On The Road Again

I am on the road today so this will be the only post of the day. I sold the Goldman 140 puts for nearly $5. Goldman's sins seem priced into the stock and volatility is very high so I want to take advantage of it.

The first couple of days next week will be seasonally strong after which "Sell in may and go away" comes into effect. Many will point to last year as a reason not to sell in May, but the market was coming off of a record washout last year. The setup this year is a lot different. We are heading into this seasonally weak period with extreme positive sentiment and following a rally of epic proportions. Have a great weekend.

Greeks and Bulls In Driver Seats

The Greeks are in the drivers seat as it seems European governments need a Greek bailout more than the Greeks themselves, in order to bailout their banks. The Europeans will come to Greece's terms. Fully paid strikes for all! The bulls are also in the drivers seat due to yet another bailout and strong seasonality. This will change in the middle of next week as seasonality turns negative. Have a good night.

The Mother Of All Bailouts

There are rumors going around that the IMF will bail out Greece. Not only that but IMF claims will be junior to existing bond holders.Why would anybody do that? The European banks hold most of Greece's debt so this would be a huge bailout of the European banking system and the Europeans control the IMF. Of course the US taxpayer will be kicking into this bailout. But don't worry, we can print the money.

Added To Citigroup Short

I added to my Citigroup short position at $4.55

Strong Seasonal Winds

There will be strong seasonal tailwinds for the market over the next few days. While complacency is high and imbalances are starting to matter, the best course of action for the bears might be to stay out of the bulls way for the next few days until the seasonally strong period passes.

While I don't plan on making any big bearish bets over the next few days, I will look for an opportunity to add to my Citigroup short position. With the government in the market looking to sell $35 billion worth of shares, my downside seems limited.

Now What

The market is a tough call now that we got a reflex rally off of yesterday's drubbing. The bulls will say that we are heading into the turn of the month during a seasonally strong part of the year. The bears will say that there is still a lot of complacency in the market, evidenced by the fact that the call buyers have not missed a beat. Additionally, imbalances may be coming home to roost.

A turn of the month rally would likely make for an excellent short setup heading into the seasonally weak part of the year with complacency running high. The immediate future is a much tougher call.

Buy The Dip?

The market traded lower briefly on news that Spain was downgraded. I thought about making a quick purchase for a flip as the market is very oversold on a short term basis. However, I looked at all the call buying and said no thank you.

Retail Lagging Again

Retail is lagging again today.  The strong economy/consumer discretionary trade is very long in the tooth and looks like it may have run its course.

Not My Problem

 While many will be quick to blow Greece off as not our problem, there are many municipalities that are in similar shape to Greece. Municipal jobs are being cut and taxes are being raised which will be a headwind for the economy. Even with these cuts deficits are not in order and a similar fate may await municipalities.

Bounce Back

After such a severe down day a bounce back  is par for the course. As long as the European markets can close without incident we should be able to sustain the bounce throughout the day. I continue to believe we are in the topping process but that a turn of the month rally is still possible.

Sector Roatation

In the year 2000 the S&P 500 traded at well over forty times earnings. A decade later the S&P 500 is still significantly lower. Valuation is the largest determinant of long term returns but matters very little in the short run. Sector returns are also dependent on valuation in the long run but in the short run many other factors come into play.

A year ago everyone shunned retail and real estate stocks as the death of the consumer and real estate were widely heralded. Since then these sectors have seen the most impressive returns. The valuations in these sectors have gotten silly but managers were underweight the sectors and are forced to chase them higher or risk falling further behind their benchmark.

It has not mattered that many retailers trade at north of thirty times earnings even though we are in the midst of a secular deleveraging. It has not mattered that many REITs trade at well above NAV.  All that has mattered is that these sectors were running the hardest and most were underweight or short the group. In the long run I have little doubt that these sectors will revert back to a normal valuation.

Yesterday was the first day in a very long time that the retailers lagged the market. That might be a hint that managers have finally finished rotating into the consumer discretionary sector. I will keep an eye on the sector in the coming days to see if it continues to lag. If the market bounces and the bounce in retail is lethargic, they might make for a good short.

Crash Test Dummies

The problem with technical analysis is that the market always looks better when its higher and worse when its lower. It looks like the market is going to close below a lot of technical levels today and that will give many something to go home and think about. There are a lot of fully invested bears out there who felt they needed to dance so long as the music was playing.

I originally thought that we would see one more turn of the month rally before a final top was put in. However, if the sovereign debt crisis comes to a head all bets are off as market participants are positioned for prosperity, not turmoil. Have a good night.

