal commensurate with recent history. Draghi and #NFP will be a key driver on the when.




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