End Of Quarter Crash

I have clearly been wrong about looking for a turn of the quarter rally. That said the S&P 500 is down more than 100 points since last Monday and there is universal unanimity that breaking 1040 has put a final nail in this markets coffin. In my experience when it is this ugly it pays to suck it up, take the pain and wait for a bounce. Even if it happens from lower levels there should be better levels to make sales into. Pass the Excedrin. Have a good night.

Another Question For Readers

Is the bull side or bear side more crowded?

Long Goldman, Short Citi Staring To Look Juicy

The long Goldman, short Citigroup trade is starting to look juicy again. But since today is the last day that the government is selling Citigroup I am a little hesitant to short Citigroup. If the spread on this trade keeps widening over the next few days I might re-enter the trade.

Early Put/Call Data Not Encouraging

The early put/call ratios are not encouraging. While call buying is not necessarily a bad thing I would have liked to see more strength with this level of call buying. Its still early and a single reading is just that but its not encouraging.

A Thought On Apple

While the iPhone heading to Verizon is likely good for longer term sales, will people now wait to buy an iPhone depressing current sales?

Friday's Jobs Report

Economist's estimates for Friday's Jobs report remains way too high. I cannot comprehend why after every economic number has been coming in soft they still expect non farm payrolls (ex-Census) to increase by 150,000. Today's ADP report should go a long way towards helping price in a bad number into the market. If the market is still depressed on Friday I expect we will rally on a bad number.

Two Small Positives

There are two small positives today from a supply/demand perspective:
  • Celgene is buying Abraxis for $2.9 billion in mostly cash.
  • Today will be the last day the government is selling Citigroup stock until August. I estimate they have been selling stock at the pace of $1 billion a week. It certainly has not been helping markets and the fact that the pressure will finally lift today is a positive.

That Shouldn't Happen

The Keynesians love to point to Ireland as an example of what happens when deficits are cut. Ireland just printed a positive 2.7% GDP number even though they did not eat the free lunch that Keynesians call deficits.

Not The Time To Be Bearish

We finally saw the mood swing to extreme bearishness yesterday. The put/call ratio has been at these levels during the decline so I can't point to any statistics that made yesterday special. But everything I heard yesterday was resoundingly bearish, save for some perma bulls and even they sounded iffy. It was very different from the recent talk of a quarter end rally or a range. In addition, we are now oversold and there were extreme breadth readings yesterday that usually lead to some sort of throwback rally.  

Even if we are in a renewed bear market it usually does not pay to short when sentiment is extreme and the market is oversold. It was true that we were in a secular bear market in March 2009 and it was true that the piper still had to be paid. That did not stop the market from rallying 80% and it will not necessarily stop the market from rallying now.

Question For Readers

If there is no news overnight, will the market go higher or lower tomorrow?

Flash Crash: Part Two

There was a mini flash crash in Citigroup as the stock traded as low as $3.32. Watch out when using stop loss orders and market orders.

20/20 Hindsight

  • The longer this market goes without a bounce the more likely it becomes that we close on the lows. Although the fact that we are so close to the end of the quarter could change that dynamic.
  • Anecdotally, I had been hearing more chatter about a quarter end rally than I liked but none of the other data I looked at confirmed the optimism so I ignored it. In hindsight, maybe I should have payed more attention.
  • Or was the fact that the market was so weak before we saw capitulation the better tell? 
  • Anecdotally,  I am no longer hearing anything good about the stock market. Talk of an end of the quarter rally has ceased.
  • At the ISE we are seeing heavy put buying with the equity only under 100. That is a rarity.
  • We are seeing put activity at the CBOE as well but given the size of the decline I would have liked to see more.

No Short Base

The biggest issue this market has is that I don't believe there is a large short base. On a day like today it is usually the shorts that get a rally started. On the positive side there are not many bulls either.

Further Expanded SPY Long

I further expanded my SPY long. I expect a bounce after the first hour of trading.

Added To SPY Long

I added to my SPY long in the 105.2 area. i will be looking to flip this part of my long into a bounce.

The Uglier The Better

The uglier trading is in the early going the better off the bulls are if they want to stage a turnaround today. It is better to get a washout . A rally attempt will only give the renters hope and prolong the process.

What The ?

State owned Agricultural Bank of China plans to raise up to $23.2 billion via a stock offering in Shanghai and Hong Kong. There are a number of red flags here for investors:
  • Why, with the Chinese market down 22% this year, are they shoving this massive IPO down investors throats? It seems very desperate on the part of the bank.
  • Western banks that are not state owned and are not forced to give out loans based on political connections can't make good loans. How will a Chinese bank with all these additional political pressures make good loans?
  • Jim Chanos says there is a property bubble in China. I don't like betting against Jim Chanos.

Reaching Maximum Oversold

It appears that the market will reach its maximum oversold reading today. I did not think we would reach it because seasonality is strong but I was clearly wrong.

What does this mean going forward? If we get a nice washout today it should be difficult for the market to make much further downside progress in the short term and the bulls will get a chance to make a run higher. The bulls can waste the reading but that would take a few days. 

China started a worldwide tumble lower last night and it is being blamed on bad economic numbers. I believe the $20 billion IPO of a Chinese state owned bank is the more likely culprit, as liquidity is drained from other stocks to buy that one.

Wake Me When Its Over

It sure feels like July 4 weekend is getting off to an early start as trading has slowed to a crawl today. I only hope the entire Summer is not like this. I believe this environment is more dangerous for the bears as the tape can be pushed around when volume is this thin and quarter end agendas are likely for a higher market. In addition, the market will be maximum oversold by the end of the day tomorrow.

The most important factor whether one is a bear or bull has been not to chase strength or weakness. For now, the elusive end of quarter rally remains elusive. Have a good night.

Treasuries Rally

The  rally in Treasuries is telling a story of a slowing economy that is not consistent with analyst's predictions for growing profits in the second half in the year . Even though I am short term bullish I believe the Treasury market has it right and the analysts have it wrong.

What's With Wal Mart

Wal Mart has not been able to get off the mat in the past few weeks, even though it is finally bouncing today. Many are attributing this to the possibility that President Obama will make it easy for employees to unionize.

An alternative reason might be that over a million Americans will be losing extended unemployment benefits this week. The Senate failed to pass legislation to extend the benefits. Many of those receiving unemployment likely shop at Wal Mart and that might be why the stock is down.

The Lows Are In

I believe the lows for the day and week are in.

Bought The SPY

I bought the SPY into the whoosh lower at slightly better prices than where I sold on Friday and the position is a little larger but still small.

