Long Term Perspectives

Equities are bubbling higher with the ES futures touching the 2k mark for the very first time (the cash did it yesterday). Since there’s not much to be said on the trading front this is a good time to run through a few long term perspectives. Now that another major milestone is in the bag the question once again returns to how long equities can keep this pace up!

2014-08-26_spoos_update

Let’s start with price and our volume profile on the E-Mini futures. If you ever entertained illusions of possessing any clairvoyance in regards to the market’s direction then think back to early August when we were in the midst of what looked like a correction with legs. Since that time we’ve seen one of the most profitable reversals of this bull market.

2014-08-26_PnF

Actually there was a very similar one earlier this year in February. Looking at the P&F the setup and ensuing resolution looks almost identical to the one last winter. What followed was quite a bit of sideways churn and plenty of guesswork which lasted all through June. It’s possible that we’ll be entering a high volatility sideways period in a few weeks from now, so enjoy the getting while it’s good. However, that said – I don’t think any correction (sideways or down) would drag out for months again as we usually see more directional tape in the last quarter.

2014-08-26_JNK_TLT

If you recall from a few weeks ago – I was getting quite nervous about the discrepancy between the JNK:TLT ratio and what we were seeing on the equities side. We did get our correction but what’s remarkable is that this chart hasn’t moved an inch while equities were driving higher.

2014-08-26_JNK_LQD

So what gives? Well, it’s a complicated story and quite frankly I’m not a bond expert. But part of the answer may lead back to this chart – a cross between JNK and LQD (investment grade corporate bonds). Seems like bond investors are piling back into corporate bonds and unless we see a significant divergence on this chart there is little standing in the way of this raging bull market. Which unfortunately most retail traders have completely missed out on.

More LT perspectives below the fold – please step into my lair:


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Cheers,

Alien Versus Predator

My money is on the aliens every time. And when it comes to finding analogs in the financial markets the Alien is the bond market and Predator is played by equities. Simply speaking – bonds (and forex) are the dog that wags the equities tail. So it makes sense to correlate the two and find out who’s lying. We play this game every once in a while and it’s particular useful when price data on the equities side keeps us guessing.

Let’s look at some ETF correlations first. Why? Because they’re easier to get in/out of for the average retail trader. So they have meaning given the overall message the bonds are telling us, however they may show us short term trends as well. Here’s JNK (guess what it represents) vs. the TLT which has 20-year treasury bonds as its underlying. That was a beautiful divergence near the top – took a while to break equities. As I said above – it’s a dog/tail relationship and bond traders are usually smarter than their equities slinging cousins.

I see a tiny bounce there at the bottom but we’ll have to give it another day or so.

Let’s zoom in a little but this time compare it with corporate bonds, which have been very very popular in the past few years. Better timing on this one on a short term basis – not if you are a fund manager who needs to flip a few Million shares. But to us this one offers better clues regarding direction on the equities side. What’s it doing right now? Bouncing a bit – which confirms our general view that we should see a re-test of the highs. Well, at least an attempt to do so. IF this really is at least a medium term correction then it has to happen anyway. Trends to just fall off the plate – they form a top first.

Now let’s mix it up with a few managed mutual funds – with more long term implications:


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Cheers,

The Fruit Of Our Labor

Whoever sold me those SPY puts on the 27th wasn’t a happy camper last night and I have an inkling it’s going to be even worse when I cash them out later this morning. I sincerely hope some of you guys followed suit and at minimum loaded up on a bit of insurance when I made my case of insurance being cheap. Well, not anymore!

That was a nasty jump in volatility and that’s the reading last night, mind you. As I’m writing this the spoos are near the 1915 mark and if it holds into the open it ought to be good for a little emotional jump higher on the VIX Richter scale.

Which will also be where I’m going to sell 2/3 of my SPY puts – they banked $267 as of last night and given we don’t see a pre-open run up higher I may be able to sell them for a 100% profit. Well, that’s if my devious plan works out – never count on paper profits until you see them in your account.

Alright, enough of padding my own shoulder (someone’s got to do it as you guys are a tough crowd!) – all you really care about is what laying ahead, so let’s consult our charts. I prefer to chart the cash but as it’s before the open the ES will have to do – fortunately it’s pretty close to the situation I see on the SPX. The 100-day SMA is but a bagel throw away at this point and the bulls should enjoy a brief breather somewhere near the 1910 mark.

The one problem I’m having with this chart however is that there is zero prior precedence. Not once has the 100-day offered stable support in the past year – which is the price the bulls are now paying for an effervescent climb higher devoid of any retracements. It’s like climbing a steep wall – it’s fun while you’re going up but on the way down it’s a chilly sight as there’s nothing to hang your hat on.

The volume profile on the ES shows us a volume hole between 1900 and 1910 – so that is adding a wee bit more ammunition. My preliminary verdict as of right now is that we probably are going to bounce a little today or tomorrow, after which the tape will decide which way it wants to swing. Whereto is the big question and the Mole has got you covered. As usual I have collected quite a bit of material allowing you to properly assess the LT odds moving forward. Please step into my lair:


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Please login or subscribe here to see the remainder of this post.

You have been briefed – now have fun but keep it frosty. See you guys later this afternoon.

Cheers,





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