Getting To The point

My earlier post about Goldman evoked a lot of emotion on the message board. The point of the post was not to decide Goldman's guilt or innocence. It was just to point out that when an event is widely feared, like today's Goldman hearing, the news is often priced in already. This is evident by the fact that Goldman is up nicely in a down tape.

Greece Matters

It appears that the market was expecting Greece to be bailed out and it is starting to look like there will be no bailout. When politicians deny and spreads explode, I tend to believe the spreads. Greece defaulting seems like a significant event to me. In an unbalanced, over leveraged global economy negative surprises tend to happen.

Cramer Turns Bearish on Goldman

Cramer was positive on Goldman and defended them until yesterday, when he suddenly turned bearish. I hate to pile on the anti-Cramer bandwagon but he has terrible timing and that is another reason to believe Goldman will put in a short term low. I actually like Cramer as he really helped me understand the market when I started learning in the 90's. He just gets very emotional and that is a very bad thing when it comes to the market.

Goldman Okay But Rest Of Financials Not

While I think Goldman Sachs is very likely to make a short term low on these Senate hearings, I think the financials are a horrible bet right now. My reasons are as follows:
  • Health care stocks tanked after reform was passed. The knee jerk reaction will be to sell financial stocks once reform passes. 
  • Citigroup is the most important financial as it captures the imagination of investors. The government will be selling shares for the next few months and that should put a lid on Citigroup.
  • The stocks have run so far that even if they fall back to support that could be a huge hit.

The "Fabulous Fab" Goes To Washington

Goldman Sachs is a corporation with over 25,000 employees. If you go through 25,000 people's emails you will find some people who believed housing was a bubble and you will find people who believed housing prices would continue higher. You will also find some narcissists, like the "Fabulous Fab", who refer to themselves in the third person.

There is very little evidence in this case but that does not matter in the court of public opinion. This was a very shrewd move by Obama to win over the masses and increase the pressure to get financial reform passed. Wall Street plays hardball with their armies of lobbyists and Obama is hitting back. While Goldman probably acted within the letter of the law, its hard to say they don't deserve this. The pursuit of short term  profits is all that matters on Wall Street, no matter what the long term damage is. The bonus comes first is the real Wall Street motto.

Financial reform will hit all the Wall Street banks but the market is acting as if Goldman will be the only one effected. It is very possible that we will see a bottom today in Goldman as the bad  news is bought. Toyota Motors bottomed the day of their Senate hearing and we might see the same for Goldman today.

Feeling Naked Without My Shorts

The level of call buying is reaching silly proportions once again today. While I was planning to wait until the seasonally strong period was over before going net short again I might make an exception. If we see a large syndicate calendar (stock offerings) tonight, I might move up my timetable.

Shorted A Boatload Of Citigroup

I shorted a boatload of Citigroup at around  $4.78 this morning. At current prices the governments stake is worth about $37 billion. That is a lot of merchandise to move. It is hard to see what the upside in the stock is as long as the government is selling.

Treasury Selling Citigroup

The Treasury has announce that it has authorized Morgan Stanley to sell 1.5 billion shares of Citigroup or 20% of their stake. Is it a coincidence that financials, especially Citigroup were weak Friday? Do you think the SEC will investigate who at Treasury leaked the info? Rhetorical question.

Seasonally Strong

The most pertinent fact is that we are still in the seasonally strong part of the year. That will last until a week from tomorrow. Usually, very positive sentiment is a negative data point  because it means that most are likely already near fully invested and few are left to buy and push the market higher. However, we are in tax refund season, when many are flush with cash. The bullish sentiment actually makes people more likely to invest that money in the market. This is also the time of the year when many make asset allocation decisions and a bullish backdrop makes it more likely that those allocations will include more stocks and less cash.

Once the seasonally strong period ends the extreme bullish sentiment should start to matter. That was the case in January as extreme sentiment did not matter until seasonality turned negative. This time around seasonality will stay weak for a lot longer. Additionally, stimulus will start wearing off in the coming months and comps will start getting tougher.

Two weeks ago we saw record readings on the ISE and CBOE put/call ratio. I thought that the readings warranted taking a shot on the short side despite the seasonality.While it did lead to a nasty day on option expiration and some backing and filling last week, ultimately the S&P 500 made a new high Friday. I closed out the position last week and will look to revisit it again in the coming week.

New Home Sales

Let's not forget that home sales soared right before the first tax credit expired and dropped quickly thereafter. I would not make too much of today's number. The number that will be more telling is the May new home sales number (comes out in June). That will give a better read of the underlying demand.

Backed Off

I remain of the belief that the market will put in a top by early May. However, I used Friday's and yesterday's dip to take down my net short exposure. The reason being that we are still in the seasonally strong part of the year and I don't want to be net short for the turn of the month.

