My Question

I was at the CA Inc. investor's day and I grilled the CEO about returning cash to shareholders. Lets go to the video tape:


Off To The CA Investors Conference

I am going to be at the CA Inc. investors conference today. I plan on asking management some tough questions at the Q&A and will post the answers I receive. Market related posts will resume Monday.


I was clearly wrong about how this week would turn out as I was expecting us to rally. Instead the market has been down for five days in a row and futures are lower into the sixth day. The reason for my optimism was that the rally off of the European bailout was only three days old heading into last Friday, we were still oversold and seasonality was set to be positive. This led me to believe that the bulls deserved the benefit of the doubt.

Instead of being nearly overbought today as I thought we would be, we are looking at a sixth straight down day. As long time readers know I believe  a string of 10 days where the majority of the action is to the downside leads to a good oversold reading. That means we are still four trading days away from a good oversold reading. However, we do not usually go down for ten straight days. Generally, there is a relief bounce somewhere in between and we have not had one yet. The good news is that we should either see a relief bounce soon or its unlikely the decline will reach 10 days.

I believe it is too late to sell both because this decline is getting long in the tooth and because I believe the debt ceiling will be raised. I am surprised that Boehner's failure to pass a bill is being viewed negatively as this increases the chances of a bipartisan compromise.



Vodafone Gets Dividend

Verizon Wireless is paying Vodafone a $4.5 billion dividend in January. The dividend is larger and coming sooner than expected. I remain of the opinion that the value of Vodafone's stake in Verizon Wireless is not reflected in Vodafone's share price.Vodafone remains my largest position.


Today feels like the markup day as tomorrow is the last day of the month. I believe that we will get a better rally once politicians hint that there is a deal. That said, I don't believe it will be up, up and away once the debt ceiling is raised.

The reason I believe the upside is limited is that the market still has issues. I thought the deal last week would put Europe on the back burner. That has not happened as markets are once again challenging Spain and Italy. The EFSF fund to deal with the crisis will not be available before the Fall, as Parliaments still need to approve it. Additionally, the economy is slowing and the Summer is not typically seasonally strong. My plan is to sell into the debt ceiling rally when it occurs.

Mom and Pops Scared

Investors withdrew $6.8 billion from equity mutual fund in the latest week according to ICI. It was the largest weekly outflow of the year. This helps explain why the market has been declining despite the fact that larger investors have been more sanguine. Yesterday's Investors Intelligence survey showed nearly 50% bulls. If larger investors joined mom and pops in their bearishness we might be able to get a decent rally.



I still think that we will get that relief bounce and I have added to my long exposure by lowering the strikes on my call spread. Have a good night.

Mea Culpa

I try to share my mistakes on the blog, as that is a major part of the learning process. When we pulled back on Friday I increased my long exposure via call spreads. The market had already been up a lot in the previous three days so even though I bought on a pullback I was still chasing.

The lesson that I am taking from this is that it simply does not pay to chase on the long side during the Summer unless we are coming off very extreme sentiment, which we were not. Hopefully, by writing this post I will save myself the mistake the next time around. Luckily, it was a call spread and the position was small so the lesson was relatively cheap.

Increased Long Exposure

I have modestly increased my long exposure on the expectation that we get a relief rally, as per my previous post.

Sentiment Not Helping

The one item that has been bugging me has been sentiment and today's Investors Intelligence numbers do not help with the number of bulls rising to nearly 50%. I still believe we should see some sort of a rally for the turn of the month and when the debt ceiling is raised. But I now believe it is a rally that should be sold into. Sentiment is already too bullish and a resolution to the debt ceiling will likely take it over the top.

Waiting For Washington

A week ago we waited for the EU and now we are waiting for Washington. Needless to say, my love for politics is not growing. It seems silly that the stock market is worried about the debt ceiling, while treasuries are higher on the day and not reflecting any risk of default. Either the US will default on its debt and there will be another financial collapse or the debt ceiling will be raised. I'm betting on the latter. Have a good night.