Markup Monday: Part Two

The market will be maximum short term oversold by tomorrow's close. At the same time we are about to enter the seasonally strong turn of the quarter. If the market were to decline into tomorrow it would setup an excellent risk/reward long opportunity. Unfortunately, markups have tended to occur two days before the end of the month which works out to today. Therefore it is unlikely that we will get that excellent setup and the rally has already likely begun.

How long can a rally last? I would expect that a rally would last through this week and part of next week. After this rally risk will be much higher as the oversold readings will no longer serve to buoy the market.

One More Thing

From The FT : 
 Peter Orszag, Barack Obama’s budget director, resigned this week partly in frustration over his lack of success in persuading the Obama administration to tackle the fiscal deficit more aggressively, according to sources inside and outside the White House.
 How many times during the election did Obama say that he doesn't want to kick the can down the road?

Markup Monday

A decline early next week would get the market to maximum oversold and setup a nice risk/reward long trade. However, markups have tended to happen two days before the end of the quarter which works out to Monday. That means there is a good chance the trade will not set up and that the turn of the quarter rally has already begun. I have a very small long (via my short SPY July 104 Put position) but still have less risk on than I have had in years. Have a great weekend.

Interesting Trade

Doug Kass over at RealMoneySilver.com is shorting Berkshire Hathaway B, which is being added to the Russell 1000. The stock has rallied nearly 15% recently partially due to the addition. The stock flew when it was added to the S&P 500, so many traders are probably queued up for the trade. The difference is that a lot less money is tied to the Russell 1000. I am entertaining shorting Berkshire Hathaway B for a trade.

Shake & Bake

At bottoms the market tries to shake out as many weak hands and renters as possible. I was a renter and the market did its best to shake me out of my modest SPY long and then proceeded to bake. Rather than be upset I watch in admiration as the market does its thing. My sole remaining position is a short SPY Put position, so I am participating in a small way in the rally. I suspect the turn of the quarter rally has begun.

More On The Put/Call

The Russell rebalancing and the announcement of a financial reform package might be skewing the put/call ratio so the signals might not be as reliable today.

Put/Call Neutral

After seeing too much call buying in the early going the put/call ratio has now turned neutral.

Sold The SPY

I took a loss on my small SPY position. This morning we are seeing call buying and the advance is meager. I will look to revisit once the put buying starts up.

Sold Goldman

I sold my Goldman Sachs position. Yesterday, I covered my Citigroup short and the long GS/ short Citi was  a pair trade. I decided to use today's pop to sell Goldman.

Hedge Fund Positioning

I believe that hedge funds are the largest determinant of intermediate term market direction these days. Real money investors (pensions, wealth funds, endowments) account for a larger portion of the market but they are largely longer term investors and don't trade as much. On the other hand hedge funds' "risk management" techniques have them cutting exposure when the market goes lower and adding exposure when the market goes higher, exacerbating moves. That is why I believe it is important to track their positioning.

Yesterday, I spoke about how hedge funds have largely derisked and it was unlikely that a great deal more of liquidations would come from them. However, I don't believe that hedge funds will necessarily jump back in the pool either. Economic data will likely be weak and the negative seasonality will likely dampen the market enough so that they don't feel the need to chase the market higher.

Many hedge funds were burned by their shorts at the March 2009 lows. Back then there were more short recommendations floating around than longs. The heavily shorted stocks trounced the market, which itself showed amazing returns. After being burned so badly hedge funds are likely shy about getting short. If hedge funds were short I would say that is a positive for the market but I don't get the sense that they are. Overall hedge fund positioning does not give great clues as to the markets direction although it is closer to being a bullish factor than a bearish factor.

The Elusive Turn Of The Quarter Rally

For the past few days we have seen fear and loathing at the open, after which traders stepped in trying to pick a bottom. When traders could not find takers for their merchandise they dumped into the close. This morning it looks like the market will gap up.

Traders will be very hesitant to chase a gap up as they have been burned too many times this week. The market does not like to make it easy to catch bottoms and if we gap up and never look back this market will have allowed very few traders to catch the bottom.

If the market continues its losing ways the bulls can look forward to the fact that the market will be maximum oversold by the end of the day on Tuesday, so there should only be three more days of pain before the short term risk/reward skews strongly in favor of the bulls.

Small Step

While the result is the same today we are seeing the largest amount of put buying we have seen for this move lower. In addition, we are one step closer to being maximum oversold. This type of selling and put buying is not usually rewarded. I am going home with my modest long position. Have a good night.

Somebody Agrees With Me

The following snippet is from a Fortune article where the author advocates being fiscally disciplined. While I believe the short term effects will be more painful than he does because of the credit bubble, I ultimately agree that it is the best long term solution. It is refreshing change from the Keynesian op eds written by those with large stakes in the current system. From Fortune:
For Meltzer, the courageous, damn-the-sages stance that Thatcher took three decades ago should guide President Obama today. "If Obama announced a strategy to deal with the long-term debt and stopped doing things to increase the uncertainty that businesses face, it would do a great deal to stimulate the economy," declares the 82-year old Meltzer.
Meltzer is right, and most of the "experts" -- from Paul Krugman to Ben Bernanke -- are wrong. The best stimulus is a solid, credible plan to radically reduce government spending, starting right now.
To be sure, President Obama frequently advocates shrinking deficits in future years. The problem is that he wants to keep spending heavily today, in what's supposedly a classic Keynesian formula for charging a weak recovery and lowering unemployment.

Staying Cautious

I have decided to hold off on further additions as the economic deterioration dictates being more cautious. I will add to my modest longs if we get closer to maximum oversold.

Pukage

It feels like investors are puking this morning. That is a good thing. I am tempted to expand my modest longs.

Playing Small

I am playing small with my SPY long. The reason being that the market could go down through Tuesday before it became maximum oversold (I discussed maximum oversold in my opener). Due to the positive seasonality I don't think it will happen but its certainly not out of the question.

Buying The SPY

I have bought the SPY for a trade because of the heavy put buying this morning.

Covered Citigroup Short

I covered my Citigroup short. The government is going to stop selling for the month of July due to earnings. I would use a pop during July to short again.

Some readers have asked me about buying the stock. It could work but its not a trade I'm interested in. Sentiment is way too positive on the stock as everybody thinks they are getting a bargain because the government is selling (It might be true but the government will be selling all year). Also if the stock goes lower I would be forced to take a loss before the government started selling again in August.