Originally, I thought that the government would start selling shares of Citigroup this week and that we would see a heavy issuance calendar. I believed that the combination of extreme sentiment and heavy issuance would trump the positive seasonality. However, the government has not started selling shares of Citigroup and the issuance calendar has been light. I will wait until early May before looking at moving to a net short position again.

Apologies for the lack of posts but I am on the road.

Covered Some Shorts

I covered some shorts into this mornings move lower. I also covered my Citigroup short. The reason for my short position was that the government was supposed to start selling shares. It was widely expected that the selling would start after earnings but it has not. I will revisit once the sale is announced.

Groudhog Day

As usual weakness did not last very long and was quickly bought. The bears need to get moving on the downside if they are going to make a move before the end of the month. Have a good night.

Good News Sold

The selloff on Friday came on bad news, while today good news is being sold. I prefer this type of selloff when looking for a top. That said, I don't think we will make much headway on the downside before the seasonally strong period ends. The best I believe the bears will be able to do is a retest or a slightly lower low than Monday. The real downside will need to wait for May.

Goldman Case Not Open and Shut

The case against Goldman Sachs is not an open and shut case. Paolo Pelligrini, of Paulson & Co. at the time of the transaction, gave testimony to the SEC that he told ACA he intended to short the CDS in question. The $13 billion hit that Goldman's stock took when this case was announced seems to price in a worst case scenario.

It is undeniable that these bankers have prospered while bringing the country to its knees. Financial reform is needed and this will effect profits in the entire financial sector. However, the way the market trades it seems that Goldman is the only one that will suffer.

Bullish Ranks Grow

The Investors Intelligence bulls are at 53% while the bears are at 17%. This is comparable to the levels seen in January. Most sentiment indicators are at similar levels of bullishness or greater than seen at the January top. That said, the market did not come down in January until positive seasonality passed. Positive seasonality ends in two weeks.

Nothing Exceeds Like Excess

Nothing exceeds like excess. You should know that, Tony. 
-Elvira Hancock (Michelle Pfeiffer) in Scarface
I am not certain what the above quote means but I am pretty certain it applies to this market. The momentum will end but it feels like it is going to take out every doubter before it does so. Have a good night.

Valuation Does Not Matter

There is no P/E too high for economically sensitive stocks like Harley Davidson or any specialty retailer as they all trade at ridiculous forward multiples. There is no P/E multiple too low for non economically sensitive stocks like Pfizer.

Momentum Market

This is the strongest momentum market I have ever seen. Not only because the market refuses to correct but the moves in individual stocks display tremendous momentum as well. For a reversion to the mean trader like myself this is as frustrating as it gets. I am ready to throw my hands in the air. Maybe that means we are close to a change.

Added To GS

I have added to my position in Goldman Sachs.

Looking To Buy A Dip In Goldman

Goldman's earnings were solid and they have been aggressively buying back shares. The shares trade cheaper on actual earnings than most banks trade on normalized earnings. I believe shares of Goldman have bottomed and I will be looking to buy a dip this morning if we get one.

The Citigroup Conundrum

The Treasury announced that they were planning on selling shares of Citigroup on April 1. Most analyst reports and articles I read assumed that the Treasury was waiting for earnings to pass before beginning to sell. Insiders generally wait until after earnings before selling shares in order to avoid insider trading charges. While the Treasury is not considered an insider it makes sense that they would want to avoid any appearance of improper trading.

I am baffled as to why the Treasury has still not announced when the sales will start, now that Citigroup's earnings have passed. I am now reminded that trying to figure out what bureaucrats are thinking is an exercise in futility.

Part of the reason I was willing to short aggressively during this seasonally strong period was that I thought the government would start selling their nearly $40 billion stake in Citigroup, which would help offset some of the seasonal strength. Now that my assumption is in question I am not going to be as aggressive putting out the shorts I took in on Friday until the government announces a share sale. If the government does not announce a share sale I will simply wait until early May before putting out more shorts.

Sold Goldman Calls

I sold the $170 covered calls against my GS position. I was planning on this being a trade but am going to hold it against my Citigroup short.

Call Buying Continues.

The silly level of call buying is back today and despite that the market is only managing a meager bounce. Normally I would say that is bearish but there is a lot of noise the morning after expiration.

Started a Citigroup Short

I have started a short position in Citigroup as i believe the government will start selling shares shortly.

What The SEC Case Against Goldman Means

I underestimated Barack Obama as I thought he was all talk and would get nothing done. Then he surprised me a few weeks back and shoved through health care reform when everyone gave it up for dead. Now he has come out fighting against Goldman Sachs. I now believe he will be able to push through financial reform.