Europe Is Better Off

Many believe that the US is in a better position than European countries like Italy, who is facing a debt crisis. The US can print money while the only way out for the European countries is austerity. While the US may be better off in the short run, that might not be the case in the long run.

Countries like Italy are confronting their deficit because there is no way for them to print money. Over here we are paying lip service to the deficit but the problem is only getting worse. The market is forcing European countries to be disciplined, making for a more sustainable situation.

Portfolio managers are massively underweight Europe because of the debt crisis. Its possible they will be correct in the short run but I believe that European equities are a better value in the long run.


Better Late Than Never

The biggest negative for the market is that there does not seem to be much of a wall of worry. Rydex traders are positioned bullishly, sentiment surveys are showing very little bearishness and we are seeing very little put buying. That said, I am going to continue to give the market the benfit of the doubt for the next few days for the following reasons:

  • We are headed into the turn of the month, which is seasonally strong.

  • The market will not be overbought until early next week.

  • This debt ceiling show will end and we will likely see a rally when that happens.

  • Europe is oversold and should continue to rally, taking us along for the ride.

More Aggressive On CVS

I am taking a slightly more aggressive stance on CVS, after lowering my exposure last week when the stock spiked above 38. I believe that the Express Script's premium bid for Medco shows that the PBM part of CVS's business deserves to trade at a premium.

EU Can't Catch A Break

Sovereign spreads are widening once again as countries like Italy are trading where they were before  the most recent bailout. Investors are assuming that if Greek investors can take a haircut than investors in other countries can  as well. I believe this is more troubling than what is going on here with the debt limit but I am not too worried. This is precisely why the EFSF is now allowed to be used for open market transactions. It seems like they might need to use it sooner than thought.

Ruining The Suspense

A Harlem Globetrotters game is entertaining but hardly unpredictable, as the Washington Generals are usually embarrassed and defeated. The current debt talks seem like a Harlem Globetrotters game to me. Everybody who has ever watched politicians before knows a deal will be reached and betting against is like betting on the Washington Generals. At worst a deal gets done a day or two after the deadline, in overtime.

There are plenty of reasons for this market to go lower but the debt talks are not one of them. The fact that we are gapping down by a percent because of the debt talks seems ludicrous to me. If you are sitting on the edge of your seat waiting to see what happens I will save you the suspense. A last minute deal will be made and it might surprise you to know that professional wrestling is not real as well.

Holding My Nose

I believe the economy is stalling out once again and that earnings are going to be effected. Yet, I am long. I don't subscribe to the idea that the market is all knowing. In 2007 the market put in a top well after the economy stalled out.

Right now most of the evidence I look at points to a higher market next week. I will worry about the weaker economy when we are overbought. Have a great weekend.

Using Weakness

I have used this weakness to buy SPY call spreads and wrote covered deep out of the money Puts against my hedges to partially finance it. This gives me a little more upside potential if we rally next week.

Poor Earnings and Euro Stress

There were some poor earnings reports before the bell from industrial companies and some sovereign spreads are widening after beginning the day tighter. I believe that the EU has the tools to deal with this now so I believe the downside is limited. That said, we are stretched in the short term and the combination of bad earnings and sovereign spreads widening could give the market an excuse to correct a bit.

The Sovereign Can Has Been Kicked

The EU approved the use of the 440 billion Euro EFSF for pretty much anything, including open market security purchases and recapitalizing banks. I am not a sovereign debt expert but I can say with some confidence that 440 billion Euros should last more than a few weeks.  TARP was similar in size and was never fully utilized.

This is not to  say that other problems cannot creep up. There has been a slowdown in the economy, with the jobs picture deteriorating further. However, there have been some positive developments as well. Earnings have held up and there has been a flurry of cash M&A.