Who Is Left To Sell

Many readers are likely wondering why if I am so bearish on the economy don't I just short the market? The question I keep coming back to is who is left to sell? The 15% drop that culminated a few weeks back was largely the result of hedge fund derisking. By most reports hedge funds now have very low levels of exposure to the stock market. Individuals never fully embraced the rally so I doubt that they have much to sell.

In the previous cycle everybody came in over leveraged and there was  a lot of forced selling. That is very unlikely to happen this time around. I was planning on being short for the Summer because I though that the rally would suck the hedge funds back in, but that does not seem to be happening. While I am certain the market can go down further, I don't have the conviction to go short. That said, with the economy imploding I have no intention of going long other than for a trade. The sidelines seem fine.

Adjusting To A Changing Landscape

As readers know I like to look at a bevy of sentiment indicators and some overbought/oversold indicators. Interpreting these indicators is somewhat of an art because the ranges change. For instance, during the bear market the market generally topped out when the 10 day moving average of the ISE equity only would hit the 170 range. During the bull market it generally took a reading over 200 to signal a top and a reading of 170 was often a good buy point.

The same goes for the overbought and oversold indicators. A market becomes maximum short term oversold when the vast majority of the past 10 days had negative breadth readings. For instance, if 9 out of the past 10 days had negative breadth readings the market would be maximum short term oversold. In a bear market or bull market maximum short term oversold usually means that the market is good for a long trade. The difference is that in a bear market it pays to wait for maximum oversold readings while in a bull market there will be very few and one might need to jump in before hand.

I am not certain that we are in the same type of bear market that we were prior to March 2009 but this is definitely not the market many have gotten used to since March 2009. Luckily, I thought that May would be the start of an intermediate term move lower and have adjusted how I view the indicators.

Even though I have changed how I view the indicators, I have not adjusted enough as recency bias is very hard to overcome. Luckily, this has not cost me money but just some opportunity. In hindsight, Monday was a good short opportunity. The sentiment indicators did not get to where I thought they needed to but that is likely because I have gotten used to the recent range of sentiment indicators. In the coming weeks I believe it will continue to pay to err on the side of caution and expect lower ranges on the indicators.

Fed Swings

While Fed days still have some wild action the ranges are a lot smaller than they used to be. This is likely due to the diminished prestige of the Fed. Today's action was once again nothing to write home about. We saw some fear in the morning but it did not last long and the bounce it led to was meager. The only good news is that expectations for economic numbers are probably a lot lower than they were at the beginning of the week. Have a good night.

Chipping Away

Apologies for the late post but I sold the SPY from this morning into the pop pretty close to the highs of the day.

U-G-L-Y, You Aint Got No Alibi

The housing numbers were ugly and there is no other way to cut it. I heard a bull defending the numbers by saying its a good thing because we need less supply. These are sales, not housing starts. A rise in sales clears supply. The expiration of the tax credit is likely the reason the numbers were at a record low as demand was pulled forward but the numbers are still not pretty.

The economy is stalling before:
  • Stimulus wears off
  • Municipalities cut spending
  • Europe cuts spending
  • China hits the brakes
I am bullish for a trade but I am not fooling myself into believing that its not that bad because I am rooting for my book.

Does The Fed Matter

Most studies of Fed days suggest buying the day of a Fed announcement, especially if the market has been getting hurt. I hope the trade works because I am long for a trade here but I have my doubts as to whether such studies are relevant. The Fed has lost credibility with market participants and previous studies look at times when the Fed was more relevant.

Will Goldman Lead

  • Goldman is higher despite Barclays taking an ax to second quarter numbers, following other analysts in the past few weeks. Will the tape follow Goldman and rally on bad housing numbers?
  • There is put buying and very loud growling by the bears.
  • The bears can take solace in the fact that the economy is deteriorating more rapidly than most believe. 

Bought SPY

I bought SPY on the bad housing number.

Updated Assessment

I expected there to be some sort of consolidation of the gains this week but yesterday's action took me by surprise. This is roughly the area where I thought the market would correct to and I even though we might head a bit lower. What surprised me is the ease with which we went lower and the lack of fear. I thought if we hit these levels the bears would be growling and there would be renewed fear and panic but that does  not seem to be the case.

I still believe that the market should rally through the turn of the quarter or at least not head lower. Seasonality will be strong and the market is still oversold in the intermediate term. What has changed is that I now believe that there is a greater chance that July 4 marks the top rather than July options expiration. I am also unsure that we will surpass the highs from this Monday. It looks increasingly likely that Monday marked the top for this move.

I don't want to make too much of one day's action in light Summer trading but my assessment of the market's condition has deteriorated. There is room for another ugly day this week before strong seasonality kicks in. I still expect us to end next week higher than where we are now but after that the market will be far more dangerous.

Bears Win

The bears have won the battle today. Not only because prices are lower but because there does not seem to be much excess fear or pessimism. Additional work on the downside might be necessary before the turn of the quarter rally materializes. Have a good night.

Nibbling

I sold the SPY July 104 Puts naked. That is not a very aggressive bet. If I were more constructive on the market in the medium term I would have just bought the underlying in the same size.

Ugly Is Good

An ugly day that gets everybody bearish would be constructive. I would consider building some longs for a quarter end rally. If I do decide to play I will play it small because I believe the market will be lower by the Fall.

Rush Of Closings

Contacts in the real estate business tell me that there is a rush of closings this week and that everybody is extremely busy. Buyers are rushing to close before the deadline for the expiration of the homebuyers tax credit. That likely means that the existing home sales number for June will be a blockbuster. While this is one time in nature, many times the market does not distinguish. Keep this in mind a month from now ahead and after the number.

Knowing Is Only Half The Battle

A lot of people knew that housing was a bubble a few years back and a lot of people knew that internet stocks were a bubble in the nineties. Few were there to collect once these bubbles burst and some even lost money trying to short the bubbles too early. Currently, there is a group who believes we will see a second half slowdown, myself included, but profiting from it will likely not be that simple.

I don't rule out that the market is rolling over but I believe it is more likely that we are in the midst of a shakeout. There are a number of reasons I believe that the rally might have more to go once this shakeout is over:

  • The market is still oversold in the intermediate term, even though it is short term overbought.
  • The rally has only been tentatively embraced.
  • Quarter end and the turn of the month have positive seasonality effects and are only a short week away.
The more likely end points for this rally are after July 4 weekend, when the positive seasonality ends or July expiration, when the market is once again overbought in the intermediate term. Bears who want to short the market should allow for both these possibilities. 

A Flush Out

If the market corrects in the coming days it is likely that we will break the 200 day moving average to the downside. That should lead to a nice flush out of the weak hands and possibly set us up for a turn of the month rally. Have a good night.

