http://themacrotourist.com/images/Azure/idiotDec1214.png

http://themacrotourist.com/images/Azure/ESGIPDec1214.png

Yesterday was an extremely interesting day for the markets. The previous night we got the big bounce off the 118 Yen level, and it looked like we were going to return to the same old “sell Yen buy US stocks” melt up. The trading before the open was choppy, but it was trying to move higher. Then the stock market opened, and in one of the more outrageously stupid moves I have seen in a long time, the buyer simply drove the market straight up almost 30 S&P 500 handles in the space of half an hour. There was no news at 930am that would account for this sort of move. It was simply a monster order driving the entire market straight up. If you try to tell me that it was the good economic reports that drove the stock market higher, then why didn’t it go higher at 830am when most of the news hit the tape? Isn’t the market supposed to be a discounting mechanism? I contend that the market was doing a fine job discounting the economic news, but what they can’t discount is the insanity of the constant program bids from what I believe to be the GIPF (Japanese Government Investment Pension Fund). Regardless of who it is, you can’t convince me that this is order flow is natural. This is not the result of the collective wisdom of thousands of different traders finding an equilibrium level for the stock market. No, this market is getting pushed up by a monster institutional order that is somehow directly tied to the Yen and the Japanese monetary changes.

http://themacrotourist.com/images/Azure/ESJPYDec1214.png

But yesterday broke the pattern. Usually when this sort of buying comes into the market, it lasts the whole day. There might be a slight dip to suck in the short sellers, but the most likely action is for the market to close on the highs of the day.

Instead the market rolled over, and actually gave up a huge portion of its gains. I don’t know if the buyer ran out of ammo, or the selling overwhelmed him, but it can only be described as terrible action. Volatility is going up, and that is usually a sign that the market is ready to go down, not up. Rising markets are usually grinding boring affairs. When things start jumping around, you better start keeping an eye on the exit. I remember reading an article that one of the most popular trades amongst the quant community is to buy stocks that are exhibiting low relative volatility and shorting the names with above normal volatility. The rocket scientists were exploiting the belief that volatility was one of the surest signs of impending weakness.

On yesterday’s rally I had actually started bringing in my short position. My thinking was that although I thought it was stupid, the buying seemed to be limitless. The Market Gods seem to always know how to make you look as foolish as possible because just as I became convinced that fighting this buyer was a losing battle, the stock market rolled over. Although it was difficult, I re-shorted the entire position on the afternoon weakness.

The fact that the buyer cannot push the market up any higher is an ominous sign. I understand all the bullish arguments – seasonals, Santa Claus rally, low interest rates, the BoJ constant buying, etc. The problem is that most of those reasons came from Lucas in the picture above…


Abe Super Majority = buy Uranium

The most recent polls show Prime Minister Abe winning a super majority. Every time a headline about his lead hits the tape, traders reflexively sell Yen and buy stocks. After all, a super majority will mean even more Abeconomics, right? I am not so sure that Abe can ease any more aggressively. I don’t think it makes sense to assume that if he wins a super majority that somehow Abeconomics is going to increase.

But here is a trade that traders might be overlooking. Prime Minister Abe desperately wants to restart the nuclear reactors that have been sitting idle since the tsunami disaster. Unfortunately he hasn’t had the political strength to push it through. The Japanese people are rightfully concerned about the potential environmental effects of another accident.

I think that Abe will use a super majority victory as a mandate to restart the reactors. Although fossil based energy prices are falling, the Japanese economy needs to stop importing all this energy and instead use the much more efficient nuclear power. In the long run, that is their only real solution. Abe knows it, and is waiting for the right time to push it through.

If he does, then uranium might prove a sneaky decent long trade.

http://themacrotourist.com/images/Azure/UDec1214.png

It has basically gone nowhere since the Japanese nuclear accident. My preferred way of playing it is the Uranium Participation Fund which is a small closed end fund that owns uranium.

It is now trading at a 10% discount to NAV, so it’s not like you are buying it with a lot of premium built into it.

http://themacrotourist.com/images/Azure/UPREMDec1214.png

When Abe wins the super majority, most traders will be busy selling the Yen. Instead, have a look at buying uranium…