Financial reform will mean lower profits for the banks. Trading stocks has become a commodity business, which is why so many large banks have gone into trading OTC derivatives. The opacity of the markets allows them to earn greater spreads as there is no choice but to trade with the large banks. If these derivatives were traded on an exchange through a central clearing house the banks would not be able to earn such high spreads, which is why they are fighting it tooth and nail. Additionally, prop trading would take a hit if financial reform were enacted and leverage would likely be reduced.

Goldman trades at eight times earnings so clearly a lot is priced into the stock. I believe the largest cost of the SEC's case will be reputational. Goldman's greatest strength has been its reputation as people want to be clients of the "smartest" firm. Goldman Sachs Asset Management has had some of the worst performing funds yet has grown because of the Goldman Sachs name. However, if clients believe that Goldman is trading against them that could induce them to take their business elsewhere. Additionally, companies and sovereign clients that are politically sensitive might not want to be associated with Goldman. The SEC fines and lawsuits can amount to a nice chunk of change but they are one time in nature. The reputational cost is the real cost.

I'll Have Some Volatility Please

Normally, when an extended market runs up strongly into expiration I would expect an expiration hangover where the market is weak in the days following expiration. However, Friday's hard down day might mitigate some of that weakness.

I believe we are in the process of forming a top but I don't think it will be straight down because we are still in a seasonally strong part of the year. While I plan to maintain a net short position, I will likely cover some shorts if the  S&P 500 approaches 1180, with the intent of putting them out again on a pop. A topping market can provide some excellent range bound trading opportunities. I am really getting tired of markets that only go in a single direction.

Breathing Room

Today's move lower has given me some breathing room. I was able to take partial profits and sell covered puts against a portion of my short positions. This greatly increases the chances that I will be able to see this position through. I am now in a position to profit if we topped out or to be able to add if we rally through early May. I still believe that we will see a significant top by early May at the latest. Have a great weekend.

Bought GS

I bought a baby position in GS under $160.

Selling More Puts

I am selling SPY 118 Puts expiring today against balance of position.

Picking Away

I put on the bulk of my net short position this week and all my adds from this week are now in the money. I slightly picked away at some of the position and sold the MAY 115 SPY Puts against a bunch.

Pigs Are Flying

The toothless SEC is taking tough action against Goldman Sachs for not disclosing they were shorting what they were selling to clients and that John Paulson chose the contents of the products. In other news, I think I just saw a pig fly outside my window.

The Earnings Game

In every earnings season there will be companies that miss expectations and those that beat. The fact that Google and AMD "missed" does not mean much to me because one will always be able to find some companies that missed. What is more interesting to me is that Bank of America and General Electric "beat the number" handily and are not trading well.

Competing Forces

I am looking towards next week as expiration is notoriously difficult to game. The bull case is that tax refund season continues for another few weeks which causes positive seasonality until early May. The bear case is that sentiment extremes tend to lead to reversals after expiration. Additionally, the government will likely start selling shares of Citigroup once they report earnings next week and I expect stock issuance to pick up.

What Bernie Madoff and Jeff Immelt Have In Common

"How statistically different was Bernie Madoff's track record from General Electric's 100-quarter record of continual earnings growth ... Do we draw the line with ponzi schemes or do we do something about less clear-cut manipulations as well?"
-David Einhorn in the foreword to No One Would Listen
Jeff Immelt is now being investigated by the SEC because he told Hank Paulson in September 2008 that he was struggling to sell commercial paper. A few days later Jeff Immelt told investors that its corporate debt programs "remain robust". While GE is not a ponzi scheme they clearly have a very liberal definition of the word "truth".

GE Capital is a black box of which investors can only guess the contents. Basically, they have to trust management. Given the history of the company that is  a tough sell for me and I would only buy earnings at a discount. Yet, investors are once again paying nearly twenty times this years earnings for GE. While everyone likes to point the finger at someone else when they lose money, "it takes two to tango" and the American investing public never learns.

More Records

It looks like the ISE equity only is going to break its record today. With ten minutes left in the day it is sitting at 365 and the previous record is 280. I would note that the data only goes back to 2006. We have seen record breaking call buying the past few days. If past is prologue this is not a good thing for the bulls.

I am very proud of the high level of discussions that occur on a daily basis on the message boards here. Bulls and bears discuss the market in a civil manner trying to figure out together where the market is headed unlike what is seen on most message boards. Thank you. Have a good night.

Rolled Pfizer Puts

I was short the Pfizer April 17 puts and have shorted the May 17's. Pfizer continues to act horribly as investors look for anything with economic exposure at any price. Between the years 2010 and 2015 Pfizer is expected to earn $15. Now that's a margin of safety. I plan on continuing to sell puts every month and take delivery if necessary. I will be more aggressive and buy the stock outright when they start to buy back shares.