A Lot Of Call Buying

There is a lot of call buying today and despite that we are starting to fade. That is not a good sign for the bulls. While this type of call buying lasted for weeks during April that is the exception. By the same token call buying would have to continue at this pace for a few days before it became a strong sell signal.

Pendulum Swinging

Generally when markets reach levels of extreme pessimism, as they did two weeks back, the pendulum tends to swing back in the other direction. Last week we saw investors begin to embrace the rally but there were still signs of hesitancy. This morning we are seeing the pendulum swing further towards optimism with the proximate excuse being China revaluing the Yuan.

After two weeks of rallying the market is finally becoming overbought in the short term just as sentiment is beginning to support a move lower. Even if the market is going to rally through the turn of the month there is still room for a pullback in the coming days. Chasing the market at this point does not seem like a low risk trade. I am also hesitant to go short for two reasons. Sentiment is not yet extreme and I am looking to take it easy this week so I will only be taking the highest risk/reward trades.

The bears will be happy to know that Jim Cramer has finally turned bullish. It was highly unlikely that we would see a top with Cramer bashing the rally everyday. This is a necessary ingredient for a top.

No Risk

After expiration I will only have two positions left, long Goldman Sachs and short Citigroup. This is the least risk I have had in years. It feels nice not to be stressed out about the market. I highly recommend it every once in a while. Have a great weekend.

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Performance Anxiety

It is starting to feel like performance anxiety is setting in as call buying is picking up. Last week at the lows it was hard to imagine that we would see performance anxiety set in so soon. I would much rather buy during periods of fear than during periods of performance anxiety.

Beats Me

I don't even try to game option expiration days as there are too many hidden forces at work. I am guessing today will be a quiet Summer Friday.

That Sucking Sound

I have been harping on options expiration as the low end for the current oversold rally for weeks  now. While the rally has now done the minimum, it seems to me this market still has some bears to suck over to the bull camp. While participants are no longer as bearish as they were two weeks ago they are still doubtful of this rally.

The market might need a rest before a resumption of the rally as the S&P 500 has shot up by 70 points in a relatively short amount of time. It would not be surprising to see some sort of pullback following option expiration better known as the expiration hangover. That would likely lead to a rally through the turn of the month.

I believe the market will work its way lower by the Fall as the extent of the slowdown becomes apparent. But the market has fallen by 15% and is now having an oversold rally. Bears are probably better off looking for a top after the July 4 weekend, although a top before that is not out of the question.

Mr. Brightside

The market has taken in a lot of bad news in the past couple of days and still hangs in. In the short run sentiment can be a larger determinant of market direction than fundamentals. It is the reason I am too scared to short here.

Treasuries Testing Highs

Treasuries are within spitting distance of their highs seen during the European meltdown. I believe back then they were rallying on a flight to safety bid. They are now rallying on the likelihood of a slowdown. The signs of a slowdown are increasing by the day.

Reactive Traders Getting Punished

Reactive traders who chase weakness or strength have been getting punished badly lately. For most of the past year it did not matter if one was reactive as market endlessly trended in whatever direction they were going. This no longer seems to be the case.

Consumer Staples Might Be The Best Bet

For those who want to play the long side consumer staples might be the best bet. The sector is under owned and it tends to outperform in a slowing economy. Usually consumer staples underperform during rallies but under the current conditions I could see them keeping up with the market. They should outperform if the market heads lower.

The Dance Continues

On the one hand we have worsening economic data and a deteriorating profit picture. On the other we have a market that does not seem ready to go down. I believe the market will go higher before eventually reversing lower into the Fall.  However, the economic deterioration is serious enough to keep me on the sidelines and stopping me from betting aggressively on further upside. A better risk/reward profile would emerge if any of the following happen:
  • A rally in the next few weeks that gets the crowd bullish again would be a good setup on the short side.
  • A nasty decline into the Fall would likely set up a year end rally.
  • A pullback early next week might setup a short term rally into the turn of the month.

Too Late To Buy, Too Early To Short

I don't believe there is a great risk/reward in buying or shorting at the current juncture. Gun to my head, I don't think we have seen the top for this move but we are getting to the point where the downside potential is larger than the upside potential. I have very small positions to match my level of conviction. Have a good night.

The Stock Market Is Not The Economy

Many people have a hard time understanding why I have been so bullish on the market yet so dire in my economic outlook. The answer is quite simple, the stock market is not the economy. This is very hard to believe for people who watch the news or read the paper as every little movement in the stock market is explained by some economic number or some piece of news.

Yesterday, Bloomberg explained the 2%+ rise is the market as a result of the NY Manufacturing Index. Really? If you believe that there is a bridge in NY that I would like to sell you. Nobody really knows why the millions of actors in the stock market made the moves they made yesterday.

There is a correlation between the stock market and the economy but it is quite loose. I have seen the stock market lead the economy and I have seen the economy lead the stock market. I have seen the stock market ignore the economy as it was already priced in.

The Strength Explained

An important source of the strength might be stock buyback activity. I recently read that buyback activity is running at a pace of over $300 billion for the year. As a percentage of market cap it is a very large number. It does not hurt that there has been little supply in the past few weeks as IPOs and secondary offerings have ground to a halt.

As the market turns up we should see a resumption in IPOs and secondaries. As the economy turns down we should see buyback activity slow. But as of now this dynamic is a positive for the market.

Put Activity

There is a lot of put activity today. In isolation that is a positive for the bulls. As is the relatively small drop in Fedex on an earnings warning.

Name Calling: Part Two

The argument by the Keynesians that deficits don't matter and that money printing is not harmful hinges on the fact that we have been running deficits until now and printed money yet borrowing costs are low as is inflation. The problem is that at some point we will cross a threshold where that is no longer the case. The way markets work is that once that point is reached it will be too late. There is no turning back for the Greeks as two years ago everything seemed fine there as well.

One could have said a few years ago that the housing bubble was not harmful, as many did, because as of yet it did not cause any harm. The same could have been said for the tech bubble before the burst. If we wait for markets to tell us that the deficits and money printing have gone too far it will be too late.

Giving Up On BP

Last week I sold naked Puts on BP. I bought them back for a small profit. The political circus is not what is bothering me. It is the fact that the news regarding the size of the spill and containing it keeps getting worse.

Reality Bites

Earlier this week I wrote an article titled Torn, where I outlined how I was torn between my indicators being positive and the economic shitstorm that is about to hit us. Yesterday's monstrous rally followed by earnings warnings today from Fedex and Nokia are a perfect example of my predicament.

