The bulls have had a grand time for a few weeks. Fun time is over and reality is about to set in for the short-term memory impaired. Again What has changed in a few short weeks? Are earnings getting better? No!…they are imploding. Did the Fed announce a New QE? No!…Will they…No!…not until stocks have gone sufficiently lower. You see bulls, the Global economy is falling apart and the Fed can’t do QE until US stocks implode. Can you imagine the Fed doing QE 4% from ATHs? Congress would hoist them up by their own petard in this election year. If that is your bet then great go for it. Otherwise you are betting on the market to have multiple expansion while earnings are going lower. That seems like a fairly ridiculous thesis. So that leaves rational contrarians looking for the second chance top. There is a very good chance it arrived while you were sleeping last night as we exploded up in an orgy of last minute short covering in Globex Futures and hit a perfect level of resistance and then reversed hard. I saw that and went to bed with a smile on my face.
So what do the bears have going for them? Well the fundamentals are awful and nothing has changed. Credit is still very stressed and we are no longer oversold but we are in fact we are extremely overbought. We have the VVIX (the vol of the vol) which bottomed on October 8th signaling that the downside is not done. The VVIX has been making higher highs and higher lows since June of last year when Oil and Credit Spread tightness peaked (2nd Chart). Looks like we just made a higher low and have turned back up strongly (1st chart). The VVIX is important because it is telling a story about a system that is coming apart at the seams. The Central Banks are literally holding this market together with spit, gum and glue. They are playing wack-a-mole putting out fires behind the scenes only to have the pressures pop up somewhere else. The second long term VVIX chart below is telling you that not all is well behind the curtain. I warned about the rapid repricing of stocks on 8/15 when the VIX was low but the VVIX was rising (3rd Chart). The set up is very similar to today as it was that weekend before the crash. Are we going to crash? No idea but the opportunity to crash is there for the market to take it.
Additionally, the SPX is diverging from oil’s current swoon which when it is under $50 dollars causes financial derivative mayhem in the system. We also have a non-confirmation of highs this week from the Dow Jones Transportation Index which topped out on 10/8 they same day the VVIX bottomed. And finally it seems the SPX has become completely unhinged from 5 Year Inflation Break Evens (below). So basically most every other asset class is screaming deflation yet stocks are whistling past the graveyard. I believe we will take out the August lows and go much lower. I think this was nothing more than a counter trend rally in the context of a bear market and I think the repricing of this market will happen quickly. This may be a truly horrifying Halloween for equity investors. Could I be wrong? Yes…but sadly I don’t believe I will. Don’t end up like the Duke Brothers from the movie Trading Places.
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The force awakens…
Inception,
Indeed!
So you think that the crowd is right? The crowd is very pessimistic, with record short interest – and the “skew” index pointing to large bets of extreme downside – will the market go with the crowd? I’ve always heard the old adage – “the crowd is always wrong” – you are suggesting that they will be right?
Who is this crowd? We have six years of longs buying and now we have some shorts? In 2007 and 2008 going into fall it was the same argument: there are too many shorts.
@zephler – we also have huge sums of cash on the line in the form of short volatility positions. When that unwinds they will be putting the fire out with gasoline.
If the fraud is deep and nobody
believes anything then we are in
bluestar land.Shit
‘There is a record amount of cash being pulled from mutual funds. This happens at bottoms, not tops.’ Leon Cooperman
Swinging for the fences,
If only it it was that easy. I am going to fade the guy who blamed his performance on Risk Parity funds and Ray Dalio.
Hey Leon!
Maybe it was some shitty stock picking, too much beta and leverage you whiner you.
Good post BlueStar. That 5 Year Inflation Break Evens is telling. And for the record, there were record short interest going into the declines in ’08, ’11.
Behold:
http://www.seeitmarket.com/short-interest-dispelling-another-market-myth-14888/
I think bulls also say multiples are not that high; however, aren’t stock buybacks at unprecedented levels due to zirp? Has that ever happened to this extent before?
The market is not manipulated; the market is manipulation.
North beach,
Yes I am aware of that thanks.
I guess that smile is gone now?
Quick! Buy while you still can! They’re not making any more stocks you know…
/sarc
lol. ouch.
Good timing
I’ve seen this 100 times in the last 6 years. Bears cling to their thesis, tunnel visioned and unwilling to re-assess the situation. Being nimble, not stubborn, is rule #1. We are climbing the wall of Bluestar worry.
Bluestar,
I enjoy your posts. Thanks
The last 6 years is over, and the bear market is on. Bear market rallies are to be expected…and exploited. And hope is far more prevalent than worry. As it should be.
adding to shorts here?
Looks like the assholes win again. Oh well. There’s always next time.
Yes, adding to shorts here. Bear market’s in the 2nd/3rd inning. Plenty of time in the game. Until there isn’t. Drop catapults lower in earnest and it’s game over. No 6 year time frame… 6 weeks. Gonna happen.
Fade the rally after all the retards have gotten long again. Complacency is a btch.
BLUESTAR is God!
I just learned more reading your last 4 posts than I did in 4 years studying Economics.
More. We want more commentary.
Freebie,
No not at all. This is a bullshit rally. Divergences and internal weakness. If another CB comes out tomorrow then I know to step aside and its like last October. Hover we turn soon.
superpostron,
did you buy puts? this is an ending move. Not a new bull.
trashman,
lol. you will learn young Jedi.
freebie,
I was a bull until last year. This is not zero hedge. maybe you have not been paying attention son but most stocks have sucked ass this year.
PB,
thanks. i agree the young ones will learn.
Jimmy two times,
Soon Jimmy very soon.
bearraid,
they have not won.
slott333,
slow and steady wins the race.
probucks,
I am not a God! Perhaps a demigod though.
Fatso,
I am here to educate and release good karma into the world.
Im scaling in. It either works or it doesn’t. Got some more on the rip.