Markets – Macro – Technicals

Suspension of Disbelief

bubblesSuspension of Disbelief:

If a writer can infuse a “human interest and a semblance of truth” into a fantastic tale, the reader will suspend judgement concerning the implausibility of the narrative.

Well, I think it’s fair to say we’ve reached this point. Growth, revenues, earnings, bad news, negative divergences, etc. nothing matters. Stocks go up. Non stop. Last night we saw $NFLX getting hammered, $IBM dropped several bucks, multiple companies dropped 10-20% on poor revenue and earnings growth and we saw $AAPL struggle all day long, none of it mattered. Japan ramped 4.5% overnight, $RUT up over 20.5% in 2 months, stops are run relentlessly and stocks are getting more expensive by the minute. In short: Everything is becoming disjointed and dislocated. The prospect for a blow-off top becomes ever more palatable if you suspend disbelief and buy into the narrative.

And these are precisely the reasons why Mella, who I have known for years to be a mega bull, is actually now transforming into a mega bear. We are on the same page here:

Mella

A market that pulls back and breathes and then advances to new highs is bullish. A market that just ramps vertically without a pause is a disaster waiting to happen, and this is the phase we have now entered.

No low has been tested for 10 weeks straight and we are blowing the roof off:

ES

How to trade all this? Carefully. I’ve outlined the $VIX futures expiration on Wednesday as a potential pivot point, $VIX should actually hit the 12 handle today. My play is start scaling into long $VX May futures today if $VIX hits the 12 zone. I wanted to grab calls on weakness yesterday, but weakness didn’t even last 2 minutes as a massive buy program just trampled over everybody.

I still see potential that this a classic bear market rally and the pattern is indeed reminiscent of the 2000 time frame:

DJIA M

And still the banking sector waves its hand but nobody is paying attention:

BKX

I could talk about how $IBM has now taken on $45B in debt while it experiences declining revenues:

IBM

or how $NFLX is slowing in subscriber growth:

NFLX2

while it bleeds cash:

NFLX

But the market doesn’t care about any of it.

The only thing this market cares about right now is this:

1 (1)

Sorry to say, but that’s what you are buying.

If you haven’t already watched this interview, have a look, El-Erian does a great job of explaining the consequences of what they are doing:

TRADE PLAN:

I got stopped overnight and I’m trying to play the fade as tight and selectively as I can and the scale outs on Sunday and early Monday help pay for the stops. I’m watching the $VIX closely here, but now that we have entered a blow-off/capitulation phase we must recognize that price is now a matter of suspension of disbelief. I’m comfortable with the stops here, but recognize this is a very difficult trading phase for most. Mella is looking to add short with wide stops and this is my mantra as well. Sizing, stops, and risk management are key here. As far as I’m concerned we are witnessing the opposite end of February 11 here. My base premise is now again a reconnect of basic MAs, BUT, and I want to be clear on this, this action can run defying all logic and reason. So no point in overthinking it:

SPX

I don’t like it, but that’s the market conditions central banks have now imposed on all of us. The debt/negative yield bubble. Read this and weep.

For those that say the lows are in and a bull market is upon is, I just have to say that even the rally off of the 2009 lows had a .382 Fib retrace first before advancing higher:

YM

And anyway you cut it or slice it, that coming move is almost a full 1,000 $DJIA points to the downside:

YMW

This is what I continue to aim for and it is then we need to make some decisions, which is then likely a nice long trade, but I don’t want to prejudge it. First things first.

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