Overall Market

The near term call on the market is tough but looking out a few weeks my bent is still on the bearish side. We are seeing record breaking sentiment levels which typically lead to corrections. However, we are also in a very seasonally strong part of the year. To make things tougher the strong seasonality usually works best in good years such as the one we just had.

In hindsight, when we look back at this week the outcome will seem obvious. If we go lower everybody will point to the nosebleed sentiment levels and if we are higher everybody will point to the seasonality. So why am I bearish on what seems like a coin toss? Because when I look out further, even if the market does make its way higher in the next week or so I believe it will be a last gasp. I believe there is a couple of percent reward on the upside with a lot more downside potential.

8 comments:

Anonymous said...

Sold PCBC @ .29

OD

Anonymous said...

As I said a short while ago, this market behaves as if it is heavily shorted. It feels like the second half of 2009 or spring 2007. Occasionally the market will sell off, but it spends the vast majority of time just drifting higher on light volume. Look at the move in the NASDAQ today, relentless dip buying.

JD

Tsachy Mishal said...

Its quite difficult to make a case that this market is heavily shorted.

Tsachy Mishal said...

I dont think it acts like a heavily shorted market either. Heavily shorted markets shoot up. This one drifts and slowly makes marginal new highs each time.

Anonymous said...

ENQ moved 25 handles higher today on nothing. Most of the move happened in 4 distinct 5 minute bars. We have been having intra-day spikes like that very frequently over the past few months, so I am not sure what you mean when you say the market has not been shooting up. Maybe you are just looking at the past week or so. In that case, there were plenty of sideways weeks during the relentless short squeezes of 2006 and 2007.

I think there is a general misconception as to how heavily shorted markets behave. People expect big fireworks when shorts cover (maybe due to the high profile short squeezes orchestrated by the Fed during the meltdown?), this is rarely the case.

It is more of a max-pain phenomena of new highs to stop positions out, followed by pauses/pullbacks to suck in fresh shorts, and then new highs again.

I do not think anyone who has traded over these past few years can deny that today's markets behave in a very similar fashion to the relentless grinds higher we saw in the years before the 2008 melt down. Look at a chart from August 2006 to Feb 2007. It feels to me that we are in the same market.

Just my opinion. I do not doubt that we are headed lower eventually, maybe even right now. I would just like to see bigger headlines and higher volume first.

JD

Anonymous said...

I would also add another corollary to previous relentless grinds higher.

The market drops swiftly on a negative headline or economic release on little volume and then spends the rest of the day grinding higher on no news to close near or above the level where it started.

China hikes rates unexpectedly on Christmas day and the only data release is a miss on a regional manufacturing survey. What does the market do? After a brief and shallow sell-off, it trades straight up all day long on very low volume.

Who is lifting those offers? Not just yesterday but all the other days where we've seen similar market action?

Only one (non-PPT conspiracy) explanation makes sense to me.

I put a lot of weight on sentiment as you do but in this case I am also looking for a capitulation rally OR exhaustion (which would be indicated by the market actually trading down and staying down on bad news).

JD

Tsachy Mishal said...

All the sentiment and positioning data such as put/call ratios and Rydex trader positioning don't suggest a market that is short.

We are seeing increasing confidence by PMs and and Investment advisors, increasing margin balances and retail inflows. I think that accounts for the move higher in the market.

Anonymous said...

Thank you for your comments.

One thing I would argue is that it does not matter how bullish a PM or IA is if he is already fully invested and there is no new money coming into the fund. If you look at cash levels in funds and money flows as per Trim Tabs you can see that this is the case. In fact Biderman is beside himself with confusion in trying to explain who is doing all the buying.

But as you know the market doesn't need new money to go up, it just needs buyers to be more eager than sellers. This has obviously been the case over the past few months.

With flows so low in M&A/PE/Funds etc, I think the current market is at the whim of the trading community, hedge funds if you want to generalize. They are always putting on and taking off positions and the market is moving based on the relative eagerness of those which are short vs those which are long.

Perhaps 'heavily shorted' is a misnomer. A better way to put it might be to say that the longs are comfortable and the shorts are staring at their screens with their fingers hovering over their mouse buttons.

JD