From a trading perspective this rally is only 3 days old and we are still oversold. We are heading into the turn of the month, which has positive seasonality. In the uber-short term we are stretched as we have rallied over 40 S&P 500 points in 3 days, but there is little reason to get too bearish here.

Too Much Call Buying

We are seeing too much call buying at both the ISE and CBOE. This might signal that the market needs a rest, but there is no reason to get too bearish. The market is still oversold even though we are stretched in the uber short term and seasonality will be positive next week. Another reason not to get too bearish is because Europe is still extremely oversold and their markets have the ability to bounce hard and drag us along as they did on the way down.

Pared Back CVS

I sold a little over 1/3 of my CVS position and wrote covered calls against the remainder into this ramp.

More Optimism On Eurozone

The fact that Italian bond yields are lower today on news of a Greek selective default makes me believe that I am reading the situation correctly.

Removed Some Hedges

Express Scripts has agreed to buy Medco and the deal has a $12 billion cash component.  The combination  of my optimism about the EU agreement, the large deal announced, the oversold reading and the positive seasonality make me more constructive. I have removed some hedges.

Optimistic On Eurozone

European markets and our futures are soft because it appears European leaders have agreed on a plan that would lead to a selective default for Greece. I believe this might be a bullish outcome.

Last night it was announced that Angela Merkel had made a deal with Nicholas Sarkozy. Its likely that Sarkozy extracted concessions from Merkel to help stabilize the rest of the Eurozone in return for allowing Greece to default.

Greece had to default at some point anyway and any solution where Greece did not default was likely to fail. The key will be if the plan is enough to stabilize the rest of the PIIGS. I suspect that even if it is not enough to end the crisis it will be enough to give the can another kick.

Still Dependent On Europe

The correlation between the Euro and the S&P 500 has been at its highest ever recently. I expect this to continue as the EU summit tomorrow will likely continue to dictate the direction of the market. The summit is only starting tomorrow but its possible that we will see some headlines starting to leak out. Have a good night. From @DRodriguezFX

More Housekeeping

At expiration I also decided to switch from a short Put position on CVS to long stock. This is a more aggressive position.

Housekeeping Item

My Microsoft position was called away this past week at option expiration. I am no longer involved. Microsoft is reporting earnings tomorrow.

A Correction On Vodafone

I want to correct an error I made on Vodafone. In a previous piece on Vodafone I wrote:
Vodadfone announced the details of their greater than $6 billion share repurchase plan. They have structured it similarly to an accelerated repurchase plan in that they cannot back out, and will complete the plan by the end of the year.

Vodafone Investor Relations clarified to me that the repurchase plan does not have to be completed by year end and likely will not be completed by then. The wording that confused me on the buyback announcement was as follows:
On 17 June 2011 Vodafone gave irrevocable instructions to Deutsche Bank AG London … to purchase Vodafone shares on Vodafone’s behalf during the period from 20 June 2011 until 30 December 2011 (the “Period”).

I apologize for the mistake. Vodafone remains my largest long position.

Know Thyself

One of the most important steps in becoming a successful investor is to learn ones strengths and weaknesses. I pride myself on being able to keep a level head when investors are panicking or getting over excited. The current crisis in Europe scares me and I am no longer playing with that strength. I get very scared when investors panic about Europe.

If the European dominoes were allowed to fall at least 5 sovereign nations and almost every bank in the World would likely go under causing a major depression. The German people are against anymore bailouts and Angela Merkel, the German Chancellor, has taken a lot of heat for the bailouts she has already agreed to. Sovereign bonds will be under renewed attack if forcible action is not agreed upon at tomorrows summit. Yet, Angela Merkel's hands are somewhat tied.

It is for these reasons, whether justified or unjustified, that I am scared. As a result I am unlikely to make large directional bets until there is a resolution to the crisis. I am currently positioned modestly net long.


While remaining net long, I have rehedged a bit by shorting some SPY. Thursday's EU meeting is a binary event. Either the EU calms the market and we rocket higher or the crisis rages on and we plummet. If it were not for the EU summit I would have likely just stayed put as we are 2 days away from an oversold reading.