My Expiration Observation

I have found that the more bullish people are heading into expiration, the less likely we get a turn before expiration and the more likely the turn happens immediately after. The reason I think it works is that if the atmosphere is bullish people are more likely to roll bullish bets and less likely to roll bearish bets. That would have the effect of propping up the market until the rolls are completed.

My Response

There is a very interesting discussion on the message board on why we are seeing record breaking readings on many option indicators and I wanted to respond to some questions and comments.

Market Owl said that Citigroup options might be skewing the readings, since the stock is so low priced. I would note that puts in Citigroup trade as well. Additionally, the Nasdaq TICK hit a record yesterday not seen since 2002 and Citigroup definitely did not affect that. That seems to confirm how bullish sentiment was yesterday.

An anonymous reader asked if inverse ETFs could be skewing the data. The ISE equity only excludes ETFs and it also has been sitting at record levels so I don't believe that is the case. I am not certain how the CBOE deals with ETFs.

A few readers suggested that liquidity might make these readings irrelevant. I would remind readers that we had a nearly 10% correction in January despite the liquidity.

What Do Readers Think

What do readers think? Do the record setting option readings mean anything? Or is something different this time around?

April and May

Historically, a large percentage of tops have occurred in the April/May period. The Super Bowl indicator works purely by coincidence, but I believe there is logic as to why so many tops are clustered around the April/May period.

The period leading to the end of April is the heart of tax refund season, where Americans are flush with cash. Retailers tend to see increased spending during tax refund season and some of those refunds find their way into the market as well. On the margin that leads to a higher market and in the stock market higher prices lead to yet higher prices as the herd grows bullish. Not only that but April is the tail end of a six month period of strong inflows that begins heading into Christmas.

Once May hits suddenly there is less cash flow heading into the market. At the same time sentiment is likely extreme because the market has been rising for so long. That explains why so many tops are clustered around this period.

Record Setting Complacency

I received a lot of questions about the CBOE equity only put/call ratio. Yesterday's reading of .32, was the lowest reading going back to 2003. That is as far back as I have data for so it might have been an all time record. The ISE equity only came in at 263. The record there is 280. Earlier this week we saw the 10 day moving average of the ISE equity reach 238, which was close to a record and only seen at major peaks.

The fact that these record extreme readings are occurring right around the time where seasonality will turn negative (in three weeks) makes me believe that we are seeing a top being formed of significance. After the initial run off the bottom in 2003 we saw an eight month correction even though we were  in the middle of a strong bull market. I believe we will see something similar if the economy holds up. If the economy falls into a double dip I believe this will mark the top. I continue to expect a top by early May at the latest.

Pain Management

I was very patient, waiting until this week before putting on significant short exposure. I decided to pull the trigger even though I knew there was a good chance I would have to wait until after expiration for my bets to pay off. I thought that the opportunity was juicy enough that I would be willing to take some pain. Even though I was ready for it, going through the pain is no less painful. I am stopping the pain for today and calling it a day. Its going to be a long few days until expiration. Have a good night.

Meanwhile In The Real World

I recently spoke to a lawyer who practices real estate law in Brooklyn. A foreclosure judgment currently takes two years to obtain. Once a judgment is obtained it takes another three years to complete the actual foreclosure. This is a result of the judges receiving orders to slow down foreclosures. The Brooklyn courts do not distinguish between commercial and residential properties.

What is a mortgage on a delinquent loan worth if it will take five years to foreclose?  Are the banks marking their delinquent loans to reflect the lengthy foreclosure process in much of the country, as many counties have slowed the foreclosure process? Why would someone give out a mortgage loan if it will take five years to foreclose? Why pay your mortgage if you have no equity when you can live for free for five years?

More Red Flags

  • The Bulls in the Investors Intelligence survey this morning came in at 51.5%, pretty close to their January levels.
  • At midday the CBOE equity only put/call is at levels not seen in over five years. 
 The market has been registering extreme readings for a few weeks now and the tendency is to ignore them at this point because they have not worked. I believe that is a mistake. This time is not different.

Changing Times

When I started trading many tops would happen on the day of a big news release like Intel earnings or a big employment report. Generally, we would see great news with a big gap up and a move lower throughout the day. In the past few years it has become rare to see that type of top.

Tops still occur when the news is good and the crowd is wildly bullish, but they don't tend to occur on events anymore. Most tops seem to occur at random times or right after options expiration. I don't know if this is because traders have become more sophisticated or if it is because there are more computers trading so an event does not have the same effect.

Further Added To Shorts

I have further added to my short position this morning. I am one add away from my maximum position.

