Ever since December when the Fed started tapering the $85 billion a month in security purchases the second derivative of the markets ascent has slowed. We all know about the divergences that have appeared since March. The question is when will the market start to discount the end of QE. Smart institutional money is already fading this and I suspect the fade will pick up since the recent market weakness will begin to alert the dumb institutional money. I am sure The PPT will work and we get a bounce here. I am not disputing that fact. The question is: do we get follow through on the bounce? My guess is no and that we will have more weakness into the end of August since we are due for an intermediate term correction. From that low we likely get a nice rally but due to the imminent end of the markets Crack Cocaine that rally fails and we get a nice healthy correction that will be quick in both price and time. In the above graph notice the markets performance when previous rounds of QE ended. This is not about fundamentals because they have not mattered for a long time. This is about liquidity and the giant sucking sound of it being withdrawn. Yes it is a market of stocks and I am a stock picker but at major turning points picking stocks does not matter. The question we should be asking is: does the Fed un-taper the taper and if they don’t…why not? Until then the path of least resistance is lower.
If you enjoy the content at iBankCoin, please follow us on Twitter
Only thing that could change is ECB starts QE since they’re the only ones late to that party… except maybe the new BRICS bank, they can QE too still.
Bruce,
Your avatar just cracks me up. I agree that they might start QE. Problem is that it is technically illegal and there are very faint rumors of Germany thinking about getting out of the euro. My bet bet is that the CB’s won’t react until there is some damage in the markets first.
I guess it’s time to go cash heavy and play with small positions if at all. Thoughts on a fat market short? Or is that an amateur move?
Superpositron,
I like index puts because they are cheap. Also I think AMZN chart is broken and low short interest. I am also looking at GM as a short. Cash is good as well.
How do you know who the smart/dumb institutional money is and how do you know what they are doing? Very broad strokes
ForgetAlpha,
I will not reveal who the smart money folks are but trust me they are either hedged, large cash positions or underweight risk depending on their institutional mandate. Dumb money is 85% of the market. When you are managing billions you will never time it exactly and due to liquidity issues you need to position yourself months in advance of a major correction. This top has been exhibiting distribution by those who would rather be early than late. Corrections happen way faster than rallies. ForgetAlpha, which are you…Smart money or a bag holder?
Bluestar appreciate the help. What sort of put would you go for index wise? Im new to option pricing.
Superpositron,
I would not recommend buying on a dip like today. It depends on your time frame. I currently am 95% cash with a 9/20 DIA put with a 160 strike. only use an amount of money you are willing to lose completely.
The NATO official said Russian forces gathering at the Ukraine border included a “spectrum” of assets — infantry, mechanized divisions, armor, a lot of artillery, both conventional and air defense, and special forces and logistics.
MH17 investigation begins amid violence Ukrainian army advances against rebels Does Putin want war in Ukraine?
“They are very capable Russian regular units and can move in a matter of hours and could significantly disrupt the situation” in eastern Ukraine, the official said.
J Livermore,
I am not as crazy as I seem. We have left Putin no choice. It would be a smart move on his part. He is being demonized regardless.
The liquidity issue is something I have been watching as this is the key issue that that drives the market. Not sure we are there yet and while there is liquidity, there will be buyers, but how orderly will the markets be come October – what indicators for drying liquidity should we be looking for?
k_melancon,
Liquidity is already disappearing. My friends who still run large dough say it impossible to trade without affecting a stock. Should selling begin in earnest then we will begin a waterfall of gaps down.
I’ve come to the darkside (or blue side?) for at least overnight.
So we should start seeing a rising trend in volatility then? I know we are off the low teens, but we are far from being in a high volatility market
K_melancon,
If the selling begins then yes volatility will explode.
Bluestar, thank you for joining out band of distinguished gentlemen. I am a member of 12631, if you want to DM that is fine. What puts on what indexes would you recommend. I was stung earlier this year when, I purchased SPY puts July 182s market sprinted and about 10 large burned up. The market needs a pull back, I want to profit from it. Thank you in advance.