Seasonality and Oversold

For the past few months seasonality and overbought/oversold indicators have worked very well. By late this week both will turn into a positive for the market.

Seasonality is currently negative but will turn slightly positive next week for the turn of the month. The chart below is from CXO Advisory Group.I highlighted the current period with a red arrow and next week is highlighted with a green arrow.

I use the 10 day moving average of the NYSE Advance - Decline line to measure if the market is oversold. A good oversold reading is reached when the moving average is set to drop a long string of negative numbers. Below are the numbers this indicator will be dropping for the next ten trading days. Starting Friday we will be dropping negative numbers for 5 out of 7 days, with 4 being quite large. This will give us decent oversold reading later this week.





Europe Related Selling

The selling from Europe is overwhelming the market. The scary thing is that we are seeing call buying this morning. There is little panic or fear in the market.

The Elephant In The Room

Before I lay out the pluses and minuses of the current market I want to acknowledge the elephant in the room. The Italian 10 year bond yield is soaring this morning and is above 6.00%, despite the passing of austerity measures on Friday. It is difficult to imagine a good rally developing without some sort of intervention by the EU. I believe the largest influence on trading this week will be Europe.

My sense is that European markets want to rally. European stocks seem to be going down begrudgingly and seem sold out. However, with sovereign spreads blowing out it is highly unlikely that they will be able to muster much of a rally. If the EU does something to help the crisis I believe we could see an explosive rally in European shares that would likely drag us along for the ride.

Turning back to our markets, the biggest negatives this week are that we are now in a period of negative seasonality and that the market will not be oversold until the end of the day on Thursday. Bullish sentiment has backed off in the past week but not as much as one would expect given the steep drop.

The good news is that we saw some of the heaviest put buying of the year late last week. Typically that leads to better performance. We saw some cash M&A activity late last week as well.  By the end of the week we will be oversold and heading into positive seasonality.


All Europe, All The Time

The woes in Europe are too much for the market to handle. I believe the EU will act but it might take a worsening of the crisis in order for this to happen. It baffles me why they have not stepped in to help Italy given that Italy has passed severe austerity measures.

Italy's deficit was only 4% of GDP to start with. Italy is fixable and there is no reason to allow this debt market stress to go on a day longer. Hopefully, they will come to their senses soon. I am positioned long heading into the weekend, so I am clearly talking my book. Have a great weekend.

Merger Friday

Last night we had an $11 billion cash deal announced in the energy space, with BHP buying Petrohawk. This morning Carl Icahn is offering $10 billion to buy Clorox. This is a very big plus for the markets. I believe it will now take a disaster in Europe in order for this market to head much lower in the near term.

Getting There

After heading lower for the past 5 trading days we finally started seeing put buying, rather than complacency. This is one of the missing ingredients I have been writing about. While this is a step in the right direction there are still some other missing ingredients. We are a week away from a good oversold reading and seasonality is negative post-expiration.  And don't forget Europe. Have a good night.

Removed Some Hedges

I have removed some hedges.

ISE Equity Bullish

If the ISE equity only closes here it will be the lowest reading since August 2010. This is a lot of put buying and is a bullish development.

A Step In the Right Direction

We are seeing heavy put buying at the ISE on what is a flattish day for the market. The VIX is trading higher as well. One of my issues with the market has been that sentiment has not moved with price. We finally might be seeing sentiment shift. This is a tiny step in the right direction.


The US has not had its fiscal house in order for nearly a decade. That entire time Moodys left the US rating at Triple A. When there are finally discussions to lower the deficit Moodys comes in and warns of a downgrade. Talk about closing the barn door after the horses have left.

This is what the ratings agencies have done consistently. Instead of acting as a counter cyclical force, they act in a procyclical manner. During good times they encourage people to make bad loans and during bad times they cause borrowing markets to freeze. This exacerbates the cycle to the upside and downside when they are supposed to be doing the opposite.