Serenity Now

"buy on the cannons, sell on the trumpets"
-old Wall Street saying
 For the definition of giddiness just turn on your TV and tune in to any financial network. I believe that the best time to buy is when the crowd is negative and the time to sell is when the crowd is giddy and complacent. It is unambiguous where we are at this stage. If I knew when the exact turn would happen I would wait for that moment. As a mere mortal I will continue to layer into shorts and will suffer until the turn

Your Friendly Reminder

This is your friendly reminder that rallies tend to end on "good news" not "bad news".

Beneath The Surface

While the box score shows little change today there was more of a story beneath the surface. Heavily shorted names, led by the REITs, exploded higher today. I would not be surprised if we find out that a fund blew up today.

I thought that today was the best chance for the bears to make their move if they were going to do it before expiration. As I mentioned yesterday, the bears might need to wait until after expiration to get at their honey. So why don't I cover my shorts and put them on at expiration? I see 20 points of potential upside and over 100 points of potential downside on the S&P 500. A large part of my bet is through June Puts so I can withstand a little squeezage. Have a good night.

Kill The Shorts

I cannot even think of a justification for the price most REITs are trading at. Shorts are getting squeezed plain and simple. The smartest long/short guys are short REITs but they can't take the pain and are just covering. That is why I try to avoid shorting stocks with high short interest.

Large Cap Vs Small Cap

In the bigger picture I believe that large cap stocks are a better value than small cap stocks. However, I am not quite ready to make bets against small cap stocks. I believe that a large part of the reason small caps have been outperforming has been the amount of stock issuance that has gone on in the large cap space, predominantly by large cap financials.

Once the government disposes of their Citigroup stake, which is worth about $40 billion, the vast majority of large cap issuance will be out of the way. At that point I would be more willing to make a large cap vs. small cap bet. For now most of the supply is coming in the large cap space and in the short run supply and demand trump fundamentals.

Wake Up Mom And Pops

According to an NFIB survey, small business optimism fell to its lowest level since the Autumn of 2009. Obviously these small mom and pops business owners don't get it. They should be playing the greatest bull market of all time. AMERICAS BACK! Baby. Boo Yah!

Are We There Yet

My view continues to be that we are close to a major top. The put/call numbers were once again off the charts yesterday. I have had to adjust the axes of many of my charts in the past week as many of the readings were literally off the charts. We are in the quiet period before earnings so I was not expecting to see much share issuance this week. However, we did see a decent amount of secondaries announced yesterday. The largest being CF Industries and Dollar General. I think that there is a decent chance we see a down day today.

From The Are You Kidding Me Department

More anecdotal evidence.

Anecdotal Evidence

In addition to many indicators being at nosebleed levels I am also seeing anecdotal evidence of a top.
  • People are talking about further upside as if it is a given.
  • If I had a dollar for every time I heard "why fight it" I could take my positions off and go back on vacation.
  • Bears are being demeaned as morons who ignore the facts.
  • Obviously the market is going up.
Maybe the bears and myself will have better luck on Turnaround Tuesday. Have a good night.

Three Possibilities For Timing A Top

As readers know I am expecting a major top to be put in during the next few weeks. I currently see three distinct possibilities for the timing of a top
  1. My best guess for the timing of a top would be at options expiration this Friday. Strong trends have tended to last through option expiration and reverse afterwards. In addition, Citigroup reports earnings the day after options expiration and the government will likely start selling shares once those earnings are reported.  Additionally, once companies report earnings we should see a pickup in secondaries. The heart of earnings season roughly coincides with expiration.
  2. Positive seasonality lasts through the first few days of May. My sense is that the market is too extended to make it that long without a correction but that is a worst case scenario for the bears, in my opinion
  3. Sentiment is so stretched that a top can happen at any moment.

Options Speculation Index

Zero Hedge has posted a chart of the Option Speculation Index by SentimenTrader.com. This index measures speculative call buying as a % of total option activity. We are currently at highs not seen since the peak of the Internet bubble.

Making My Move

With the VIX at 15, I decided to use options to further raise my short profile. I went out to June in case seasonality holds up through the end of this month. That way I give myself some time to be right and don't get squeezed out.

Raised My Short Profile

I have raised my short profile as per plan. I plan on raising it further over the coming weeks.

A Bullish Argument

The most persistent bullish argument I have heard is that the rally will not end until investors start putting money into stock mutual funds. Bulls point to the lack of inflows into mutual funds as proof that the rally has not been embraced. However, I believe that mutual funds are losing their importance as more investors either invest themselves or through ETFs.

I recently read that ETF assets grew by $50 billion in March. I believe this low cost way of investing is now preferred to high cost mutual funds. Many would counter that bond mutual funds are still seeing  massive inflows. I would point out that the bond market is a dealer market that only institutions and large investors can deal in. In the case of the bond market, if one wants an allocation there are few ways to get around the fees.