I believe that by the Fall the bears will win the battle but I would not be surprised to see more rallying in the coming weeks. My positions are small and I am considering going completely to cash by Friday. The best course of action might be to wait until the Fall to pick up the pieces.

The Embrace

Today is the first day that investors are embracing the market. The breakout above the 200 day moving average will likely accelerate the process. While this is a necessary step in forming a top it is a process that could take some time. I suspect the rally will last at least until expiration. However, the turn of the month and quarter end are coming up so I would not be surprised to see a rally last through July 4 weekend. The caveat is that the economy is unbalanced and negative surprises are more likely to occur under these conditions.

Name Calling

The Keynesians have gone on a name calling spree. I have seen many articles recently where Keynesians call those who want to balance the budget names. I found the following quote from a Bloomberg article rather amusing.
“There is no reasoning with the public right now,” said Thomas Mann, a congressional scholar at the Washington-based Brookings Institution. “The public would flunk Economics 101.”
I would point out that it is none other than Ben Bernanke who wrote the textbook for Economics 101.  These Keynesians have been firmly in control of monetary and fiscal policies for the past few decades. It is their Keynesian policies that have landed us in the mess we are in. What astonishes me is that after being so wrong for so long not only are the Keynesians not humble, but they are quite certain of themselves.

Finally Some Call Buying

While an hour of call buying does not make a top the bears should be happy to see that there is call buying at the ISE this morning. It is better than the market being up 1% and there being put buying.

Unfortunately for the bears this does not become a strong sell signal until it continues for a couple of weeks. Although if one believes we are in a bear market the amount of call buying required for a sell signal is less.

The Obama Drama

Much is being made about the speech tonight by President Obama regarding the BP oil spill. I believe Obama's speech is a silly reason to sell the stock. The size of the oil spill and the final tab to clean it up will determine the future of BP. Obama's speech is politics and will not have any effect on BP in the longer term.

Everybody Is A Technician

Everybody is a technician these days. There is endless talk about the 200 day moving average and a potential head and shoulders top. At the end of the day most people just follow their gut switching between technical or fundamental excuses to justify following the herd.

I am aware that I am just a primate who has undergone a little more of the evolutionary process. That is why I always look at the same indicators so I am not tempted to follow the indicator of the week or the herd.

It is likely the market will need to close above this 200 day moving average in order to get everybody bullish again. It seems inevitable as too many people seem to be leaning short against that level.

Don't Sell This Market Short

Rydex traders moved back to their most bearish positioning for this move yesterday. In addition, the put buying continued yesterday. All this despite a 5% rally in the market. There is no way to describe this other than bullish. I am tempted to expand my longs.

Round Trip

The market once again punished those that chased as it made a round trip after being much higher earlier. This is a far cry from the market investors have gotten used to where momentum rules and strength begets strength. Trading was thin as many have signed off to watch the World Cup.

I am starting to think that taking the Summer off might be the best course of action for most investors. If a double dip is going to happen it should happen in the coming months. At the same time shorting is dangerous as the market is oversold and sentiment is negative. The sidelines seem nice and the beach seems even nicer. Have a good night.

Still Too Much Put Buying

There is still too much put buying. The continued strength that is being met by skepticism is the best thing the bulls have going for them.

Little Risk On

While I am still leaning long I have little risk left on. Unlike the way most view the market, after a 5% rally the market looks less enticing to me.

Total Recall

I sold my position in Total SA after a nice rally

Horse or Cart

Credit is rallying today. I read the view numerous times last week that the market would go lower because credit was not confirming the rally. Credit is a coincident indicator of the stock market most of the time. Credit can sometimes offer a clue but there is no magic bullet in investing.

Torn

I am torn in my opinion of the market. Fundamentally, the proverbial excrement is about to hit the fan. While when I look at my indicators the market seems to be in excellent shape.

From the standpoint of sentiment the market looks very similar to the way it did in February. As in February, the market continues to rise despite the fact that the crowd is bearish, which is a very bullish dynamic. The market is also oversold in the intermediate term.

On Friday I outlined the bearish fundamental headwinds so I will not rehash them again. If the economy is going to fall into a double dip recession it should happen now. I believe that a double dip recession is a high probability outcome.

There are differences between February and now. Seasonality was a tailwind in February and is now a headwind. Additionally, the economic numbers looked great in February as they were being compared to the depth of the recession and stimulus was still having a positive effect. That is no longer the case.

My plan is to pare down my bullish positions by expiration and be in all cash or mostly cash. This rally was the easy call in my opinion. What happens next is a tougher question. I will let others fight it out.

The Greater Hyposcrisy

Which is the greater hypocrisy?

Last week I pointed out how Matt Simmons, a proclaimed oil expert, caused bankruptcy fears in BP. Simmons claimed there was  a second leak that would bankrupt BP in a month. According to Zero Hedge Matt Simmons' firm Simmons & Co. upgraded BP to a buy on Friday after helping to crash the stock on Wednesday.

From ABC News : 
Getco LLC, a big market maker and high-frequency trader, has hired a key U.S. Securities and Exchange Commission associate in charge of crafting rules for the equity and option markets.

Summer Friday

The market looked grim earlier in the week when I wrote No Reason To Buy Is A Reason To Buy. We have come back very strong, as we usually do when the crowd becomes too bearish. We are in a very dangerous economic period but I believe the market has a window to rally into expiration.

Aside from the first hour of trading there has not been much movement today. Today's action is a lot more like a Summer Friday than last week's was. I am signing off for the week. Have a great weekend.

Say Uncle

The bears continue to buy puts today. I believe they will say "U-N-C-L-E" before this rally is over. They are clearly not saying it yet.

Momentum Not Working

For most of the past year momentum has been the best strategy. Buying strength and selling weakness has been rewarded. However, in the past few weeks that strategy has been deadly. I can't say that I'm sad too see this change.

I Don't Get It

I still have a hard time figuring out why people trade on the retail sales figures. Most retailers already reported same store sales figures for May and those numbers are 100% accurate, while the government number is an estimate. Usually markets don't move much on retail sales but I think today's gyration highlights how jittery investors have become.

Walking The Tightrope

There are alot of headwinds about to hit the economy:
  • Austerity measures will hit global growth.
  • Municipalities are also enacting their own austerity measures.
  • Stimulus is wearing off.
  • Mortgage resets are about to hit.
  • Inventory rebuilding has largely run its course. 
  • Comps are getting tougher.
That said, the short term outlook for the stock market is positive as sentiment became too extreme and we are now working off that extreme. I am likely going to press my longs until expiration next week. At that point I am likely going to go to cash as I want to err on the side of caution with the macro headwinds we are facing.