On a separate note, I would like to thank them for the buying opportunity last night.

AAII Sentiment Near Historical Average

The AAII individual investor survey has bulls and bears near historical averages, with 39% bulls and 29% bears. One can say that investors should be more negative given the recent drop but for the most part this is yet another muddled indicator. This raises my conviction that the best course of action is to wait for the bulls or bears to push things too far.

I believe it is too dangerous to short because the EU can announce a bond buying program at any time. On the negative side we are heading into weak seasonality next week and are still overbought. A decline next week would get us oversold and we would be heading into positive turn of the month seasonality the following week. I doubt the market will make it so easy but one can hope.


Last night I removed some hedges after the Moodys US downgrade. I have rehedged by shorting SPY.

Covered Some SPY

I removed part of my hedge by covering some SPY. This Moodys downgrade of the US is nonsense.

Thinking About Italy

The EU bailed out Greece, which is the equivalent of throwing money down a sinkhole. What are the chances that they let Italy go? Italy is not a lost cause and they are working on getting their house in order. The market is not yet at an extreme but if we get there and we are looking into the abyss, I don't believe they will let Italy go. Have a good night.

Now Is The Time

Now is the time for the EU to announce a bond buying program to support Italy. Euro shorts are on the run from Helicopter Ben's speech and a large bond buying program would absolutely rip their heads off. This would give the EU the best bang for their buck.  In the case of Italy I believe this is a liquidity crisis. Their deficit is only 4% of GDP and they are passing additional austerity measures.

Any Reason To Rally

I believe the reason for this rally is silly. We would likely first need to see a major slowdown in order for  QE III to happen. It would also likely cause higher commodity prices, while offering little economic benefit.

After the beating the market has taken it might be looking for any excuse to rally. I believe Europe is still the major issue. If the EU does something to stem the bleeding than we likely have seen a short term low. If not I expect this rally will get erased rather quickly.

Investors Intelligence A Negative

The Investors Intelligence survey is out and the bulls have increased to 44% while the bears are down to 22%. I suspect that next week these numbers will change as the drop of the past few days has likely not been factored in. That said, this is far away from a buy signal and a lot closer to a sell signal.

Dazed and Confused

I have mixed feeling about the market in the near term and can make both bullish and bearish arguments. I will start off with the bearish arguments. It is bearish that the market has gone down so much and sentiment has not moved in kind. Rydex traders have not backed off their bullish stance, nor have newsletter writers according to the Hulbert HSNSI. From Marketwatch:
As of last Thursday’s close, the day before the U.S. Labor Department reported that far fewer than expected jobs had been created during June, the HSNSI stood at 39.3%. Today it is 33.4%, or a fall of less than six percentage points.

That’s the functional equivalent of a shrug. If contrarians are right, this means that the market has more downside work to do before a sustainable rally can begin. The typical gesture at the beginning of such a rally is more likely to be panic than a shrug.

On the positive side much of the selling came out of Europe and it can easily be reversed on news that the EU is taking steps to soften the blow from the crisis. Additionally, the type of extreme breadth readings we have seen tend to lead to snapbacks. While I have accepted a little more market risk into the carnage, I am waiting for the odds to stack up better before taking a strong directional bias.


Ireland Downgrade Could Be A Positive

The downgrade of Ireland could turn out to be a positive. It will put more pressure on the EU to take drastic action and increases the chance they announce something tomorrow.

Hanging On Europe

On the one hand the market is nowhere near a bearish extreme and we are still overbought. On the other hand there is a decent chance of some sort of a snapback rally after the very quick drop we have suffered. With the outlook mixed it is likely that the powers that be in the EU will determine the direction of the market for the balance of the week. I am of the opinion that they have little choice but to act. The only question is when. Have a good night.

