Last Friday Was A Short-Term Top…..Could It Be More?

Last Wednesday I talked about a potential top Forming.  Well it looks like we have a top in place but the question remains: will it be more serious than a mere blip?  Today was a great day for the bears.  I expect some sort of bounce either tomorrow or Friday.  The real danger lies in the unsettling nature of the currency markets and the commodity collapse we are witnessing.  My gut says that it is moving into stocks now.  Many seem to have forgotten that QE ended in October.  I maintain that this has been a liquidity driven market and that liquidity is being drained from the system by the Fed.  We know this because the Dollar is rising, commodities are collapsing and bonds are ripping higher (notice the beautiful cup and handle formation on TLT).  Equities are the next domino to fall.  It is not a question of if but when and I expect sooner rather than later.  The other CB’s stepped in after QE ended and we embarked on one of the most historic V shaped rallies in the history of the stock market.  It only took three central banks to do it and save the equity markets from an October collapse.  The other CB’s do not have the same effect on global liquidity that the Fed does due to our reserve currency status and that is why I believe these attempts will not stick.

What is interesting is that most active managers have not participated in this rally.  High beta vs low beta stocks have under performed by 18% YTD.  The CB’s want Mom and Pop to think all is well with the world as we hit marginal new highs in The SPX, Dow and QQQ.  On average most of you who day trade or manage other peoples money as a long only or hedge fund have, for the most part, had an awful year.  I know its been a hard year but step back and simply analyze the difference between this year and last year.  The answer is the Karate Kid:  Wax ON…Wax Off! or as we know it QE On!…QE Off!  What worked last year has been a disaster this year because without the crack cocaine of QE we flip to Global Deflation and stocks have started to discount that throughout the taper.  The broad US indexes will begin to discount the end of QE shortly.  Soon the lie of this recovery will be revealed to Mom and Pop and then the real panic selling can begin.  But first the institutional herd is starting to stir and margin calls in Hedge Fund land are just getting started.

Watch the USD/JPY which appears to be reversing after a parabolic rise.  A strong Yen hurts the global equity and emerging market bond carry trade.  Moves in our stock markets are increasingly about flows and leverage not fundamentals.  This has been showing up in the divergences.

I bought more Puts on Monday that give me some more time and ability to capture a crash. A third of my portfolio is TLT and I am short AMZN.  I have lots of cash and I am getting ready to start adding more once we get a confirmed flip to a bear market.  I was up 20% coming out of the October low.  I was betting big on a crash in October but as you know I was wrong.  I am up only up 5% due to the ravages of Theta and an ill timed entry into AMZN.

My gut says this may be a top of significant import, however the CB’s are scared and can attempt to warp this sell set up with some more Hail Mary type passes.  Do they have any more Bazookas left?  I will not commit more capital until I have more evidence that The Top is in. I am in awe of how they saved us from a crash in October.  I don’t worship them and do not believe they are omnipotent but I now respect them.  Eventually they will fail to win in this fight to stop deflation because they are not Gods and the cycles will overwhelm them.  They always have.