The outlook for today is a tough call. A pullback would not be surprising after yesterdays surge. But I think shorts and under invested bulls will be pretty quick to jump on any weakness.

Bears Will Need To Wait For Expiration To Pass

The put buying today strengthens my belief that the crowd will need to turn bullish before this rally is over. What reason is there to turn bullish? I don't know but the crowd always finds a reason to be bullish once the market is already higher. I remember hearing a few weeks ago when the market was 15% higher about "liquidity", recovery  and how bank accounts earn nothing. I'm sure they will come up with something.

Too many people are too well protected as put buying in the past few weeks has been off the charts. It is difficult for me to see much downside before option expiration next Friday. Have a good night.

What I Would I Want To See Before Getting Bearish

There is a decent chance that at some point the Euro will have a one day surge against the dollar of a few cents as it is extremely oversold. I would want to get that day out of the way before getting short.

Its That Time Of The Day

We are approaching the time of the day where the bulls have been taking it on the chin. If they can withstand the charge they could have the baton for the rest of the day.

Bears Fueling The Market

There is a lot of put buying for a market that is up so much. Those puts will serve as fuel for a further advance if the bulls can hold.

Not Looking For A Repeat Of Yesterday

I am not looking for a repeat of yesterday. Today almost feels like dejavu but it just seems too cute for the same thing to happen two days in a row. There is a lot of put buying today which also supports the market.

Sold Some Lottery Tickets

I sold some BP 29 Puts expiring next Friday naked for $1.20.

The 1987 Effect

For years after the crash of 1987 every time the market had a few rocky days and a bad Friday everybody became scared of another Black Monday. In almost every instance this turned out to be an excellent buying opportunity.

I believe that yesterday we witnessed a similar dynamic. After investors watched Freddie, Fannie, Bear and Lehman go to zero or thereabouts they now fear the Lehman Brothers effect. A renowned oil expert said matter of factly that BP is going to zero in the next few months because there is a second larger leak that BP is covering up. He offered little in the way of evidence of a second leak yet investors were quick to conclude that we had another Lehman Brothers on our hands.

Investors bought a combined 30,000 puts at the 22.5 and 20 strikes of BP expiring next week. A trader quoted in the Wall Street Journal called them lottery tickets. These puts are trading for 79 and 53 cents respectively. That is quite a price to pay for lottery tickets that have a week of life in them and are only likely to pay if a bankruptcy becomes evident by then. It seems like a mugs game to me but investors are always fighting the last battle. I suspect we will be seeing a lot more Lehman lotteries in the coming years.

The Article On BP

Here is the link to the article that apparently scared many people in BP today. I am not an expert on oil and the expert being interviewed is clearly a lot more knowledgeable than I am. However, it would have been nice if the reporter asked him how he knows that there is a second spill larger than the first. It is quite an accusation to throw out there without offering up the proof. But I'm certain it will generate good ratings to the site.

Market Hell

The market is having a Lehman Brothers moment with BP. I am having a tough time wrapping my arms around why the market is so scared of BP. The company earns $20 billion a year, which should be enough to cover lawsuits, which will take years anyway. The market acts as if bankruptcy is imminent. It makes little sense to me but the market does not care what makes sense to me. Have a good night.

What Exactly Is The News On BP

Does anybody know what the news is on BP? I see the articles but it doesn't seem much worse than what we have been seeing.

The Gift That Keeps On Giving

For the bears BP is the gift that keeps on giving. It is a large part of the European indexes so it does not help that when they wake up tomorrow it will be down another 10%.

Capitulation in BP

The death plunge in BP looks like capitulation to me. I don't have the cojones to buy it but it sure looks like a bottom.

Shifted Exposure

I shifted some of my exposure from the SPY into Total S.A. I want some exposure to a stronger Euro and I am able to buy the shares on weakness.

US Dollar Sentiment

With everyone being a currency expert and recommending a Euro short the following data point from the SentimenTrader.com Morning Report really stuck out.
Sentiment on the US Dollar has continued to become more optimistic as many of its trading partners have suffered.

One measure of that sentiment is our Public Opinion, which shot up to 79.2% this week.  That is the 2nd-highest reading since data began in 1999.  The only other higher reading was 79.5% on November 19, 2008 (the Dollar dropped about 8% over the next few weeks).

Risk On

I added to my SPY position in the pre-market. Adding to positions on strength is not something I do often but I just realized that I am not long enough given the widespread bearishness.

Rydex Traders Increasingly Bearish

Yesterday, Rydex traders moved to their largest bearish position for this move and the largest since the July 2009 bottom. I pointed out here and here that anecdotally it seemed that everyone was trying to short this market. The data seems to confirm that.

The only indicator that showed any optimism yesterday was the ISEE index. However, the CBOE put/call ratio showed continued put activity and the II survey shows the bearish ranks growing to their highest level since July 2009 and the bullish ranks shrinking. All in all the evidence points to high levels of bearishness which historically has been positive for future returns. Once the crowd is bearish they have already sold.

The CNBC Bottom

Nearly every "expert" on CNBC thought that shorting this market was the right trade and was confident about it. Mr. Market does not like it when it when everybody thinks they have him figured out. Or is it Ms. Market? Stay tuned. Have a good night.

The Beauty Of The Market

The market does not like to make it easy to catch bottoms. I was a little disappointed when the market bounced right off of the support level that everyone was watching this morning. It just seemed too easy. So what does the market do? It makes another trip lower later in the day, where it seems inevitable that 1040 will be cracked, the weak hands are shaken out and only the true believers are left. Bravo. That was beautiful.

The 1:30 Hour

Legend is that the margin clerks get busy at 1:30. That is the time when we started our death plunge yesterday. I don't know if traders are now front running this or if it is happening again but we will find out soon enough.

Too Much Call Buying

I don't like the amount of call buying out there. I sold the 108 covered calls against my SPY long. I am in a position to buy if we break 1040.

Sold Total S.A.

I caught a nice bounce in Total S.A. and I sold the position. Just in case. That probably means we rally through the end of the day.

The Good and The Bad

First for the good:
  • The Euro never turned red this morning during the test lower.
  • It felt very gloomy this morning. That is usually how it feels at bottoms.
  • Europe has been outperforming the past few days. 
  • I am seeing many more recommendations to sell and short than the first time we tested these levels.
And now the bad:
  • The market got saved at support. I like it better when the market breaks support and then rallies. It leads to a better shakeout. I suspect that we still might need to do so. 
  • The ISE Equity only did not get to panic levels during the dip.
  • Breadth is negative, especially on the Nasdaq.
  • Goldman is weak.

