Wasn’t it just a week ago that stocks were supposed to be headed for a 1987 style crash? Remember all the hyperbolic analysis about the removal QE and the dire implications for the stock market? Now, a full 120 S&P handles off the lows, these doomsdayers are strangely quiet.
Even though last week I was arguing that the selling was overdone, I did not think that the bounce would be this violent. The recent buying orgy has been almost as frantic as the selling panic from the middle of last week. Yesterday’s constant relentless bid had all the hallmarks of a monster buy program. The steady climb higher with the occasional dip, only to be met with a sudden move back to the highs, are the tell tale signs of a gargantuan program buyer. Although it took me longer to recognize the nature of yesterday’s order than I care to admit, by the afternoon, my plan was to let it run, with the idea of shorting into the bell. These types of orders often demand liquidity going into the close and I viewed it as a low risk spot to get short. We will see if the order comes back today, or whether it was a one day affair.
I am not much of a technician so you should be weary when I break out the technical indicators, but I do find that moves often retrace to the famed “Fibonacci” levels.
Yesterday’s big move up was a perfect 61.8% retracement of the recent decline from the Alibaba top.
I established an equity index short into the late afternoon push. I will probably risk all the way up to 1975 on the S&P 500 futures.
Now that the bears have been silenced, the bulls have become a little too sure of themselves. I still contend that this is not the market to chase momentum either way. I am following through with my plan to buy the dips and sell the rips.
The VIX has never done this.
Last week I shorted VIX as a long proxy for the stock market. I thought that the fears about a crash were overdone and that this was causing the VIX to be much too high. Over the past three days as the fears have subsided, the VIX has declined by more than 10% each day.
According to zero hedge, this has never happened before. I think that the uniqueness of this move is a testament to the manic nature of this market. Although the bulls will point to the strength of the last few days as evidence of the sustainability of the rally, I think that this sort of violent back and forth is not constructive.
I was lucky enough to be short the VIX, but betting that it will continue to decline all the way back to the lows is the wrong bet. I covered the entire trade yesterday. And if you forced me to be long or short, even though I am not a big fan of owning volatility, I think I would choose the long side. I am scared by the violence of this up move. I am not heartened by it at all. Remember that the biggest up days are often in bear markets…
Tepper is shorting the Euro
Wouldn’t you know it? I decide to cover my long US dollar position right before a new move higher. Over the past few days the US dollar has resumed its climb. The rumours out of Europe about the possibility of the ECB buying corporate bonds certainly didn’t hurt. But I think the rally is also being driven by hedge funds piling into the trade.
Yesterday at the famed RobinHood Foundation conference, one of my favourite hedge fund managers, David Tepper made the case for shorting the Euro. Although I am the first to admit that I am the ultimate macro tourist (for those not familiar with the term, being a macro tourist is not a good thing), when you get a room full of predominately equity hedge funds chasing the latest fad in macro land, it is a recipe for disaster. We have seen Tepper’s comments mark the the short term turning points before.
I wish I had waited until today to cover my short Euro, but I think the recent weakness is the result of even more hedge funds piling into an already crowded trade. Do I think that the Euro will be lower in a year’s time? You betcha. Do I think you should short it today? Nope. Don’t forget that these sorts of conferences reflect the positions that the biggest hedge funds have already put on. There is absolutely no edge chasing these trades as they move on the news. It is the institutional equivalent of buying some stock that Cramer mentions on MadMoney in the after market.
It is lonely not being long the US dollar with all the other hedge funds, but I am sticking to my plan. I will focus on trades that aren’t so crowded.