Somebody Intervened

At one point overnight,  Italian 10 year yields were over 6%. They are now at 5.62% and lower on the day. The Euro was at 1.3840 but is back above 1.40. It is pretty clear that there was intervention. The EU has little choice but to intervene.

Not At An Extreme

While the S&P 500 has fallen nearly 50 points at lightning speed, the decline is a mere two days old. While I certainly prefer the market today versus two days ago, we are not yet at a low risk entry point. It takes both price and time to swing traders back to excess pessimism. For instance, Rydex traders actually increased their bullish positions yesterday. When a decline is 10 trading days old we rarely see that type of bravery.

In the uber short term , we should see a bounce develop at some point this week. I thought the EU would announce some sort of large scale intervention before the European open but it is difficult to coordinate between so many countries. I remain of the belief they will do so before the end of the week as they have little other choice. At current interest rates, the peripheral countries have no chance. A bounce will likely coincide with this announcement, but it will likely be short lived.

A Step In the Right Direction

I am more constructive than I was a couple of days ago as a lot of the excess optimism is now gone. Unfortunately, we are still overbought and sentiment is not yet at a pessimistic extreme. While I believe we should stabilize at around these levels, the trade for the past few months has been to buy oversold and sell overbought. We are not oversold yet. Have a good night.

Too Big Too Fail

Italy is truly too big too fail. Every bank in the World would be bankrupt if Italy went down. If not by holding Italian debt than by holding debt of others who hold Italian debt. I don't want to belittle the issue but I cannot see that happening. One can even argue that this will force the hand of the EU to conduct some sort of massive operation.

The Flush

I suspect markets may have made a low for the day. We got a nice flush when the Euro broke below 1.4000 but it has now rebounded nicely. The Euro has been leading markets.

Good and Bad News

The good news is that it seems market participants are once again fearful rather than impressed by the market's resilience. The bad news is that we are not at an extreme yet and that the situation in the Eurozone is serious.

A Twinkie Market

Hostess Twinkies make childhood happier with totally artificial ingredients. The market has been made happier by government manipulation. 0% interest rates, Mortgage Lending Programs, Cash for Clunkers, TARP, etc...I'm worried to this day about what would happen if all the manipulation wasn't happening... And it's continuing with the European bailouts. It's as if the Government is in business to give bad financial advice and force unsophisticated (and sophisticated) investors to speculate. In the short term performance game, everyone needs to keep up

-Seth Klarman, May 2010

A little over a year ago Seth Klarman compared the current market to a Twinkie. It feels nice and good but its all artificial. It remains an excellent analogy. One of the most ignored aspects of the economy is that it is not standing on its own two feet and the government has had a large role in propping it up. This also means that corporate profits are being propped up, as profits would be lower in a weaker economy and absent 0% interest rates.

I believe that many investors are treating corporate profits as if they were self sustaining. Many others allow the "market action" to dictate their investment decisions, essentially doing the same thing as the former group. Its entirely possible that this trade continues to work out, as it has been. However, history has taught us that in the long run markets and economies cannot be manipulated by governments.

"Like The Action" Is Not Actionable

I have heard two bullish arguments this weekend.  The most prevalent has been that the action was great on Friday, given the bad news. Secondly, many now believe that that underperforming, underinvested hedge funds will need to chase performance. While I could see this bullish scenario playing out, I believe these are shaky grounds on which to make an investment decision.

Few liked the action a few weeks back but that was an exquisite time to buy. I prefer buying when everybody is bearish rather than when everybody "likes the action". In my experience, the best time to buy is when it feels scary and wrong.

I am not bearish but the bullish arguments being touted are not the type that get me excited about the upside. Color me unconvinced of the bull case. Right now I am neither bull nor bear but opportunist.



The Economy and The Market

I believe the US economy is slowing along with the economies of the rest of the world. Austerity across the world will weigh on economic growth along with the end of the inventory rebuild and the end of QE II. The decoupling argument is wishful thinking at best.