Traders Are Short

My sense is that traders are now positioned short. What do readers think?

Bought Total SA

On the latest dip lower I bought Total S.A, the French oil company. They have been hit because they are European and because of BP. Yet oil is its own currency and BP has little effect on them. I would point out that Exxon Mobil is rallying smartly today. They might have some catch upside.

What Can Make The Market Rally

Here are some possible catalysts for a rally:
  • An oversold rally in the Euro.
  • An ECB rate cut at their meeting on Thursday. Fiscal austerity should allow them to loosen monetary policy.
  • A Goldman settlement with the SEC. If there will be a settlement it should come soon as the deadline for Goldman to respond to the complaint is fast approaching.
  • BP oil spill further stabilized.

Staying Short Citigroup

I have read many astute articles in the past few weeks about why Citigroup is worth significantly more than current prices. Hedge fund analysts have very convincing spreadsheets showing that Citigroup could easily double. Dick Bove said the shares could go to $25.

I do not have the skills to be able to determine what Citigroup is worth as the balance sheet is perplexing and figuring out what business they are in is even more perplexing. Taking their word on their book value and plugging in profit margins that are higher than those they were earning before the financial crisis does not cut in my book.

So what do I know about Citigroup? I know that as of two weeks ago the government had over $20 billion worth of shares to sell and that they are actively selling. I know that few people really know what they are worth.

As long as the government is selling shares and they are still above the governments buy price of $3.25, the wind is at my back as there is a huge seller. Most of those who are pounding the table have already committed themselves at higher prices and could easily turn seller.

Who Cares

Fitch roiled the markets overnight when it warned about the UK fiscal challenge. One would have to be living in a cave not to know that. I am still shocked every time these late to the game ratings agencies are able to effect the markets.

No Reason To Buy Is A Reason To Buy

The time to buy, if only for a trade, is when there is no reason to buy. I believe we are currently in that type of environment. The image below is the story box from CNBC.com

 6 out of the 7 featured stories are bearish. In late April when it was time to sell I am pretty sure most of the articles would have been bullish. I believe we will make more downside progress at some point but for now I believe that the downside is becoming a little too easy.

Financials Drag Market Lower

The financials slowly deteriorated throughout the day and led the market lower. While no new problems emerged in Europe the sellers disappointed with Friday's Jobs Report were not done. Look at the financials early tomorrow for signs of traction or slippage. Have a good night.

Bears Pressing Their Luck

My sense is that the bears are starting to press their luck. I am not sure if a turnaround will have to wait until Turnaround Tuesday but I think we are close to a push higher.

The Euro Hangs In

Not only did European markets hang in well given the late day drubbing on Friday and the "bad news" out of the G-20 but the Euro, everybody's favorite short position, has moved back to the flatline.

The "bad news" I refer to is the fact that the European countries are refusing the Greenspan/Bernanke solution of spending and printing their way out of debt. Instead they are choosing to get their budgets in order, much to the chagrin of Tim Geithner. Imagine that, people willing to take some pain now in order to secure a better future.

Quiet Day

I expect a quiet day today with an upside bias. Given the insane volatility we have grown accustomed to that is a truly variant view.

TheThreat of Inflation

The following excerpt from a New York Times article discusses the possibility that China will be the source of inflation. If this happens low rates will no longer be an option.
The cost of doing business in China is going up.
Coastal factories are raising salaries, local governments are hiking minimum wage standards and if China allows its currency, the renminbi, to appreciate against the U.S. dollar later this year, as many economists are predicting, the cost of manufacturing in China will almost certainly rise. 
...
The shift was dramatized Sunday, when Foxconn Technology, one of the world’s largest contract electronics manufacturers and the maker of everything from the Apple iPhone to Dell computer parts, said that within three months it would double the salaries of many of its assembly line workers. ...

Last week, the Japanese auto maker Honda said it had agreed to give about 1,900 workers at one of its plants in southern China raises of between 24 percent and 32 percent in the hopes of ending a two week-long strike, according to people briefed on the agreement.
The changes are coming about because of the growing clout of workers in China’s sizzling economy, analysts say, and because soaring food and housing prices are eroding the spending power of migrant workers.

Buying The SPY

I have bought the SPY in the pre-market.

Torn

I believe it is now inevitable that we will see a double dip recession. The economy is already weakening and there are many headwinds about to hit the economy:
  • Stimulus is wearing off.
  • Inventory has already largely been rebuilt. A large part of the growth in the past year has been the rebuilding of inventories. I believe that process is largely done.
  • Comps are getting tougher.
  • Municipalities are cutting back and firing employees.
  • The housing tax credit expires this month.
  • A large number of mortgages are resetting and according to Bank of America strategic defaults are growing as Americans realize they can live rent free for years before they are foreclosed on.
At the same time  it seems that the crowd is now unanimously bearish after the market has already fallen by 15%.
  • Most sentiment surveys are showing the bears far outnumbering the bulls.
  • I stumbled upon a recap of Fast Money from Friday. Apparently all four participants were bearish and very confident in their views.
  • Nobody seems to be trying to call a bottom anymore.
  • While I was disappointed in the level of put buying this Friday put buying has been running high for a number of weeks.
 Once the bearish case is already so well known it is unusual for the market to continue lower. Barring a contagion it seems the market is ripe for a bounce. I was worried about a contagion coming out of Europe but this morning it seems that Europe is actually stabilizing our markets.

The Good News

The good news is that we finally saw some capitulation in the last hour rather than the call buying we were seeing this morning. That and the fact that they are going to ring the bell in ten minutes. Have a great weekend.

Levels

Many technical minded people believe 1065 is an important level on the S&P 500 because that was the low of the "flash crash". We just bounced off that level. 1040 was the low for this move.

Wanna Play

Hungary is about to hit the skids. If Hungary falls a game of dominoes probably ensues. This leads to the question will Hungary get bailed out or will they let the dominoes fall? In all likelihood Hungary gets bailed out but is this really a game you want to bet all your marbles on?

The fact is that there is too much debt in the World at every level. So far it has been a giant game of pretend and extend. One day the game will come to an end. If stocks were cheap based on the Hussman method I would be much more inclined to play but for now I'm playing at the $2 tables.

I'm Chicken

I used the latest bounce to exit my SPY long and instead sold the SPY 104 puts naked. I remain short the 112 SPY Calls as well.  This is a much more defensive position. The risk of contagion is simply too high. I have been trading very well the past few weeks and am not interested in giving it back.