Looking To Short

There are two times during the year where extreme bullish sentiment need not be a contrary indicator. The first is the period from late December to early January where many receive bonuses and the second is tax refund season. During these times many are flush with cash and prevailing bullish sentiment actually encourages them to put the money into the market. However, once these seasonally strong periods pass there usually is a correction.

Currently we are in tax refund season, which helps explain why the market has been able to rise relentlessly despite overly bullish sentiment for a few weeks now. However, positive seasonality is coming to an end over the next few weeks.

As I outlined yesterday, bullish sentiment is at an extreme seen once every few years. There will be a lot of supply of new stock as the government likely starts selling shares of Citigroup next week (once Citigroup reports earnings) and there have been rumblings of other secondaries and IPOs.

Rarely have so many factors been pointing to a major top. I would point out that currently sentiment is the only factor pointing to a top and that the other factors will come into play over the next few weeks. That is why I plan on expanding my small short position to a large position over the next few weeks.

Rarefied Air

The historical data for the ISE equity only index only goes back to 2006. In the history of the indicator the 10 day moving average has only reached the current heights on three previous occasions. In the chart below I marked these peaks with red arrows.

The first peak was on 1/17/2006. The S&P 500 corrected 30 points after this reading and did not exceed that level for another two months. Even after the level was regained temporarily in March the market proceeded to correct through August. The first reading led to an eight month correction that was not very large in magnitude but lasted a long time.

The second reading occurred on July 17, 2007. The S&P 500 proceeded to correct 150 points in short order. This was the internal high for the bull market even though there was a slightly higher high in October.

The third reading occurred on October 15, 2007. That marked the bull market high. Enough said.

We are currently looking at the fourth such reading. I suspect that in a few months we will look back and see that this time is not that different from the previous occurrences.

No More Rope A Dope

The crowd is bullish as nearly every sentiment indicator I look at is extreme. In the coming weeks we will see IPOs, secondaries, the government selling shares of Citigroup and seasonality turning negative. This suckers going down. I have been playing rope a dope with my small short position but I am planning on making a big move in the next few weeks. Have a great weekend.

Investors Buy The Dip, Private Equity Sells the Rip

The writing is on the wall if anyone cares to read it. But the party is so much fun, let's just stay a little longer.
Private-equity firms KKR & Co. and Bain Capital Partners are prepping initial public offerings for three of its larger holdings—retailer Toys "R" Us Inc., hospital chain HCA Inc. and semiconductor business NXP Semiconductors, according to people familiar with the deals. If the stock market continues its ascent, or at least remains stable, those IPOs are expected to price in the coming months, these people said.
KKR and Bain, two of the most aggressive private-equity firms during the buyout boom, are now as aggressively looking to cash out. They are leading what is expected to be a season of IPOs as long as the markets continue to stabilize or climb. The IPOs would allow the firms to partially cash out their stakes and return money to investors. They also could use the proceeds to pay down the sizable debt used to finance the takeovers.

Thoughts From 20,000 Feet

After a long flight delay I am finally back home, feeling well rested after a nice vacation. On the plane ride home I had the opportunity to think about the market. The conclusion that I have come to is that sentiment is in place for a top of consequence. I can recall a handful of occasions when the bulls were so fearless and they did not end well for the bulls.

While I am confident that sentiment is in place for a major top, the timing is a little trickier.  Sentiment is stretched enough that it could happen at any time but the week before options expiration does not usually see major reversals of strong trends. Another positive for the bulls is that we are in the quiet period before earnings so there is likely to be little supply of stock in the form of secondary offerings or insider selling. While seasonality will not be a factor next week it will be a positive thereafter until the beginning of May. 

However, after options expiration the picture will change drastically. Many major reversals have been seen right after expiration. The government will start selling their shares of Citigroup a little bit after expiration,  Bank of Ireland will  likely sell shares of M&T Bank and we should see other supply as well. In addition, once the turn of the month passes seasonality will turn negative.

In summary, I still hold a small net short position and am planning to make the position very large after expiration. I am tempted to increase my position now as I am confident that sales at these levels will eventually be rewarded.

Just Buy The Dip Fool

The buy the dip mentality is becoming self reinforcing. I suppose tomorrow we will see people starting to front run the Monday move higher in the market because its 100% guaranteed that every Monday will be up. I believe this is setting market players up for a huge surprise at some point. I have to go find a street corner where I could hold up my "The End Is Nigh" sign. Have a good night.

Keep An Eye On Retail

Retail sales for March were a barn burner as I suggested they would be yesterday. Many retail stocks are up over 50% since early February and it seems that some good news is already baked in, as the sector has started the day off lower. Keep an eye on this sector today as it might give a hint as to how much good news is already priced in to this market. The news is always best at the top.