A slowdown will only effect markets if it effects corporate profits. Thus far corporate profits have held up but at some point they will take a hit. The extent of the slowdown will dictate the effect on corporate profits. I am uncertain if we will be able to muddle through or if it will be worse.

I don't believe paying up for stocks is  a good idea in the current environment. At the same time I don't believe the bears will be rewarded until corporate profits are effected. I believe the best course of action is to buy pessimism and sell optimism.



Wrote CVS Puts

I wrote naked August CVS Puts. This is the third month in a row I have been selling CVS Puts at these levels.

Wrote Covered Puts

I wrote some SPY covered puts expiring next week against part of my hedge. I believe choppy is the most likely outcome next week.

Random Thoughts To Start The Morning

  • Often options expiration helps a move persist when the market is overbought. The bears might have to deal with some sideways, choppy action before getting their honey after expiration.

  • With the VIX approaching 15, even the bulls should think about buying some cheap insurance.

  • I have mentioned how poor hedge funds as a group have been performing recently. Wouldn't it be ironic if they went risk on and then at some point the rug is pulled out due to a slowing economy?

  • After the employment report we are right back to where we started the week.

  • Do these massive moves have people trading  on tilt?

Time Is Your Friend

In the past I would have gotten caught short in a rally like this. The only thing that has saved me is that I wait for exhaustion based on time, not price. Now I need to learn how to hold on a little longer. We are getting late in the game. Have a good night.

Everybody's Bulled Up

Everybody's all bulled up after the S&P has skyrocketed. The only thing that is missing for a reversal is time. Today is day eight of the rally and we typically do not see good exhaustion until after ten days. That works out to Turnaround Tuesday. I am trying very hard not to go net short before then although it will be tough to stop myself if we gap up again tomorrow.

Extreme Call Buying

100 S&P 500 points higher and they are buying calls hand over fist. Both the ISE and CBOE are showing extreme call buying. One day of this does not make the market a sale, but we are definitely closer to extreme optimism than extreme pessimism.


I covered my SPY short from the pre-market for a gain of a few pennies. It looks like my Microsoft position will be called away and the CVS Puts I am short are nearly worthless. Both reduce the long side of my book. I don't want to find myself very short before the market reaches extremes.

Now Short

I have shorted SPY for a trade. This is ludicrous already.

Individuals Bullish

According to the AAII survey individual investors are once again bullish, with 41.8% being bullish and 24.7% being bearish. The historical average is 39% bulls. This indicator is in the overly bullish camp but not yet at an extreme, which jibes with where I believe the market is as well.

Wax On

The persistence of market moves in both directions in the past couple of years has been astounding. The market just continues in a single direction with few corrective moves in between. It has paid to wait for extremes before fading the market and playing for corrective moves has been a mug's game. I believe this is occurring because of the prevalence of momentum strategies and because hedge funds reduce risk when the market goes down and vice versa. Both strategies exacerbate market moves.

We are currently not at an extreme but at a  point where we would normally expect to see a corrective move. In past years I might go net short at this point for a trade, but under the current circumstances I am only willing to go to market neutral.

While corrective moves have become rarer, they have not disappeared. I believe that we will eventually see one, at which point I would feel more comfortable taking on market risk again.

Digestion or Indigestion

The bulls will argue that we are digesting last weeks run while the bears will argue that we are building a top. I don't know who is right but believe that we will get a better buying opportunity even if we go a little higher first. Have a good night.

Two Possibilities

  • The two most likely outcomes are that we have a pullback this week or that we rally a little more and then get a meatier pullback next week. I don't believe its up, up and away from here.

  • I don't know which will happen, but either way I believe it will be better to wait for the pullback.

  • According to this article the average hedge fund is down for the year through June. The S&P 500 is up over 6% in the same time period.