The Rumor Mill

There are rumors circling that Goldman and the SEC will soon come to an agreement. Given the way Goldman trades I believe those rumors have credibility. I remain long Goldman/ short Citigroup.

There is also a Reuters report out there saying that the Peoples Bank of China is buying the Euro now.

Breadth Is Horrible

Market breadth is horrible at better than 5 to 1 negative and call buying is still running high. This does not bode well for the rest of the day. The bulls can point to the fact that Google and Goldman are higher but the bear case is stronger in my opinion.

Too Much Call Buying

When I saw the horrible job news this morning the first thought that popped into my head was "buy when the news is the worst". I decided to wait to see the put/call ratios. The market is acting great all things considered but there is way too much call buying for a down day.

Grim Long Term Picture

The long term picture is grim. The economy is weak already and this was before the European slowdown, before the stimulus wears off, before comps get tougher,  before credit spreads widened and before the housing tax credit expired. I still think the market can hold up into expiration and possibly into quarter end but its going to be a long Summer after that.

Headline Risk

This morning we are seeing the "headline risk" that I spoke about in yesterday's closing column. S&P futures were up about 5 points when I first checked at around 5:45 AM and have suddenly dropped to down 10. There are more scary headlines out of Hungary as it now appears they also lied about their deficit and there are rumors of a large derivatives loss at SocGen.

Most probably these dips could be bought but the system is fragile and there is the small chance that this becomes an all out contagion. Therefore I would suggest keeping trades small. On their own the economy and markets would be breaking down but with government intervention things are holding up. That is not a healthy environment where one could have a lot of conviction.

No Change To My Outlook

My outlook remains positive for the short term. Despite scary headlines and put buying the market hangs in. I am only holding a medium sized long position because I believe there is very large headline risk. It now appears that Hungary will need a bailout or should I say the European banks that lent money to Hungary need a bailout. Have a good night.

Sold NOV

I sold NOV for a small profit. We had the bounce I was looking for and I don't want to turn a trade into an investment. Unfortunately NOV did not bounce as hard as the rest of the group.

Benefit Of The Doubt

Yesterday was a good day for the bulls and not just because of the outsized gains. There was heavy put buying and Rydex traders became more bearish showing that traders have not yet embraced this rally. Chances are that traders will fall back in love with the market before the move is over. The downside is that the stupefying moves continued as the market swings wildly from day to day.

While wild volatility is hardly encouraging I believe the bulls deserve the benefit of the doubt between now and expiration. A lot of puts have been bought in the past few weeks and they might have to expire worthless before the bears can make another run.

Strong Close

The crowd has been conditioned to expect weak closes and is likely positioned for one. If that weakness does not manifest soon we could see a strong close.

What The Chinese Read About Us

The snippet below is from the China Daily. The article is very harsh towards the West but the sad thing is that its not far from the truth.

A year and half after the first shock waves of the global financial tsunami, Western economies - including the US and the European Union (EU) but excluding Australia and Canada, which are big natural resources exporters - are marching toward economic failure. I base this assertion on just one thing: Their governments are afraid to do the right thing.
With the full knowledge of what their fatal policies will lead to, their politicians do not seem to have the political courage to rally the support of the people to accept the necessary pain and make the sacrifices as preached by the Washington Consensus. Instead, Western governments have taken the other direction.
Much attention has been focused on the stagflation effect of spawning banknotes from helicopters, a metaphor for monetary quantitative easing.
That was bad already. Worse, the money has been given to a bunch of rich crooks who created the present quagmire in the first place. This is more than robbing the poor to pay the rich.
It is a typical case of grave moral hazard, especially in the US, where those who follow the rules are being punished for the benefit of those who destroy them. The world is now turned upside down, and it clearly spells trouble.

Put Buying Bodes Well

At the ISE we are seeing a lot of put buying in the early going even though the market is higher. This bodes well for the remainder of the day as does the better than 2 to 1 positive breadth.

Still Think We Will Rally

I apologize for the late and short post but I have been doubling up on research this morning. I remain of the belief that the market should rally in the short term even though I believe there is potential for more damage during the Summer. The bear argument that the bulls are wasting their oversold readings is gaining credibility. That said  in the current environment anything could happen so size your trades accordingly.

Nasty Close

The insane volatility is continuing this week. The market was very quiet for the most of the day when suddenly all hell broke loose. This is one tough market to navigate. Buying weakness and selling strength has been the best course of action recently. Speaking of weakness,  I made a late day buy of an oil service stock NOV. Had I waited a few more minutes I would have received a 2% discount instead of a 2% haircut. As Forrest Gump says "Shit happens". Have a good night.

Bought Some NOV

I have bought shares of NOV (thanks to reader CP for putting me on to NOV). They actually make safety equipment for oil rigs among other things and are down 9% today in sympathy with the sector. The valuation is reasonable at less than ten times earnings net of cash. This is just a bounce play but I wanted to buy something that has value in case I am early.

Calling All Ideas

Energy stocks are getting absolutely crushed because of BP. The sector is down over 30% in the span of less than three months. I believe that there are babies being thrown out with the bathwater but am not familiar with the sector. If anybody knows of these babies please post it on the message board with a brief explanation.

Respect Seasonality

If there is one lesson that has been reinforced this year it has been to respect seasonality. Even though the market was very extended in January it did not turn down until seasonality turned down. The market was even more extended in April but did not turn down until Sell In May and Go Away came into effect. Today we are seeing a big turnaround just as the first of the month is ushered in.

There is no holy grail in investing and there are plenty of times when seasonality does not work. However, the way to make money in the long run is to play the odds and seasonality works more times than it does not. There are many factors to take into consideration when taking a position and seasonality should be one of them in short and medium term time frames.

BP Has Taken Us Down For The Last Time

If there is one positive out there I can point to it is that BP has taken us down for the last time. Expectations are now that the well will not be plugged until August so it will be difficult to surprise us with worse news. I am almost tempted to take a speculative long in BP as those hoping for a quick solution puke up their stock.

Wavering

After a straight 15% move down that spiked the VIX to nearly 50 some sort of bounce to relieve the oversold condition was a very high probability outcome. I thought that a bounce would be more powerful than the one we are currently witnessing. The "flash crash" has likely turned off a lot of investors from the market, especially individual investors. This leaves us with a bunch of hedge funds and supercomputers shooting at one another.

Originally I thought that this rally could last until option expiration and possibly the beginning of July. The bearish argument that the market is working off its oversold condition by chopping around is gaining credibility. I am still constructive on the market for the coming week. Seasonality is strong and the market is still oversold. However, I am contemplating moving to a more neutral stance at the end of this week.