Daily Market Brief

Goldilocks And The Three Bears

Goldilocks-The-Three-BearsWith apologies to the old English fairy tale of Goldilocks and the three bears I shall adapt the story to our current time. Goldilocks is of course this market that is the picture of purity and innocence and no matter what happens always comes out shining. The pieces are sure falling into place. Everything is bullish now. Again. Whatever concerns there may have been last week got washed away, not by any particular good news, but by the fact that prices went higher.

Golidlocks does have everything going for it:

1. Central Banks. Yellen handed out a license to kill bears at will on Monday by arguably making the most dovish statement of any Fed chair ever. Add to the menu the ECB expected to go full bore on quantitative easing today and Japan and China on the same bandwagon it is not wonder then that the front run of prices in the past few days didn’t allow for any breathing whatsoever.

2. Gap ups every day and who needs gap fills? A new phenomenon in the market for the past 8 days now we have seen nothing but gap ups and now 3 unfilled gaps in the same week. This seemingly guaranteed new feature surely makes Golidlocks sleep sweetly and unbothered at night.

3. Pundits screaming bullish on TV. I rarely watch CNBC, usually only to get a pulse on sentiment and I sure got a dose of this with the clip below. Orgasmic is how one can describe the excitement. Certainly hard not to get caught up in it, makes me want to go out and buy stocks:


4. Seasonality is screaming bullish for April, best month of year, etc. We know it’s strong and it certainly got off to bang up start with new highs in the $SPX and the $DJIA. Never mind that $IWM and $QQQ are lagging, that only means there is more upside to catch up on to right?

april seas

In short, what’s wrong with me? Just buy, it’s the easy trade. And this is exactly the part of the story where my 3 little bears come in.

Bear #1:

Retail buyers are ‘all-in’ again in stocks with the least exposure in bonds in years, meaning there is little to no diversification. I’ve talked about margin debt enough to not need to have to repeat it here, but there’s a theme emerging: They are succeeding at getting everybody in at the highest prices ever. Heck even companies are doing it via buybacks. Buybacks were supposed to be bargains for shareholders now they are just debt instruments to manage earning results. But here we are, retail buyers are exposed like they haven’t been since…..yup, 2007:



CPC ratio. So it is no wonder then that the concept of protection again is moot as the $VIX is dropping below 13 again and the CPC ratio drops below 50. Now a drop below 50 is not a signal that stocks drop immediately, but 8 out of the last 10 occurrences resulted in a sizable pullback within a week or two following:



The trigger for a pullback frankly has a multiple personality disorder, he can be lack of growth, negative earnings surprises, a systemic event, or the final relevance of one of the many divergences that accompany this market. Only 188 NSYE companies made a new high along with new $SPX highs as Q1 earnings growth is coming in at a projected negative 0.4%. Stuff of dreams.

So frankly selling this market with the Goldilocks factors outlined above make this trade the hardest possible trade. And it has been said, the hardest trade is often the best trade. We shall see.

Trade plan: My view remains that the world is still round and hence gap fill will occur, but the precise moment is unknowable. A lot will frankly depend on what the ECB will do today. The DAX jumped over 8.4% in 2 weeks front running this meeting, so it might be a sell the news event or we may spike higher if they indeed spike the market with more easing. My premise is that such a spike is supremely sellable as the resulting deviations and overbought readings will make a sizable pullback the more likely. The other possible spike event is the NFP number tomorrow which also has been nothing but a bull fest. So the case for a spike above 1,900 remains very strong.

My strategy is twofold:

If we were to drop on ECB today I would close several positions and consider a call play into tomorrow. If we just keep spiking then the case for a solid reversal trade gets stronger and I will continue to scale in and get more aggressive in exposure. This would make my one weekly put exposure a loss. In the meantime I see today as a better today for intra-day option scalps with tight stops, so don’t be surprised to see some of those trades come across the screen. The re-connect with the 5EMA and the 21 MA is also a target given the large deviation we currently are witnessing, so whatever macro view one has this is increasingly becoming a tradable edge to explore on any continued disconnect:







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