  • There was an interesting theory in the FT over the weekend from a Citigroup strategist:

There is one more piece to this market jigsaw, in our view. That piece is arguably the key marginal buyer of equities — hedge funds. This year has not been a vintage year for equity hedge funds. Many funds are in need of a performance boost before year-end. We suspect that brings risk of ‘collective’ action from equity hedge funds at some point in 2H11. This is necessary to repair performance damage across the industry since start-year. This action is much more likely to occur in an environment of reduced, rather than elevated, macro uncertainty. To us, that could be September and that could be further fuel for another 4Q rally.

  • I could see the pile on happening "if" corporate profits are not hit by the slowing economy. That's a big if.

Rydex Traders Get Bullish

While the market did little yesterday, Rydex traders greatly increased their net long exposure by both covering shorts and increasing their longs. During the most recent downturn Rydex traders had extremely poor timing. They were very long heading into the downturn and greatly reduced their net long exposure towards the bottom.

Along with the overbought status of the market, this is yet another reason to expect a pullback sometime this week. I do not expect much of a decline this week as the overbought reading is not great. We will get a better overbought reading at the end of trading on Monday. That is because the rally only started in earnest on Monday of last week and not enough time has passed for a good overbought reading.

Summer Trading

Trading was very slow today except for the brief period following the Portugal downgrade. There is potential for this slow trading environment to continue throughout the Summer.

Momentum stocks won the day while most other stocks lagged. Its likely many under performing managers are trying to play some catch up by pumping up their beta. I will leave that game to other people. Have a good night.

Invest In Pizza

Before I get to the main point of this post, I want to point out to readers that I earned my trading stake on the short side. In early 2007 I bought Leap puts on the SPY. By the Summer of 2008 I believed I had enough money to invest full time and quit my job, largely as a result of my short side trades.

Doug Kass, wrote an article today on what an albatross it is to be too negative and I agree. We just had one of the worst dozen years in economic history, with the popping of two bubbles and unemployment going from 4% to 10%. After all these negative events, once dividends are included, the S&P 500 is just as high as it was at the peak of the Internet bubble. The mid and small cap indices are much higher than they were back then.

Pizza at my favorite pizza place cost me $1.05 when I was a kid. The same slice costs $2.50 today. Over time the price of most things tend to go up, stocks included.

I am not saying that one cannot make money on the short side, as I would be a complete hypocrite if I did. I will likely go net short many more times in my investing career. I am just pointing out what a difficult task it is in the long run. Perma-bears are fighting an uphill battle.

Short Term Pullback

I am going to make a case for a short term pullback, with one caveat. This rally only started in earnest a week ago and market participants were very under invested heading into it. One week has likely not changed that dynamic by that much. While I believe we will see a pullback, the short side is far from a slam dunk.

The S&P 500 has rallied 5.5% in a week, making the market overbought in the short term.  Seasonality has turned negative and short term sentiment is no longer excessively bearish.We saw some signs of excess bullishness like the ISE equity only well above 200 for two days in a row.

While I believe we will see lower prices, all the ducks are not lining up on the short side. As a result, I have moved closer to market neutral but am not interested in the short side yet.


I thought I was being very patient by maintaining a decent sized net long position until late this morning. But this is a risk on/risk off market with no in betweens. I am very tempted to short more SPY but many of the arguments I put forth this morning against shorting the market are still valid. I am calling it a week. Have a Happy Fourth of July.

Shorted SPY

I shorted some SPY to get me closer to market neutral.

Short Side Getting Interesting

The short side is getting more interesting for a short term trade after the market has surged on the ISM numbers. When we finally do get a pullback we should see better prices to buy at.

No Answers Here

It is hard for me to put together a strong argument to buy or sell short this market. How does one buy a market that is up nearly 5% in a straight line and is overbought heading into negative seasonality?

The short side is not too attractive either as investors still seem to be fighting this rally. The put/call ratios have been showing put buying and surveys show that investors remain bearish and under invested. For my part, I am more focused on individual situations rather than trying to make a market call.