Bluestar, looking ahead , what do you think of Gold and miners in general ? Do you think the smart money could slowly get in the sector ?
It was great to come back and see you posting more, really enjoying the reads.
Bluestar,
I wouldn’t know what to call myself if my definition of smart money or bagholder depended on whether or not moving into cash over the next 3-6 months is a prudent move. I generally think that most people who would consider themselves “smart money” have never been capable at calling market tops on a consistent basis. Many of the most successful investors that I know, or follow, don’t spend time trying to pick market tops (or bottoms for that matter) because they know that it’s a bet with very poor odds. As far as I’m concerned, those who make a great deal of money by calling a market top/bottom did so through sheer luck. Markets are far too dynamic for anyone to have any kind of edge that will generate alpha on a consistent basis. How many of the most successful investors got there my trying to predict whether the S&P was going to go up or down in the next 3-6 months? Market pundits might get more face time on CNBC if they constantly make bold predictions on where the market is going, but real investors don’t. I’ve seen a slew of highly intelligent investors, professional and otherwise, who have consistently underperformed over the last 5 years because they let their bias of market direction conflict with their equity picks. I think the scars of 2008-09 still run rampant, and every slight downturn in the market is treated as the beginning of the next financial crisis. But a simple analysis of long term historical trends and equity performance will clearly show that betting (waiting) for an event like 2008 to occur again is a “bag holders” bet.
Todd,
I wold not initiate a position down here. wait for a bounce then buy iwm, diy, spy or qqq. sept or october. I like diy or SPY due to low implied vol. be prepared for your index put to go to zero. We will get a bounce soon I believe then you can make your trade.
nautique,
smart money is a broad term. I am not a gold bug but the long term charts say lower. Then they will be fabulous buys.
TJWP,
Thanks. lets see how this plays out.
Forgetalpha,
I actually agree with you. Picking the top to the day is nonsense. However smart investors who have a sense of cycles always fade rallies that persist this long. I went to cash in january and I missed some opportunities but when the drawdown happens I will be glad I am in cash. Klarman’s Baupost is 40% cash and he is explicitly making a market timing call. He did it in the tech bubble and in the credit bubble. Much of awesome track record is avoiding the drawdowns and having capital to buy low. By the way 2000-2001 was almost as bad a drawdown as 2008 so we have had two in 14 years. The problem of 2008 was transferred onto the US gov’s balance sheet. This is the swan song of the credit super cycle. The end is nigh. Volatility and stock correlations are about to go much higher. But maybe I am wrong. only time will tell. However here are some numerical facts for you to consider. Since 1896 the DJIA has had what is called a four year cycle that averages 48 months from low to low. The average decline into a four year cycle low has been 34.38% since 1896. The longer the advance of the cycle (current advance is 64 months) the sharper the decline. In the secular bull of the 80’s and 90’s the low of 4 year cycle was higher than the previous low and very shallow. In secular bear markets the four year cycle low is lower than the previous four year cycle low. So if we are still in a secular bear we take out the 2008 low. If we are in a secular bull we still have a correction and the average correction is 34%. Either way we are due cyclically for a protracted sell off and a great buying opportunity. This is just math not hubris or arrogance but just facts. Do with them what you will. Keep coming back I like your feisty ways.
bluestar – What affect have has electronic trading has on liquidity? can’t thee algorithms “see” what is going on and then add or subtract trades to shape a perceived large trade?
Serious business with the huricane Bluestar! Hope you and your fam are safe! Peace!
Happy to be long again, indeud.
Todd,
Thanks. Crazy. my furniture was supposed to be moved into today. Not going to happen.
Algos are dumb robots that can only front run. I am hearing more and more that large institutions are going back to old school where they give the dealer an order and say i give you 25 cents now go get me out now. They are avoiding dark pools like the plague
J livermore.
Stay frosty. I expect a major pullback once QE ends.
Thanks, bluestar – I appreciate the commentary and insight