Bull Markets do not end on bad news. As much as it pains me to say that it is true. Do you really think the central banks will let these two blokes end their confidence game. Hell no! The market internals are awful and we are due for an intermediate term correction (5-10%) that began on May 20th. I expect to cover around 2010-2040. The market could correct down to the October 14 lows but I doubt the CB’s let that happen. When the VIX hits 20 I will be looking to go long some call options for a trade.
We have been churning at a top since December. Ultimately I expect tremendous pain ahead. I don’t think we get a lot of heads up as to the end of this Bull Market due to the ungodly amount of CB intervention and lack of liquidity due to market structure and the regulatory regime that’s reduced dealer balance sheets. The odds of a crash are high. However, I don’t think we crash due to Greece. Keep an eye on credit spreads as they appear to be be widening again and the stock market buyback machine may be in jeopardy. Bottom line: at some point we get a buyable dip in the next two weeks (but it is only a trade) and then we rally to a new high or close to a new high. I would not want to be long coming out of August into September.
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Bluestar, can you explain in detail when you say there’s a “lack of liquidity due to market structure”? Always enjoy the posts, and the other opinion.
boyaj,
Over 50% of volume are HFT’s. They are under no obligation to make a market. If volume overwhelms them they pull their bids and walk away. Additionally when the big buy side guys need to sell quick they go to the street and ask them to commit capital. Due to the new regulatory rules the capital buffer that used to be there is now much smaller. This matters more on fixed income but will affect equity markets should selling volume pick up.
indeed, bubbles pop with exuberance, not worry.
Heard a great quote:
the markets are not manipulated; the markets are manipulation.
I agree with the notion that bull market doesn’t end on bad news, but what if the top was 4 weeks ago? Then today’s down on bad news can be just a follow-through, nothing to do with marking a top.
fifty2 weekhi,
Actually you could be right but either way we need to see a second chance rally before the fun really begins,
Germany won’t let Greece default because Deutsche Bank can’t afford it. A Greek default could lead to a major headache for that bank and systemic risk to the German economy. They will announce stop gap measures later this week that shoot markets to a blow off high.
I’m looking to enter some $DB puts going out to October on the next pop higher. I honestly believe there is bankruptcy risk there were things to go even slightly against them in the derivatives markets.
Quality Control,
I concur on DB. I will join you on that trade.
Yeah Blue, the path they are on is eerily similar to Lehman. Downgraded on the same exact day Lehman was in 2008. Co-CEO abruptly resigning. To have $75 trillion in derivatives exposure is just mind blowing to me, even if the net exposure is far less. Things can get out of control quickly though, especially if things start to whipsaw on them.
I’m sure you’ve read the same articles I have on the subject.
Quality,
Remember this? http://ibankcoin.com/bluestar/2014/11/14/is-deutsche-bank-is-holding-the-old-maid/
Wow, I must’ve missed this somehow when you blogged it. A man ahead of everyone else. I think you’re dead on with your assessment. $DB is one of the central reasons why Germany MUST have a deal with Greece. $75T in derivatives exposure, $500B in deposits. Not to mention they’ve got ex-Lehman employees running critical departments. What could go wrong?
Boyaj, The best example I can think of as to what happens with a loss of liquidity and what it means would be the 1987 market decline as it related to the NASDAQ OTC. Back then, unlike the Big Board Specialist, an OTC market maker had no obligation to step in and trade to keep the market going. Sounds very similar to HFT today no?
Here is a good description of what happened next from Mike Metzs book Black Monday; “after the horrendous losses they took on Black Monday many OTC market makers are effectively out of the picture. The SEC will report that some OTC trading desks are even refusing to take calls today. The agency will also cite a suspiciously high occurrence of improper price entries into a computerized OTC trading system that is making it impossible to trade the affected stocks.” At the time I recall reading that OTC market makers were simply throwing away the trade tickets for trades they made to avoid losses. “Tim Metz goes on to write “The averages will understate the calamity this drop represents for holders of the least liquid OTC stocks, some of which can not be sold at any price.” Keep in mind this happened on the NASDAQ after the Oct 19th drop. If you’re able to see some price charts for many Nasdaq stocks during that time period, many had far, far worse price declines AFTER the 19th.
I happen to have been home that day and watched this on FNN (a later CNBC takeout) and remember calling the broker at around 3:45 on the 19th to buy Polaroid plus some oil stock I don’t recall the name of. Prices then were moving 1/2, 3/4, or a point or more lower from one trade to the next with the tape running about an hour (I think) late. I had no idea what I paid till the confirm came in the mail.
Thats what happens when liquidity vanishes.
The writer I sited in the above post wasn’t Mike Metz , it was Tim Metz. My mistake
DB represents 6% of my portfolio.
Geez , they couldn’t let it go.Lehmen
had a hated leader.They let Goldman survive ,I see the
same with DB.
Good the buy-able dip maybe here today. Blue, for your scenario, would gold/miners be another instrument aside from bear funds, or would it be dragged down along everything else? TIA!
Liquidity improved Monday, thick markets, but ping pong is the premier sport of this year’s summer algos.
fiftytwoweek,
I think gold is yet to bottom IMHO. I would personally avoid unless its a quick trade.