There’s an old gambler’s saying: If you can’t figure who the sucker at the table is, it is likely you. While headlines & bulls gleefully celebrated new record closing highs on the $SPX (which were accomplished with a last 10 second ramp btw, but who’s counting) I note that very few people are even bothering to ask if there are suckers at the table.
I am certainly open to the possibility that I’m the sucker here and markets will keep going up forever. After all renowned technical strategist Ralph Acampora tweeted about markets entering a melt-up phase last night:
Not to knock Ralph, but he has been all over the map and often wrong last year, most famously calling for $DJIA 12,000 2 weeks after calling for up, up & away on CNBC. So be aware, folks like him, and others on twitter who claim technical prognostic powers, flip their opinions as soon as action changes. But so it goes. Ralph is now calling for a melt-up. Where has he been?
We all know markets can behave irrationally and often longer so than one can remain solvent, so I want to share how I approach this particular moment in time. First a quick summary why I remain in the correction camp here, recognizing that time is rapidly running out for my scenario if markets keep up the ‘melt-up’ program:
1. That’s all there was?
While $SPX and $IWM made new closing highs the remain below the recent intra-day peaks. We knew this week was heavy with QE, Yellen, and month end mark-ups. So I ask, with all this in favor of bulls, this is all they could do? A last minute squeeze into the close on mark-up day? After 2 months of 2014 $130B in QE got us a measly 6 $SPX points? A record ramp of 10% in 15 days in the $IWM got us barely a few points of green for 2014? The fact remains, markets are super stretched to the upside and very overbought. Yes they can get more overbought, but it all seems rather contrived.
2. Trannies and $XLF remain laggards. Big time. The charts are in stark contrast to $SPX and $IWM creating very large divergences.
3. Yellen is no Bernanke
Whatever your opinion on Bernanke he managed to push through his agenda ruthlessly and skillfully and arguably successfully as he managed to get out unscathed without having to face the ultimate consequences of this policies. Watching Yellen again give her testimony yesterday she keeps striking me as an empty sheet woefully over her head. This may be my bias based on her resume of never voicing an opinion other than consensus, but I see NOTHING in her words or demeanor that would indicate a person ever willing to stick her neck out on anything. She is playing it safe. Completely worthless testimony (“we have tools, need more tools so we have an arsenal of tools”. Really?). So one can only speculate if she is capable of making tough calls. My gut tells me she will never make a tough call until her back is to the wall, and that kind of person would be the absolute worst in any crisis situation. She will be too little too late when push comes to shove. Maybe she will surprise me, but I think the big surprise for markets will be how bad she really is.
4. Ukraine/Global Risk
This is a tough issue as so called black swans are impossible to predict, but markets have been very fortunate in recent years that all issues seem to now resolve themselves positively one way or another. Yesterday though was another sign of odd divergence as US markets completely ignored all Ukraine concerns. Europe didn’t. They are closer and they may be more nervous about Putin then the Ukraine itself. The history is deep and the former KGB officer is a power player. He does not want an anti-Russia regime to replace the deposed president. Who knows what will happen over the weekend, but I doubt this issue will be resolved by Friday’s close. It’s a potential risk event. Tensions and anger remain high.
My trading strategy:
As you know I’ve been trying to build a swing position. As the turn obviously hasn’t happened yet you are continuing to see me trade very tactically and opportunistically. I’ll summarize my actions yesterday to highlight this point:
1. $ES cover overnight. We saw a nice big drop in overnight futures initially. I knew Yellen and QE was looming and a gap fill was very likely. So I covered my big $ES short position and locked in some nice gain with the intent of re-shorting again higher up. I kept my other futures positions in case we would dip lower.
2. By open futures were green again. Magic. We knew from previous days that markets have been pushing higher and peak before noon. After a 6 hour continue ramp into resistance I tried to re-enter an $ES short, but continuous chop without real selling gave me a poor risk/reward to keep the position so I exited for flat which turned out to be the right decision as markets indeed levitated higher past the noon time frame.
3. As the chop continued I noted a bull flag forming. Not liking the set-up but recognizing it’s potency in a mark-up environment I entered a $SPY long call play. The subsequent squeeze into higher resistance allowed me a quick 80% gain exit only 20 minutes later. I also noted the 10 year hitting its 200MA and entered a bond short position via the $TY. Overnight yields are rising so this is looking good so far.
4. As I exited the calls I then started initial scale in positions for $ES and $YM and using the continued $IWM excess to add some $IWM puts.
Bottom line: I’m still on the bearish side of the equation, but remain in tactical mode locking in profitable trades along the way as much as possible.