Are Down Days Still Legal

The market finally seems to be correcting just as the bulls thought there was clear sailing as far as the eye could see. Generally, the first dip after such a strong move higher is bought and there is a second chance to sell stocks. Even if we first see some further downside, I would expect that to be the case this time around as well. The caveat is that if the Greek crisis comes to a head, traders are very poorly positioned for a crisis and that could exacerbate the downside.

I still have a small net short position and hope to be able to raise the size of that position after options expiration. I apologize for the laggage in posts but I have been on vacation and will return to my normal schedule next week.

The Infatuation With Retail

The infatuation with the retail sector is a microcosm of what the stock market has become. An extremely short term oriented game with little concern for the bigger picture. While March comps should look spectacular when they come out tomorrow there is possibly no sector with a worse longer term outlook.

Comps are easy because we were deep in a recession this time last year. The weather was warm in March and Easter was early, which will assist comps further.There is an undeniable increase in consumer spending but it is largely due to massive government stimulus that will wear off and cyclical factors.

Taking a longer term view of the retail sector paints a much more dire view. Most retailers trade at twenty times 2011 estimates, which is the price high growth stocks should trade at. The American consumer is aging and has under saved for retirement. All the while taxes are headed higher, interest rates are higher and oil prices are higher. Not to mention the headwind retailers face from the Internet.

I believe it to be a virtual certainty that retail shares will be a horrendous long term investment. But right now all that matters is that the stocks have high short interest and that the momentum is in their favor. The long term is for people who don't like making money. Like me.

Still No Bottom In Treasuries

The ten year yield has moved up to 4% and there are few signs of a bottom in sight. Sentiment towards treasuries is not terribly bearish, as investors are too bullish on stocks to care about treasuries. In previous instances during the past year where bonds threatened to break down, short treasury recommendations were abundant and treasuries proceeded to rally strongly. Now that treasuries have actually broken down I am hearing few short recommendations.

The move lower in treasuries is only a couple of weeks old and the move move is not exhausted or extended in terms of time. Higher yields are yet another warning sign that investors are blissfully ignoring as the fear of losing money has morphed into the fear of not being able to keep up with the Dow Joneses.

Window For A Decline

As of last week, the Market Climate for stocks remained characterized by strenuously overbought conditions, strenuous overvaluation, overbullish sentiment, and hostile yield trends. If one was making a bet, and the payoff to the bet was simply whether the market will be up or down in the coming few weeks, it turns out that the raw probability of an advance in these conditions is greater than the raw probability of a decline. However, this does not reflect magnitudes. The probable gains are characterized by the likelihood of minor but successive marginal new highs. The potential downside risk is smaller in probability, but considerably larger in terms of magnitude.
- John Hussman in his Weekly Market Commentary
The market continues to defy the odds by grinding higher despite sentiment extremes that have previously led to meaty declines.  The only thing that has changed since I left last week is that seasonality is no longer as strong starting today. While seasonality is positive through the balance of the month, the strongest part of the month has passed.

There is a window for a decline in the coming days as seasonality is no longer as strong, but generally we have not seen large reversals before options expiration. I continue to believe that the best setup for the short side would be in the latter part of April, after options expiration.

I have had a small net short position from a little above the1160 level on the S&P 500. At the moment I plan on maintaining that posture. However, if the market holds up into late April I plan on ramping up my short positions.

Calling It A Day

The complacency and rampant buying is continuing today but seasonality is still in the bulls favor. The remainder of the day should see slower trading as traders head out for the long weekend. I will be out of the office for the remainder of the day. Have a Happy Easter and a great weekend.

Ford and Citigroup

Shares of Ford fell nearly 10% from a relatively mild offering of shares, compared to the amount of shares Citigroup is offering. I am waiting to hear details on when the sale of Citigroup shares will begin, as the full details of the sale have not yet been announced. I am considering taking a short position in Citigroup in the coming weeks.

Complacency Vs. Seasonality

Not much has changed over the past two days as the dilemma remains the same. There is a disturbing level of complacency, which generally leads to poor results in the stock market. Whether looking at put/call ratios, Rydex positions, fund manager surveys or just looking around me there is little worry about risk.

While complacency remains a problem, seasonality is strongly in the bulls favor. April is the strongest month of the year and the beginning of the month is the strongest part of the month. April is the heart of tax refund season and the deadline for IRA contributions. I have seen many markets stay frothy until positive seasonality has passed, such as the decline in January. The market was frothy for a few weeks before the decline but until we passed the seasonally strong period the market stayed up.

The combination of positive and negative factors lead to a difficult investing environment. I don't think we will see an outsized move in either direction due to the mixed conditions.